UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                             ----------------------

                                    FORM 10-Q

             [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF

                       THE SECURITIES EXCHANGE ACT OF 1934

                  For the quarterly period ended June 30, 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.)

                  7249 National Drive, Hanover, Maryland 21076
                    (Address of principal executive offices)

       Registrant's telephone number, including area code: (410) 712-0275

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 checkmark whether the registrant is an accelerated filer (as defined
in rule 12b-2 of the Exchange Act)


                                  Yes X               No_____


As of July 27,  2004,  a total of  8,109,153  shares of Common  Stock,  $.75 par
value, were outstanding.



<PAGE>

                     COMPUDYNE CORPORATION AND SUBSIDIARIES

                                      INDEX

                                                          PAGE NO.

Part I.  Financial Information

   Item 1. Financial Statements - Unaudited

      Consolidated Balance Sheets - June 30, 2004
      and December 31, 2003                                  3

      Consolidated Statements of Operations -
      Three Months and Six Months Ended
      June 30, 2004 and 2003                                 4

      Consolidated Statement of Changes in
      Shareholders' Equity - Six Months Ended
      June 30, 2004                                          5

      Consolidated Statements of Cash Flows -
      Six Months Ended June 30, 2004 and 2003                6

      Notes to Consolidated Financial Statements           7-15

  Item 2. Management's Discussion and Analysis of
      Financial Condition and Results of Operations       16-28

  Item 3. Quantitative and Qualitative Disclosures
      About Market Risk                                      29

  Item 4. Controls and Procedures                            30

Part II.  Other Information                                  31

      Signature                                              32




                                       2
<PAGE>




                          ITEM 1. FINANCIAL STATEMENTS
                     COMPUDYNE CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                   (unaudited)


<TABLE>
<CAPTION>
                                                                     June 30,      December 31,
                                ASSETS                                  2004           2003
                                                                   ------------    ------------
                                                                          (in thousands)
Current Assets
<S>                                                                <C>             <C>
       Cash and cash equivalents                                   $      3,729    $      1,869
       Marketable securities                                             20,312            --
       Accounts receivable, net                                          40,150          41,780
       Contract costs in excess of billings                              15,447          17,568
       Inventories                                                        6,174           6,704
       Deferred tax assets                                                1,509           1,371
       Prepaid expenses and other                                         2,784           2,322
                                                                   ------------    ------------
             Total Current Assets                                        90,105          71,614

Property, plant and equipment, net                                        9,227          10,079
Goodwill                                                                 21,280          21,280
Other intangible assets, net                                              9,585           9,785
Other                                                                       779             904
                                                                   ------------    ------------
           Total Assets                                            $    130,976    $    113,662
                                                                   ============    ============
                      LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities

       Accounts payable and accrued liabilities                    $     17,238    $     21,078
       Billings in excess of contract costs incurred                     10,369          13,551
       Deferred revenue                                                   4,482           6,036
       Current portion of notes payable                                     440           2,103
                                                                   ------------    ------------
             Total Current Liabilities                                   32,529          42,768

Notes payable                                                             3,705          15,555
Convertible subordinated notes payable                                   39,025            --
Deferred tax liabilities                                                  1,654           1,592
Other                                                                       575             820
                                                                   ------------    ------------
             Total Liabilities                                           77,488          60,735

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 June 30, 2004 and
          December 31, 2003, respectively; 8,704,030 and 8,567,680
          shares issued at June 30, 2004 and
          December 31, 2003, respectively                                 6,527           6,426
       Additional paid-in-capital                                        43,544          42,755
       Retained earnings                                                  7,709           7,926
       Accumulated other comprehensive income (loss)                       (205)            (93)
       Treasury stock, at cost; 594,877 shares at
          June 30, 2004 and  December 31, 2003                           (4,087)         (4,087)
                                                                   ------------    ------------
             Total Shareholders' Equity                                  53,488          52,927
                                                                   ------------    ------------
             Total Liabilities and Shareholders' Equity            $    130,976    $    113,662
                                                                   ============    ============
</TABLE>



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


                                       3
<PAGE>


                     COMPUDYNE CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (unaudited)


<TABLE>
<CAPTION>
                                                 Three Months Ended       Six Months Ended
                                                       June 30,                June 30,
                                                   2004        2003        2004        2003
                                                 --------    --------    --------    --------
                                                    (in thousands, except per share data)
Revenues:
<S>                                              <C>         <C>         <C>         <C>
  System sales                                   $ 32,920    $ 42,696    $ 67,246    $ 84,976
  Service and other                                 4,863       4,842       9,564       9,329
                                                 --------    --------    --------    --------
      Total revenues                               37,783      47,538      76,810      94,305

Cost of sales                                      26,636      35,751      55,465      70,735
                                                 --------    --------    --------    --------
Gross profit                                       11,147      11,787      21,345      23,570

Selling, general and administrative  expenses       8,677       7,696      16,831      15,654
Research and development                            1,874       2,032       3,629       3,913
                                                 --------    --------    --------    --------
Income from operations                                596       2,059         885       4,003
                                                 --------    --------    --------    --------
Other expense (income)
  Interest expense                                    845         334       1,594         713
  Interest income                                    (344)         (1)       (414)        (10)
  Other expense (income)                              (58)         (1)         63           1
                                                 --------    --------    --------    --------
      Total other expense                             443         332       1,243         704
                                                 --------    --------    --------    --------
Income (loss) before income taxes                     153       1,727        (358)      3,299
Income taxes expense (benefit)                         63         690        (141)      1,320
                                                 --------    --------    --------    --------
Net income (loss)                                $     90    $  1,037    $   (217)   $  1,979
                                                 ========    ========    ========    ========
EARNINGS (LOSS) PER SHARE:
Basic earnings (loss) per common share           $    .01    $    .13    $   (.03)   $    .25
                                                 ========    ========    ========    ========
Weighted average number of common
shares outstanding                                  8,075       7,898       8,042       7,860
                                                 ========    ========    ========    ========
Diluted earnings (loss) per common share         $    .01    $    .13    $   (.03)   $    .24
                                                 ========    ========    ========    ========
Weighted average number of common
shares and equivalents                              8,376       8,139       8,042       8,106
                                                 ========    ========    ========    ========
</TABLE>




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


                                       4
<PAGE>




                     COMPUDYNE CORPORATION AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                                   (unaudited)
                                 (in thousands)



<TABLE>
<CAPTION>
                                                                                   Accumulated
                                                           Additional                 Other
                                           Common Stock     Paid-in   Retained     Comprehensive   Treasury Stock
                                          Shares  Amount    Capital   Earnings     Income /(Loss)  Shares  Amount      Total
                                        -----------------  ---------- ---------   ---------------  ---------------   --------
<S>                                     <C>     <C>        <C>        <C>         <C>              <C>   <C>         <C>
January 1, 2004                         8,568   $  6,426   $ 42,755   $  7,926    $    (93)        595   $ (4,087)   $ 52,927

Stock options exercised                   136        101        789       --          --          --         --           890

Net loss                                 --         --         --         (217)       --          --         --
                                                                                                                         (217)

Other comprehensive income, net of tax:
Ineffectiveness of interest
   rate swap agreement                   --         --         --         --            93        --         --            93
Unrealized gain (loss) on
  available for sale
  marketable securities                  --         --         --         --          (205)       --         --          (205)
                                        --------------------------------------------------------------------------------------
Balance at
  June 30, 2004                         8,704   $  6,527   $ 43,544   $  7,709    $   (205)        595   $ (4,087)   $ 53,488
                                        =====   ========   ========   ========    ========         ===   ========    ========
</TABLE>

