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, 2005
                                       OR

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


                For the transition period from        to
                                              -------    -------

                         Commission File Number 0-29798


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

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

              2530 Riva Road, Suite 201, Annapolis, Maryland 21401
                    (Address of principal executive offices)

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

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 August 5, 2005, a total of 8,113,579 shares of Common Stock, $.75 par
value, were outstanding.


<PAGE>


                     COMPUDYNE CORPORATION AND SUBSIDIARIES
                                      INDEX

<TABLE>
<CAPTION>

                                                                             Page No.
                                                                             --------
<S>                                                                             <C>
Part I.  Financial Information

   Item 1.  Financial Statements - Unaudited

      Consolidated Balance Sheets - June 30, 2005
      and December 31, 2004                                                     3

      Consolidated Statements of Operations -
      Three Months and Six Months Ended June 30, 2005 and 2004                  4

      Consolidated Statement of Changes in
      Shareholders' Equity - Six Months Ended
      June 30, 2005                                                             5

      Consolidated Statements of Cash Flows -
      Six Months Ended June 30, 2005 and 2004                                   6

      Notes to Consolidated Financial Statements                                7-15

   Item 2.  Management's Discussion and Analysis of
      Financial Condition and Results of Operations                             16-30

   Item 3.  Quantitative and Qualitative Disclosures
      About Market Risk                                                         31

   Item 4.  Controls and Procedures                                             32-33

Part II.  Other Information                                                     34

      Signature                                                                 35

</TABLE>


                                       2

<PAGE>


                          ITEM 1. FINANCIAL STATEMENTS

                     COMPUDYNE CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                   (unaudited)

<TABLE>
<CAPTION>

                                                                                 June 30,      December 31,
                                                                                   2005           2004
                                                                               -----------     ----------
                                                                                 (dollars in thousands)
                                     ASSETS
<S>                                                                                 <C>            <C>
Current Assets
        Cash and cash equivalents                                             $      4,432     $    5,198
        Marketable securities                                                        8,502         19,577
        Cash and marketable securities - pledged                                       489              -
        Accounts receivable, net                                                