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




                                       5
<PAGE>

                                         COMPUDYNE CORPORATION AND SUBSIDIARIES
                                          CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                       (unaudited)


<TABLE>
<CAPTION>
                                                                    Six Months Ended
                                                                        June 30,
                                                                   2004         2003
                                                                 --------    --------
                                                                     (in thousands)

Cash flows from operating activities:
<S>                                                              <C>         <C>
     Net  (loss) income                                          $   (217)   $  1,979

Adjustments to reconcile net (loss) income to
    net cash provided by operations:

    Depreciation and amortization                                   1,367       1,376
    (Gain) loss from disposal of property, plant and equipment         (1)          1
    Amortization of debt discount                                      83        --
    Unrealized loss on interest rate swap                              68        --
    Amortization of discounts on marketable securities               (122)       --

Changes in assets and liabilities:
    Accounts receivable                                             1,630       2,044
    Contract costs in excess of billings                            2,121       3,714
    Inventories                                                       530         764
    Prepaid expenses and other current assets                        (462)       (658)
    Other assets                                                      125         (79)
    Accounts payable and accrued liabilities                       (3,908)      2,268
    Billings in excess of contract costs incurred                  (3,182)         52
    Deferred revenue                                               (1,554)     (2,019)
    Other liabilities                                                 (90)         (1)
                                                                 --------    --------
Net cash flows (used in) provided by operating activities          (3,612)      9,441
                                                                 --------    --------
Cash flows from investing activities:
    Purchase of marketable securities                             (31,195)       --
    Redemption of marketable securities                            10,662        --
    Additions to property, plant and equipment                       (315)       (339)
    Proceeds from sale of property, plant and equipment                 1           9
    Net payment for acquisition                                      --           (71)
                                                                 --------    --------
Net cash flows used in investing activities                       (20,847)       (401)
                                                                 --------    --------
Cash flows from financing activities:
    Issuance of common stock                                          890         193
    Warrants exercised                                               --           166
    Purchase of treasury stock                                       --          (166)
    Repayment of bank notes and line of credit                    (13,513)     (6,428)
    Borrowings of convertible subordinated notes payable           38,942        --
                                                                 --------    --------
Net cash provided by (used in) financing activities                26,319      (6,235)
                                                                 --------    --------
Net change in cash and cash equivalents                             1,860       2,805
Cash and cash equivalents at beginning of period                    1,869       1,274
                                                                 --------    --------
Cash and cash equivalents at end of period                       $  3,729    $  4,079
                                                                 ========    ========
Supplemental  disclosures of cash flow information:
  Cash paid during the period for:
      Interest                                                   $    244    $    587
      Income tax, net of refunds                                 $    215    $  1,220
</TABLE>


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


                                       6
<PAGE>


                     COMPUDYNE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

1. SUMMARY OF SIGNIFICANT POLICIES

Basis of Presentation:

The  accompanying  unaudited  consolidated  financial  statements  of  CompuDyne
Corporation and its subsidiaries  (the "Company") have been prepared pursuant to
the rules  and  regulations  of the  Securities  and  Exchange  Commission.  The
consolidated  balance  sheet as of December  31, 2003 has been  derived from the
Company's December 31, 2003 audited financial  statements.  Certain  information
and note disclosures  included in the annual financial  statements,  prepared in
accordance with accounting principles generally accepted in the United States of
America, have been condensed or omitted pursuant to those rules and regulations,
although the Company believes that the disclosures made are adequate to make the
information presented not misleading.

In the opinion of management,  the accompanying unaudited consolidated financial
statements reflect all necessary adjustments and reclassifications (all of which
are of a normal,  recurring nature) that are necessary for the fair presentation
of the periods  presented.  It is suggested  that these  consolidated  unaudited
financial  statements be read in  conjunction  with the  consolidated  financial
statements and the notes thereto  included in the Company's  annual report filed
with the  Securities  and  Exchange  Commission  on Form 10-K for the year ended
December 31, 2003.  Operating  results for the three and six month periods ended
June 30, 2004 and 2003 are not necessarily  indicative of operating  results for
the entire fiscal year.

New Accounting Pronouncements:

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. FIN
46(R)  is  effective  for  entities   being   evaluated   under  FIN  46(R)  for
consolidation  no later  than the end of the first  reporting  period  that ends
after March 15,  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.


                                       7
<PAGE>



Comprehensive Income:

The following table shows the components of comprehensive  (loss) income, net of
income taxes, for the six months ended June 30, 2004 and 2003, in thousands.

                                                   For the Six Months
                                                      Ended June 30,
                                                     2004       2003
                                                   --------   -------
Net (loss) income                                  $  (217)   $ 1,979
Unrealized loss on available-for-sale securities      (205)      --
Ineffectiveness of interest rate swap agreement         93       --
Translation adjustment                                --           (7)
Loss on interest rate swap agreement                  --           41
                                                   -------    -------
Comprehensive (loss) income                        $  (329)   $ 2,013
                                                   =======    =======


Stock-based Compensation:

As of June 30,  2004,  the  Company  continues  to account  for its  stock-based
compensation  plans, which are described more fully in the Company's 2003 Annual
Report,  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 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 Three Months
                                                                              Ended June 30,
                                                                           2004           2003
                                                                          ------          ----
                                                                  (in thousands, except per share data)
<S>                                                                       <C>            <C>
Net  income, as reported                                                  $  90          $1,037
Deduct:  Total stock-based employee compensation expense determined
under fair value based method for all awards net of related tax effects    (261)           (281)
                                                                          ------         -------
Pro forma net (loss) income                                               $(171)         $  756
                                                                          ======         =======
Earnings (loss) per share:
Basic - as reported                                                       $ .01          $  .13
Basic - pro forma                                                         $(.02)         $  .10

Diluted - as reported                                                     $ .01          $  .13
Diluted - pro forma                                                       $(.02)         $  .09
</TABLE>


                                       8
<PAGE>

<TABLE>
<CAPTION>
                                                                            For the Six Months
                                                                               Ended June 30,
                                                                           2004               2003
                                                                          ------             ------
                                                                   (in thousands, except per share data)
<S>                                                                    <C>                 <C>
Net (loss) income, as reported                                            $(217)             $1,979
Deduct:  Total stock-based employee compensation expense determined
under fair value based method for all awards net of related tax effects    (509)               (579)
                                                                          ------             ------
Pro forma net (loss) income                                               $(726)             $1,400
                                                                          ======             ======

Earnings (loss) per share:
Basic - as reported                                                       $(.03)             $  .25
Basic - pro forma                                                         $(.09)             $  .18

Diluted - as reported                                                     $(.03)             $  .24
Diluted - pro forma                                                       $(.09)             $  .17
</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:


<TABLE>
<CAPTION>
                                                     For the Three Months           For the Six Months
                                                        Ended June 30,                 Ended June 30,
                                                     2004               2003       2004           2003
                                                    -----              -----      -----           -----
<S>                                                  <C>                <C>        <C>             <C>
Expected life in years                               5.5                6.7        5.5             6.9
Risk-free interest rate                              3.3%               2.6%       3.2%            2.8%
Expected volatility                                 76.6%              79.6%      76.6%           80.0%
</TABLE>


Reclassifications:

Certain prior period  amounts have been  reclassified  to conform to the current
period's presentation.  The effect of these reclassifications is not material to
the consolidated financial statements.

2. OPERATING SEGMENT INFORMATION

The following is the operating  segment  information  for the three months ended
June 30, 2004 and 2003, in thousands.


<TABLE>
<CAPTION>
                                                                         Pre-tax
                                 Revenues         Gross Profit         Income/(loss)
                            -----------------   -----------------   ------------------
                              2004      2003      2004      2003     2004        2003
                            -------   -------   -------   -------   -------     ------
<S>                         <C>       <C>       <C>       <C>       <C>        <C>
Institutional Security
      Systems               $13,954   $25,692   $ 2,244   $ 3,240   $   (84)   $   835
Attack Protection             6,741     6,533     1,082     1,380      (456)       (52)
Federal Security Systems      4,371     4,261       611       603       214        296
Public Safety and Justice    12,717    11,052     7,210     6,564       960        482
CompuDyne Corporate            --        --        --        --        (481)       166
                            -------   -------   -------   -------   -------    -------
                            $37,783   $47,538   $11,147   $11,787   $   153    $ 1,727
                            =======   =======   =======   =======   =======    =======
</TABLE>


                                       9
<PAGE>



The following is the operating segment information for the six months ended June
30, 2004 and 2003, in thousands.

<TABLE>
<CAPTION>
                                                                               Pre-tax
                                  Revenues           Gross Profit           Income/(loss)
                            -------------------   -------------------    --------------------
                              2004       2003       2004       2003        2004        2003
                            --------   --------   --------   --------    --------    --------
<S>                         <C>       <C>         <C>       <C>       <C>        <C>
Institutional Security
      Systems               $ 30,011   $ 49,140   $  4,749   $  6,517    $    123    $  1,572
Attack Protection             13,694     14,876      2,001      3,355      (1,135)        510
Federal Security Systems       7,946      7,750      1,101      1,125         414         503
Public Safety and Justice     25,159     22,539     13,494     12,573       1,395         550
CompuDyne Corporate             --         --         --         --        (1,155)        164
                              ------     ------     ------     ------       -----         ---
                            $ 76,810   $ 94,305   $ 21,345   $ 23,570    $   (358)   $  3,299
                            ========   ========   ========   ========    ========    ========
</TABLE>


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 651,200 and
814,520  shares  for the  three  month  periods  ended  June  30,  2004 and 2003
respectively,  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 as the effect is  antidilutive.
Stock options and warrants to purchase  651,200 and 1,044,020 shares for the six
month periods ended June 30, 2004 and 2003 respectively,  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 2011
Notes are excluded as the effect is antidilutive.

The  computations of the Company's  basic and diluted  earnings (loss) per share
amounts  for the  three  and six  months  ended  June 30,  2004 and 2003 were as
follows, in thousands, except per share data:


<TABLE>
<CAPTION>
                                                           Three Months Ended                 Six Months Ended
                                                             Ended June 30,                     Ended June 30,
                                                         2004              2003              2004           2003
                                                     ------------       ----------       -----------     ---------
<S>                                                  <C>                <C>              <C>             <C>
Net income (loss)                                    $         90       $    1,037       $      (217)    $   1,979
                                                     ============       ==========       ===========     =========
Weighted average common shares outstanding                  8,075            7,898             8,042         7,860
Effect of dilutive stock options and warrants                 301              241               -             246
                                                     ------------       ----------       -----------     ---------
Diluted weighted average common shares outstanding          8,376            8,139             8,042         8,106
                                                     ============       ==========       ===========     =========
Net income (loss) per common share
     Basic                                           $        .01       $      .13       $      (.03)    $     .25
     Diluted                                         $        .01       $      .13       $      (.03)    $     .24
</TABLE>

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 Company
does not believe  this  contingency  was met for the three and six months  ended
June 30, 2004. Accordingly, no undistributed earnings have been allocated to the
2011  Notes.  At each  reporting  period,  the Company  will assess  whether the
contingency  criteria have been met and consequently if  undistributed  earnings
should be allocated to participating securities.




                                       10
<PAGE>

4. INVENTORIES

Inventories consist of the following, in thousands:

                  June 30,  December 31,
                    2004      2003
                  --------  -------------

Raw materials      $3,943      $3,745
Work in progress    1,601       2,310
Finished goods        630         649
                      ---         ---
                   $6,174      $6,704
                   ======      ======


5. GOODWILL

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 $21.3 million at both June 30, 2004 and December 31, 2003.

Goodwill  consisted of $19.8 million for the Public Safety and Justice  segment,
$0.8 million for the Institutional Security Systems segment and $0.7 million for
Attack Protection segment as of June 30, 2004 and December 31, 2003.

6. INTANGIBLE ASSETS

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. Except trade names, which have indefinite lives, the intangible assets are
being amortized using the straight-line method.

Intangible assets consist of the following, in thousands:

                                 June  30,    December 31,    Amortizable
                                    2004         2003            Lives
                                 --------    -------------    -----------
                                                              (in years)
Trade name                       $  6,913    $  6,913         Indefinite
Customer relationships              2,500       2,500              14
Backlog                               300         300               2
Other                               1,220       1,220          2 - 20
                                 --------    --------
                                   10,933      10,933
Less: accumulated amortization     (1,348)     (1,148)
                                 $  9,585    $  9,785
                                 ========    ========




                                       11
<PAGE>

Amortization  expense for the Company's  intangible assets for the three and six
month  periods  ended  June  30,  2004  was  $87  thousand  and  $200  thousand,
respectively. The following schedule lists the expected amortization expense for
each of the years ending December 31, in thousands:

                           Year                       Expense
                           ----                       --------
                           2004 (remaining)           $    150
                           2005                            270
                           2006                            225
                           2007                            225
                           2008                            225
                                                      --------
                           Total                      $  1,095
                                                      ========

7. 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 June
30,  2004,  the  Company  had a product  warranty  accrual in the amount of $454
thousand.

                                               Product Warranty Liabilities
                                               ----------------------------
                                                      (In Thousands)
                                                      --------------

         Beginning balance at January 1, 2004           $   517
         Plus accruals for product warranties               126
         Changes in pre-existing warranties                  (1)
         Less payments                                     (188)
                                                           ----
         Ending balance at June 30, 2004                $   454
                                                        =======



8. INVESTMENTS IN MARKETABLE SECURITITES

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 June 30,
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. As of June 30, 2004
the  Company  had no  realized  gains or  losses  and the  cost  for  marketable
securities was determined  using the specific  identification  method.  The fair
values of marketable  securities are estimated  based on quoted market price for
these securities.


Marketable securities at June 30, 2004 are summarized, in thousands, as follows:


<TABLE>
<CAPTION>
                                                                    Gross Unrealized
                                                                    ----------------
                                              Cost              Gains            Losses        Fair Value
                                            ---------         ---------       -----------     -----------
<S>                                        <C>                <C>             <C>             <C>
Collateralized mortgage obligations
  (CMO's) consisting of securities
  issued by Fannie Mae,
  Freddie Mac,  and Ginnie Mae              $  20,655         $     -         $       343     $  20,312
</TABLE>



                                       12
<PAGE>

The cost and estimated  fair value of current debt  securities at June 30, 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)                               Costs         Fair Value
                                              -------------        -----------
         Due in one year or less              $         -          $         -
         Due after one year and beyond              20,655              20,312
                                                    ------              ------
         Total debt securities                $     20,655         $    20,312
                                              ============         ===========



9. NOTES PAYABLE AND LINE OF CREDIT

<TABLE>
<CAPTION>
                                                                                 June 30,  December 31,
                                                                                    2004       2003
                                                                                 --------- ------------
                                                                                     (in thousands)
<S>                                                                              <C>         <C>
Industrial revenue bond,  interest payable quarterly at a variable rate of 1.14%
to 1.38% (1.21% at June 30, 2004) principal payable in quarterly installments of
$35,000. The bond is fully collateralized by a $1.6 million letter of credit
and a bond guarantee agreement                                                     $ 1,540   $ 1,540



Industrial revenue bond,  interest payable quarterly at a variable rate of 1.01%
to 1.30% (1.18% at June 30, 2004)  principal  payable in yearly  installments of
$300,000. 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                                    44,395    17,658
          Less convertible subordinated notes discount                               1,225      --
                                                                                 ---------   -------
             Subtotal                                                               43,170    17,658
          Less amount due within one year                                              440     2,103
                                                                                 ---------   -------
                                                                                   $42,730   $15,555
                                                                                 =========   =======
</TABLE>



                                       13
<PAGE>


Maturities of notes payable are as follows, in thousands:

               Year Ending December 31,              Amount
               ------------------------        ---------------
                    2004 (remaining)            $          140
                    2005                                   440
                    2006                                   440
                    2007                                   440
                    2008                                   440
                    Thereafter                          42,495
                                                --------------
                                                $       44,395
                                                ==============

On January 22,  2004,  the  Company  completed  an  offering  of $40.25  million
principal  amount of the 2011 Note.  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.
These 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               1,225
                                                        ----------
                                                        $   39,025
                                                        ==========

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,  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 can redeem the 2011 Notes 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.  After January 15, 2009, the Company can redeem the 2011
Notes at a premium of two percent of the face value.

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 the straight
line basis to interest expense over the term of the 2011 Notes. Interest expense
recorded for the total of the deferred  financing costs and debt discount on the
2011 Notes  totaled $63 thousand  and $119  thousand for the three month and six
months ended June 30, 2004, respectively.

During  January 2004, the Company repaid  substantially  all of its  outstanding
bank borrowings from the proceeds of the issuance of the 2011 Notes. The Company
has decided not to repay any of its Industrial  Revenue Bond ("IRB")  borrowings
as it has determined that there were 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.

At 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. Of
this line of credit  $10.0  million  matures on March 1, 2007 and $15.0  million
matures  on  March  1,  2005.  At June  30,  2004  $5.4  million  was  committed
principally to letters of credit securing the Industrial Revenue Bonds.


                                       14
<PAGE>



The bank borrowings contain various financial  covenants,  including among other
things,  maintenance of fixed charge coverage ratios,  interest coverage ratios,
maximum  senior  debt to  earnings  before  interest,  taxes,  depreciation  and
amortization  ("EBITDA") ratios,  maximum permitted capital expenditures,  and a
restriction  against paying  dividends.  The Company was in compliance  with all
bank covenants at June 30, 2004 and June 30, 2003.

The interest rate on the line of credit is variable based on the  performance of
the Company and ranges from LIBOR + 1.00% to Prime + 0.75%.  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.  If
borrowings  exceed $10.0 million for thirty  consecutive  days,  commitment fees
equal to a range of 0.20% to 0.35% will also be  incurred  on the $15.0  million
line 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 six months ended June 30, 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 three and six
months  ended  June  30,  2004  was a gain of $58  thousand  and  $87  thousand,
respectively,  resulting  in a remaining  liability  for the  investment  of $68
thousand.  Future  changes  in the  value  of the  interest  rate  swap  will be
recognized in earnings.

10. COMMITMENTS AND CONTINGENCIES.

The Company's Public Safety and Justice segment settled certain  litigation with
one of its customers on June 30, 2004. As a result of the settlement  agreement,
the Company  refunded  $350 thousand to this customer in exchange for the return
of the hardware and other products  previously  delivered to this customer.  The
Company recorded the excess of the accrued  liability related to this dispute as
a reduction of cost of sales of $292 thousand,  which is included in the results
of operations for the three and six months ended June 30, 2004.

11. SUBSEQUENT EVENTS.

The Company  entered into a new lease for its corporate  headquarters on July 1,
2004.  The  lease  has a term of five  years and  total  future  minimum  rental
payments under the lease are $528 thousand.

On July 6, 2004 the Company  granted  75,000 stock options to an employee of the
Company. These options were granted at a strike price equal to the fair value of
the common stock on the date of grant,  are subject to vesting  provisions,  and
have a term of five years.



                                       15
<PAGE>




                                     ITEM 2
                     COMPUDYNE CORPORATION AND SUBSIDIARIES
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS

OVERVIEW

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  ("ISS")  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 234 systems installed at 63 facilities
including 58 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 original equipment
manufacturers  (OEM) 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 we are a
premier  provider  of Level 8 security  products,  the highest  rating  level of
commercial  security  products.  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 the United
States Department of State, the segment's largest customer, 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.


                                       16
<PAGE>


The Public Safety and Justice segment consists of two subsidiaries  known to the
industry as  CorrLogic  and  Tiburon.  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  that improves the efficiency and accuracy of  correctional  facility
operations.  CorrLogic's  focus is entirely  on  information  solutions  for the
corrections industry.

During 2002, we expanded our  offerings in the Public Safety and Justice  sector
by completion of our acquisition of Tiburon. 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.  We believe  that 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 560
systems  supporting  approximately 255 active customers,  Tiburon is a leader in
public safety and justice solutions.

MANAGEMENT OUTLOOK

We find ourselves in very  challenging  times.  We now have three major areas of
emphasis:  the first is  increasing  the  amount of our  backlog;  the second is
migrating to a business model with a more  predictable  revenue stream;  and the
third is finding  attractive  acquisition  candidates  to enhance  our  existing
businesses.

During 2003 and the first quarter of 2004,  as depicted in the following  chart,
we saw the amount of our backlog  decline.  During the second quarter of 2004 we
saw our backlog  increase  for the first time since the fourth  quarter of 2002.
Although  this increase was a relatively  modest $5.2 million,  or 4.0% of March
31, 2004  backlog,  we view the fact that the backlog  stopped  declining and in
fact started to increase as a very  important  milestone and an early  indicator
that the difficult economic  environment we have been operating under during the
past 18 months has stabilized.



<TABLE>
<CAPTION>
                      Institutional                              Federal              Public
                        Security           Attack                Security           Safety and
 (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
</TABLE>


Historically, approximately over 75% of our revenues were generated from sources
where the ultimate customer is a 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 has improved and thus the tax bases for our customers 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  customers  so that when the current  economic  cycle
turns around we will be well positioned to capitalize on new  opportunities.  As
noted  above,  our  slightly  increased  backlog at June 30, 2004  preliminarily
indicates  to us that the  markets we serve are  stabilizing  and we are hopeful
that our future backlogs will reflect this trend.

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  12.5% of our revenue is generated from recurring  revenue
sources  (primarily  maintenance  revenues),  and the majority of these revenues
occur 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.

                                       17
<PAGE>

<TABLE>
<CAPTION>
                                                     Six Months Ended June 30, 2004
                                                     -------------------------------
    (in Thousands)                  One-time Revenue    %     Recurring Revenue   %          Total
                                    ---------------    ----   -----------------  ----      ---------
<S>                                  <C>               <C>      <C>               <C>      <C>
Institutional Security Systems       $      27,472     35.8     $     2,539       3.3      $  30,011
Attack Protection                           13,694     17.8              -          -         13,694
Federal Security Systems                     7,946     10.3              -          -          7,946
Public Safety and Justice                   18,134     23.6           7,025       9.2         25,159
                                            ------     ----           -----       ---         ------
     Total                           $      67,246     87.5     $     9,564      12.5      $  76,810
                                     =============     ====     ===========      ====      =========
</TABLE>

Since the majority of our revenues are one-time revenues and are  non-recurring,
we must reinvent our book of business  every day.  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 two to
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, we
recently  hired a Chief  Operating  Officer  (COO).  The COO  position  is a new
position within CompuDyne.  Our new COO, Mr. Maurice Boukelif,  brings extensive
manufacturing and operational experience to us. Relying on his expertise, we are
hopeful we will be able to make this business model shift in the next few years.

Our third key focus area is  acquisitions.  With the January 2004  completion of
the 2011  Notes  offering,  we have  significant  resources  with  which to fund
acquisitions. We are particularly interested in three areas.

The first is a business that would either prove additive or complementary to our
current  offerings in the Public  Safety and Justice  segment.  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.

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 customers and markets.

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  our other three  segments,  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.

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

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2004 AND 2003

Revenues.  The Company had revenues of $37.8 million and $47.5 million for three
months ended June 30, 2004 and 2003,  respectively.  This was a decrease of $9.8
million or 20.5%.

Revenues from the  Institutional  Security Systems segment were $14.0 million in
the three months ended June 30, 2004 a decrease  from $25.7 million for the same
period of 2003. This was a decrease of $11.7 million or 45.7%. 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 its
working on less projects than it did in the previous year. The principal  reason
was because 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 2004 and the  second  quarter  of 2004 than in 2003 and the second
quarter of 2003. At June 30, 2004,  the backlog for the  Institutional  Security
System's  segment was $62.8 million which was a $10.6 million  increase over the
previous  quarter.  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,  2003 and the first half of 2004,  the
types of  projects  that the  Company  solicits,  namely  large-scale  medium to
maximum  security  installations,  declined  in 2003 and the first half of 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.



                                       18
<PAGE>


Revenues from the Attack Protection segment was $6.7 million in the three months
ended June 30, 2004,  an increase from $6.5 million for the same period of 2003.
This was an increase of $0.2 million or 3.2%. 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 the first  half of 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 its fiber optic intrusion  detection systems.  During
the three months  ended June 30 of 2004  compared to the three months ended June
30, 2003 the Norshield line experienced a 20.6% decline in revenues, whereas the
Fiber  SenSys  line  experienced  a 109.1%  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 for this  segment.  As of June 30, 2004,  the Company was awarded
five of these embassy  projects,  for a total CompuDyne  contract value of $11.2
million,  lost two embassy  projects  and the eighth has yet to be awarded.  All
indications  are that this  increased  level of new  embassy  construction  will
continue for at least the next several years. We expect bidding on an additional
16 embassies during the second half of this year.

Revenues from the Federal Security Systems segment was $4.4 million in the three
months ended June 30, 2004, an increase from $4.3 million for the same period of
2003.  This was an increase of $0.1 million or 2.6%.  Substantially  all 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 June 30, 2004 was $6.3
million and at December 31, 2003 was $8.3 million.

Revenues  from the Public  Safety and Justice  segment was $12.7  million in the
three months ended June 30, 2004,  an increase  from $11.1  million for the same
period of 2003. This was an increase of $1.7 million or 15.1%. This increase was
a result of this segment  shipping more hardware to its software clients than it
did during the three months ended June 30, 2003.

Expenses. Cost of goods sold of $26.7 million in the three months ended June 30,
2004 were down $9.1 million or 25.5% from $35.8  million  during the same period
of 2003.  This decrease was a result of a decreased costs of goods sold of $10.7
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 29.4% in the three months ended June 30,
2004 as compared to 24.8% in 2003.

Cost of  goods  sold in the  Institutional  Security  Systems  segment  of $11.7
million in the three months ended June 30, 2004 were down $10.7 million or 47.8%
from $22.4 million  during the same period of 2003.  This decrease was more than
the related sales decrease of this segment of 45.7%  resulting in an increase in
the gross profit  percentage  to 16.1% from 12.6% in the three months ended June
30, 2003. During 2002, the West Coast operations of the  Institutional  Security
Systems segment  identified that the costs to complete its projects was expected
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 and as these projects neared  completion the  Institutional  Security
Systems segment identified  additional cost overruns which would cause the costs
to complete these projects to increase, resulting in a higher cost of goods sold
in 2003 as a result of these charges in estimate to complete.


                                       19
<PAGE>


These   increases  were   identified  and  recorded  in  the  cost  to  complete
calculations in the following periods.

                  Third and Fourth Quarters of 2002      $ 2,400,000
                  First Quarter of 2003                      248,000
                  Second Quarter of 2003                   1,277,000
                  Third Quarter of 2003                      373,000
                  Fourth Quarter of 2003                     487,000
                  First Quarter of 2004                      176,000
                  Second Quarter of 2004                      80,000
                                                         -----------
                    Total West Coast Margin Reductions   $ 5,041,000
                                                         ===========

As a result,  as these  projects  are being  brought to  completion  the revenue
generated by them is  resulting in little  margin or in some cases losses as the
additional  cumulative  cost overruns of $5.0 million were being  identified and
realized.  To address this situation,  the Company  implemented more centralized
controls and replaced certain personnel at its West Coast operations. As of June
30, 2004, we believe that  additional  cost overruns to complete  these projects
will be minimal,  and as of June 30, 2004 we have accrued for any known probable
losses.

Cost of goods sold in the Attack Protection segment of $5.7 million in the three
months ended June 30, 2004 was up $0.5 million or 9.8% from $5.2 million  during
the same period of 2003.  This increase was more than the related sales increase
of this  segment  of 3.2%,  resulting  in a 5.1%  decrease  in the gross  profit
percentage  to 16.1% from 21.1% in the three months ended June 30, 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 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 a huge contributor,  this did
in fact result in further  utilization  of  approximately  12,000 square feet of
previously unused manufacturing space in this plant in Alabama. In addition,  we
identified a quality  problem with the windows and doors being  installed on one
active and current  project.  As a result of this  identified  problem,  we were
forced to take  remedial  action in the field to repair this defect.  During the
June 30, 2004 quarter we were forced to increase our estimated  cost to complete
this  project by $0.5  million  thus  causing  this project to become a negative
margin  project.  The entire  estimated loss on this project was recorded in the
June 30, 2004  quarter.  As this  project is brought to  completion,  it will be
without any margin.

Cost of goods sold in the Federal  Security  Systems  segment of $3.8 million in
the three  months  ended  June 30,  2004 were up $0.1  million or 2.8% from $3.7
million during the same period of 2003.  This increase was more than the related
sales  increase of this  segment of 2.6%  resulting  in an 0.2%  decrease in the
gross profit  percentage  to 14.0% from 14.2% in the three months ended June 30,
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 $5.5 million in
the three  months  ended June 30,  2004 were up $1.0  million or 22.7% from $4.5
million during the same period of 2003.  This increase was more than the related
sales  increase of this segment of 15.1%  resulting  in an 2.7%  decrease in the
gross profit  percentage  to 56.7% from 59.4% in the three months ended June 30,
2003. A substantial  portion of this segments sales increase represents hardware
sales  whereby we buy and  procure  hardware  for our  clients.  Hardware  sales
inherently  have a  significantly  lower  margin  than our  software  sales.  In
addition,  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  customer.  As a result we recorded a $1.7
million  pre-tax  charge.  During  the second  quarter  of 2004 this  matter was
settled  resulting  in a reduction by the segment of $0.3 million of the accrued
charges, which was reflected as a reduction of its cost of sales.


                                       20
<PAGE>



Selling,  general and  administrative  expenses  was $8.7  million for the three
months  ended June 30,  2004,  an  increase  of $1.0  million or 12.4% from $7.7
million  for the same  period  of 2003.  Much of this  increase  is  related  to
additional  costs  incurred  by the  Company  related to legal fees  incurred in
connection  with  responding  to the  complaint  filed by the Public  Safety and
Justice  segment  customer,  expenses  incurred in  connection  with  evaluating
potential acquisitions,  recruiting fees incurred to fill the recently hired COO
position  and  other  senior  management   positions  and  to  comply  with  new
requirements mandated by the Sarbanes-Oxley Act and the SEC.

Research and  Development  expenses were $1.9 million for the three months ended
June 30, 2004, a decrease of $0.2 million or 7.8% from $2.0 million for the same
period of 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.  During the second quarter of 2004, certain of the segment's research and
development resources were diverted to work on revenue producing projects, which
resulted in a decline in our research and development expenses.

The following  table compares the weighted  average of the Company's three month
period ended June 30, 2004 and June 30, 2003 interest bearing borrowings and the
related rates charged thereon.


<TABLE>
<CAPTION>
                                 Monthly Weighted Average  Monthly Weighted Average
                                   Second Quarter 2004       Second Quarter 2003
                                   Amount          Rate      Amount         Rate
                                 ----------      -------   --------       ---------
                                      (in Thousands)        (in Thousands)
<S>                                 <C>                    <C>           <C>
Bank borrowings                     $  --          --      $16,497       3.7%
Industrial revenue bonds            $ 4,145       3.5%     $ 4,585       4.2%
Subordinated borrowings             $40,250       6.3%          --         --
Swap hedge agreement                $ 3,382       4.6%     $ 6,088       4.1%

In addition the Company recorded
the following interest expense:
Amortization and write-off
    of deferred financing charges   $   145                $    51
</TABLE>



Taxes on Income.  The effective tax rate was  approximately  40% during both the
three month periods ended June 30, 2004 and June 30, 2003.

Net Income.  The Company reported net income of $0.1 million and $1.0 million in
the second quarters of 2004 and 2003,  respectively.  Diluted earnings per share
decreased to $.01 in the second  quarter of 2004 from $.13 in the second quarter
of  2003.  The  weighted  average  number  of  common  shares   outstanding  and
equivalents  increased  in the second  quarter of 2004 as compared to the second
quarter of 2003 to 8.4 million from 8.1 million in 2003.

SIX MONTHS ENDED JUNE 30, 2004 AND 2003

Revenues.  The Company had revenues of $76.8  million and $94.3  million for the
six  months  ended June 30,  2004 and June 30,  2003,  respectively.  This was a
decrease of $17.5 million or 18.6%.

Revenues from the  Institutional  Security Systems segment were $30.0 million in
the six months ended June 30, 2004, a decrease  from $49.1  million for the same
period of 2003. This was a decrease of $19.1 million or 38.9%. 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 its
working on less projects than it did in the previous year. The principal  reason
was because 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 first six months of 2004 as compared to the first six months of
2003.  At June 30, 2004,  the backlog for the  Institutional  Security  System's
segment was $62.8  million  which was a $5.5 million  increase over the December
31,  2003  backlog  amount.  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, 2003 and the first half of 2004, the
types of  projects  that the  Company  solicits,  namely  large-scale  medium to
maximum  security  installations,  declined  in 2003 and the first half of 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.


                                       21
<PAGE>


Revenues from the Attack Protection  segment was $13.7 million in the six months
ended June 30, 2004, a decrease  from $14.9 million for the same period of 2003.
This was a decrease of $1.2 million or 7.9%.  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 the first  half of 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 its fiber optic intrusion  detection systems.  During
the six months ended June 30, 2004 compared to June 30, 2003 the Norshield  line
experienced  a  25.6%  decline  in  revenues,  whereas  the  Fiber  SenSys  line
experienced  a  81.8%  increase  in  revenues.  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 has appeared to
stabilize.  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 for this segment. As of
June 30, 2004,  the Company was awarded five of these  embassy  projects,  for a
total CompuDyne  contract value of $11.2 million,  lost two embassy projects and
the eighth has yet to be awarded.  All indications are that this increased level
of new embassy  construction  will continue for at least the next several years.
We expect bidding on additional 16 embassies during the second half of 2004.

Revenues from the Federal  Security  Systems segment was $7.9 million in the six
months ended June 30, 2004, an increase from $7.8 million for the same period of
2003.  This was an increase of $0.1 million or 2.5%.  Substantially  all 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 June 30, 2004 was $6.3 million.

Revenues from the Public Safety and Justice segment was $25.2 million in the six
months ended June 30, 2004 an increase from $22.5 million for the same period of
2003. This was an increase of $2.6 million or 11.6%.  This increase was a result
of this  segment  shipping  more  hardware to its  software  clients than it did
during the six month period ended June 30, 2003.

Expenses.  Cost of goods sold of $55.5  million in the six months ended June 30,
2004 were down $15.3 million or 21.6% from $70.7 million  during the same period
of 2003.  This  decrease was a result of decreased  costs of goods sold of $17.4
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 27.7% for the six months ended June 30,
2004 as compared to 25.0% in 2003.

Cost of  goods  sold in the  Institutional  Security  Systems  segment  of $25.3
million for the six months ended June 30, 2004 were down $17.4  million or 40.7%
from $42.6 million  during the same period of 2003.  This decrease was more than
the related sales decrease of this segment of 38.9% resulting in a 2.6% decrease
in the gross profit  percentage to 15.8% from 13.3% in the six months ended June
30, 2003. During 2002, the West Coast operations of the  Institutional  Security
Systems segment  identified that the costs to complete its projects was 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 and as these projects neared  completion the  Institutional  Security
Systems segment identified  additional cost overruns which would cause the costs
to complete these projects to increase  resulting in a higher cost of goods sold
in 2003 as a result of the charges in estimate to complete.



                                       22
<PAGE>

These   increases  were   identified  and  recorded  in  the  cost  to  complete
calculations in the following periods.

                  Second Six Months of 2002                   $     2,400,000
                  First Six Months of 2003                          1,525,000
                  Second Six Months of 2003                           860,000
                  First Six Months of 2004                            256,000
                                                              ---------------
                           Total West Coast Margin Reductions $     5,041,000
                                                              ===============

As a result,  as these  projects  are being  brought to  completion  the revenue
generated by them is  resulting in little  margin or in some cases losses as the
additional  cumulative  costs overruns of $5.0 million were being identified and
realized.  To address this situation,  the Company  implemented more centralized
controls and replaced certain personnel at its West Coast operations. As of June
30, 2004 we believe that  additional  cost overruns to complete  these  projects
will be minimal,  and as of June 30, 2004 we have accrued for any known probable
losses.

Cost of goods sold in the Attack Protection segment of $11.7 million for the six
months ended June 30, 2004  increased  $0.2  million or 1.5% from $11.5  million
during  the same  period of 2003.  This  increase  occurred  in spite of a sales
decrease  of this  segment of 7.9%,  resulting  in a 7.9%  decrease in the gross
profit percentage to 14.6% from 22.6% during the six months ended June 30, 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 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  a  huge
contributor,  this did in fact result in further  utilization  of  approximately
12,000 square feet of  previously  unused  manufacturing  space in this plant in
Alabama.  In addition we identified a quality problem with the windows and doors
being  installed  on one  active  and  current  project.  As a  result  of  this
identified  problem,  we were  forced  to take  remedial  action in the field to
repair this defect.  During the first six months of June 30, 2004 we were forced
to increase our  estimated  cost to complete  this project by $0.9 thousand thus
causing this  project to become a negative  margin  project.  The entire loss on
this  project  was  recorded in the June 30, 2004  quarter.  As this  project is
brought to completion, it will be without any margin.

Cost of goods sold in the Federal  Security  Systems  segment of $6.8 million in
the six months  ended June 30,  2004  increased  $0.2  million or 3.3% from $6.6
million during the same period of 2003.  This increase was more than the related
sales  increase of this segment of 2.5%,  resulting  in an 0.7%  decrease in the
gross  profit  percentage  to 13.9% from 14.5% in the six months  ended June 30,
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 $11.7 million for
the six  months  ended  June 30,  2004 were up $1.7  million or 17.0% from $10.0
million during the same period of 2003.  This increase was more than the related
sales  increase of this segment of 11.6%,  resulting  in a 2.1%  decrease in the
gross  profit  percentage  to 53.6% from 55.8% in the six months  ended June 30,
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 customer.  As a result we recorded a $1.7  million
pre-tax  charge.  During the  second  quarter  of 2004 this  matter was  settled
resulting  in a recovery by the segment of $0.3  million of the accrued  charge,
which was reflected as a reduction of its cost of sales.

Selling,  general  and  administrative  expenses  was $16.8  million for the six
months  ended June 30,  2004,  an  increase  of $1.2  million or 7.5% from $15.7
million  for the same  period  of 2003.  Much of this  increase  is  related  to
additional  costs  incurred  by the  Company  related to legal fees  incurred in
connection  with  responding  to the  complaint  filed by the Public  Safety and
Justice  segment  customer,  expenses  incurred in  connection  with  evaluating
potential acquisitions,  recruiting fees incurred to fill the recently hired COO
position  and  other  senior  management   positions  and  to  comply  with  new
requirements mandated by the Sarbanes-Oxley Act and the SEC.



                                       23
<PAGE>


Research and Development expenses was $3.6 million for the six months ended June
30,  2004,  a decrease  of $0.3  million or 7.3% from $3.9  million for the same
period of 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.  During the first six  months of 2004  certain of the Public
Safety and Justice  research and development  resources were diverted to work on
revenue  producing  projects,  which  resulted in a decline in our  research and
development expenses.

The  following  table  compares the weighted  average of the Company's six month
period ended June 30, 2004 and 2003 interest bearing  borrowings and the related
rates charged thereon.


<TABLE>
<CAPTION>
                                                Monthly Weighted                 Monthly Weighted
                                                 Average - 2004                   Average - 2003
                                               Amount            Rate          Amount          Rate
                                            -------------      -------      ------------      ------
                                                   (in Thousands)                (in Thousands)
<S>                                         <C>                  <C>        <C>               <C>
Bank borrowings                             $       1,233        2.1%       $     18,205      3.9%
Industrial revenue bonds                    $       4,295        3.4%       $      4,883      3.7%
Subordinated borrowings                     $      40,250        6.3%                  -        -
Swap hedge agreement                        $       3,721        4.5%       $      6,426      4.0%

In addition the Company recorded
the following interest expense:
Amortization and write-off
    of deferred financing charges           $         273                   $        101
</TABLE>

Taxes on Income.  The effective tax rate was  approximately  40% during both the
six month periods ended June 30, 2004 and 2003.

Net Income.  The Company  reported net (loss) income of ($0.2)  million and $2.0
million in the first six months of 2004 and 2003, respectively. Diluted earnings
per share  decreased  to a loss of  ($.03) in the first six  months of 2004 from
$.24 in the first six  months of 2003.  The  weighted  average  number of common
shares  outstanding  and  equivalents  decreased to 8.0 million in 2004 from 8.1
million in 2003.  This  decrease in the  weighted  average  number of shares was
caused by the Company excluding anti-dilutive common stock equivalents caused by
the Company being in a loss position.

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 customers 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.

As of June 30, 2004, the Company had working  capital of $57.6 million  compared
with $28.8  million as of December 31,  2003.  The most  significant  changes in
working  capital were due to the cash proceeds from the 2011 Notes financing and
the  commensurate  pay down of the Company's debt, with the balance  invested in
available-for-sale marketable securities.

Net cash used by operating  activities  was $3.6 million in the first six months
of 2004 versus $9.4 million  provided by operating  activities  in the first six
months of 2003.

Net cash used for investing activities was $20.8 million in the first six months
of 2004  compared  to net cash used of $401  thousand in the first six months of
2003. In the first six months of 2004, a net cost of $20.5 million of marketable
securities were purchased.




                                       24
<PAGE>

Net cash provided by financing activities amounted to $26.3 million in the first
six months of 2004 compared with a net cash use of $6.2 million in the first six
months of 2003.  $13.5  million  of our bank  borrowings  were  repaid  from the
proceeds of the issuance of the 2011 Notes.

The following table  summarizes the long term debt of the Company as of June 30,
2004 and the payments due by period, in thousands.

                                   Long-term Debt
                                   --------------
         December 31:

               2004                 $         140
               2005                           440
               2006                           440
               2007                           440
               2008                           440
         Thereafter                        42,495
                                    -------------
         Totals                     $      44,395
                                    =============


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.

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 matures
on March 1, 2005.

The  Company's  total  outstanding  borrowings  at June  30,  2004  amounted  to
approximately $44.4 million. The 2011 Notes accounted for $40.2 million of these
borrowings.  The remaining  amount of $4.1 million  resulted from  borrowings at
variable rates and consisted of two industrial  revenue bonds outstanding in the
amounts of $1.5  million and $2.6  million.  The  interest  rate  charged to the
Company at June 30, 2004 for its  industrial  revenue  bonds was 1.21% and 1.18%
respectively. The variable interest rate for these borrowings fluctuated between
1.01% and 1.38%  during  the first  six  months of 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.

Other than the Company's  letters of credit,  which  amounted to $5.4 million at
June 30, 2004, the Company has no other material off balance sheet liabilities.

The Company had $19.6 million of unused  availability  under its lines of credit
at June 30, 2004.

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.
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.


                                       25
<PAGE>



The current interest rate  environment  nationally is 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  which  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  lines,  it intends to keep such
lines open and available to enhance its financial flexibility.

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 were 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.

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  customers  is  limited.  As a  result,  in  order to  enhance  its
profitability,  the  Company  recognizes  the need to  continue  to seek ways to
reduce its costs.

TOTAL BACKLOG

CompuDyne's  total backlog amounted to $136.9 million at June 30, 2004. This was
a  decrease  of 1.8% 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:

                                              June 30,           December, 31,
                                                 2004                2003
                                            ------------         -------------
Institutional Security Systems              $    62,765          $    57,258
Attack Protection                                17,761               10,043
Federal Security Systems                          6,296                8,326
Public Safety and Justice                        50,065               63,727
                                            -----------          -----------
         Totals                             $   136,887          $   139,354
                                            ===========          ===========

Included  in the backlog of the Public  Safety and  Justice  segment at June 30,
2004 and  December  31, 2003 is $3.7  million and $12.0  million,  respectively,
representing  awards  received by the segment,  for which the customers have not
yet entered into signed contracts. These awards are expected to result in signed
contracts over the next twelve months.

CRITICAL ACCOUNTING POLICIES

A complete description of the Company's significant  accounting policies appears
in the  Company's  Annual  Report to its  stockholders  and is  incorporated  by
reference  in its  Annual  Report on Form 10-K for the year ended  December  31,
2003.

PERCENTAGE OF COMPLETION ACCOUNTING AND REVENUE RECOGNITION

Approximately 75% 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   manufacturing   and
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 effect 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.



                                       26
<PAGE>

Revenues for support and  maintenance  contracts  are  deferred  and  recognized
ratably over the life of the contract.

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

GOODWILL AND INTANGIBLE ASSETS

The Company  reviews the carrying value of goodwill and  unamortized  intangible
assets  annually  during  the  fourth  quarter  of the year as of  October  1 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 and intangible
assets that totaled approximately $30.9 million, net, at June 30, 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
resultant  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 customers 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.

Over time the  Company  believes  these  units will  start to see a  significant
increase in business which has not as of yet begun.

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 our operations  during the first
six months of 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 June 30, 2004 the notional  amount of the swap agreement had
declined to $3.4  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 six months ended June 30, 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 three months ended June 30, 2004 was a
gain of $58 thousand, and the change in fair value of the interest rate swap for
the six months  ended June 30, 2004 was a gain of $87  thousand,  resulting in a
remaining  liability for the  investment of $68 thousand.  Future changes in the
value of the interest rate swap will be recognized in earnings.


                                       27
<PAGE>


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 its variable rate bank
notes  payable.  Subsequent  to the pay-down of its bank notes  payable 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.

RECENT ACCOUNTING PRONOUNCEMENTS

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  endied 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  Entitites" (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. FIN
46(R)  is  effective  for  entities   being   evaluated   under  FIN  46(R)  for
consolidation  no later  than the end of the first  reporting  period  that ends
after March 15,  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.

                                       28
<PAGE>

                                     ITEM 3

           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 information below summarizes our sensitivity to market risks associated with
fluctuations  in  interest  rates as of June 30,  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 June 30, 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 this
note offering 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
             Year Ending          Variable       Average Variable               Fixed           Average Fixed
             December 31           Rate ($)        Interest Rate                Rate ($)         Interest Rate
             -----------         -----------     -----------------      -----------------       --------------
 <S>                             <C>              <C>                   <C>                      <C>
               2004 (remaining)   $   140,000             1.7%              $           -                  -
               2005                   440,000             2.0%                          -                  -
               2006                   440,000             2.3%                          -                  -
               2007                   440,000             2.6%                          -                  -
               2008                   440,000             2.9%                          -                  -
               Thereafter           2,245,000             2.9%                40,250,000                 6.25%
                                  -----------                               -----------
               Total              $ 4,145,000             2.6%              $ 40,250,000                 6.25%
               Fair Value         $ 4,145,000             2.6%              $ 40,250,000                 6.25%

       Interest Rate Swaps

           Year Ending             Variable           Average       Average
           December 31             Rate ($)          Pay Rate    Receive Rate
           -----------            -----------        ---------   ------------
               2004 (remaining)   $ 1,352,940            4.9%           2.0%
               2005                 2,029,420            4.9%           3.0%
               2006                         -             -               -
               2007                         -             -               -
               2008                         -             -               -
               Thereafter                   -              -              -
                                  -----------
               Total              $ 3,382,360            4.9%           2.5%
               Fair Value         $   (67,599)

</TABLE>

                                       29
<PAGE>




                                     ITEM 4

                             CONTROLS AND PROCEDURES

The Company's management conducted an evaluation, under the supervision and with
the  participation of the Company's Chief Executive  Officer and Chief Financial
Officer,  of the  effectiveness  of the design and  operation  of the  Company's
disclosure  controls  and  procedures  as  of  June  30,  2004.  Based  on  this
evaluation,  the Chief Executive  Officer and Chief Financial  Officer concluded
that (i) the  Company's  disclosure  controls and  procedures  are  effective in
ensuring that information required to be disclosed in reports filed or submitted
to the SEC is accumulated and  communicated  to management,  including the Chief
Executive  Officer and Chief Financial  Officer,  as appropriate to allow timely
decisions  regarding required  disclosure and (ii) such information is recorded,
processed,  summarized and reported within the time periods specified in the SEC
rules and forms.

In addition, the Company's management, including the Chief Executive Officer and
Chief Financial Officer,  reviewed the Company's internal control over financial
reporting,  and  there  was no change in the  Company's  internal  control  over
financial  reporting  during  the six  months  ended  June  30,  2004  that  has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial  reporting.  The Company  continually strives to
improve its  disclosure  controls and  procedures  to enhance the quality of its
financial reporting.

                                       30
<PAGE>

                           PART II - OTHER INFORMATION

Item 1 - Legal Proceedings

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 customer.  As a result we recorded a $1.7 million  pre-tax
charge. During the second quarter of 2004 this contract was settled resulting in
a recovery  by the  segment of $0.3  million of the  accrued  charge,  which was
reflected as a reduction of its cost of sales.

Item 4 - Submission of Matters to a Vote of Security Holders

Proposal #2 -  Amendment  of the  Corporation's  Articles  of  Incorporation  to
Increase the Number of Authorized Shares of the Corporation's Common Stock.

At the Annual Meeting of Shareholders on May 27, 2004, the shareholders approved
an  amendment of the  Corporation's  Articles of  Incorporation  to increase the
number of authorized shares of the  Corporation's  capital stock from 17,000,000
to 52,000,000,  2,000,000  shares of preference  stock,  without par value,  and
50,000,000  shares of common  stock  having a par value of $0.75 per share.  The
votes were cast as follows:

For - 5,838,554        Against - 989,214          Abstain - 15,258

Proposal  #3 -  Amendment  of the 1996  Stock  Incentive  Compensation  Plan for
Employees.

At the Annual Meeting of Shareholders on May 27, 2004, the shareholders approved
the Amended and Restated 1996 Stock  Incentive  Compensation  Plan for Employees
increasing  the  number  of  shares  of  common  stock  which  may be  issued or
transferred  under the  Employee  Plan upon  exercise of options or other rights
from 1,800,000 shares to 4,000,000 shares. The votes were cast as follows:



For - 2,408,146        Against - 1,223,411        Abstain - 36,306

Broker non-vote - 3,175,263



Proposal #4 - Amendment of the Corporation's  Articles of Incorporation to Allow
the Board of Directors to Fill Vacancies on the Board Created by the Size of the
Board Being Increased.

At the Annual Meeting of Shareholders on May 27, 2004, the  shareholders did not
approve an amendment of the Corporation's Articles of Incorporation to allow the
Board of  Directors to fill  vacancies  on the Board  created by the size of the
Board being increased. The votes were cast as follows:



For - 2,853,384        Against - 796,756          Abstain - 17,622

Broker non-vote - 3,175,264



Item 6: Exhibits and Reports on Form 8-K
(a)      Exhibits -

3.1  Amendment to Articles of Incorporation of CompuDyne  Corporation filed with
     the  Secretary  of the State of Nevada on July 22,  2004,  incorporated  by
     reference to Registrant's Proxy Statement dated April 29, 2004 for its 2004
     Annual Meeting of Shareholders.

3.2  Amendment to By-laws as amended through June 30, 2004, filed herewith.

10.1 CompuDyne   Corporation   Amended  and   Restated   1996  Stock   Incentive
     Compensation  Plan for  Employees,  herein  incorporated  by  reference  to
     Registrant's  Proxy  Statement,  dated  April 29,  2004 for its 2004 Annual
     Meeting of Shareholders.

31.1 Certification  by Mr. Martin Roenigk,  Chief Executive  Officer pursuant to
     Rule 13a-14(a), filed herewith.

31.2 Certification  by Mr.  Geoffrey  F.  Feidelberg,  Chief  Financial  Officer
     pursuant to Rule 13a-14(a), filed herewith.

32.1 Certification Pursuant To Section 906 Of The Sarbanes-Oxley Act of 2002, 18
     U.S.C. Section 1350, for Mr. Martin Roenigk, Chief Executive Officer, filed
     herewith.

32.2 Certification Pursuant To Section 906 Of The Sarbanes-Oxley Act of 2002, 18
     U.S.C.  Section  1350,  for Mr.  Geoffrey F.  Feidelberg,  Chief  Financial
     Officer, filed herewith.


                                       31
<PAGE>


                                    SIGNATURE

  Pursuant to the  requirements  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



Date: July 30, 2004                            /s/ MARTIN ROENIGK
                                               ------------------------
                                               Martin Roenigk
                                               Chief Executive Officer

                                               /s/ GEOFFREY F. FEIDELBERG
                                               --------------------------
                                               Geoffrey F. Feidelberg
                                               Chief Financial Officer

                                       32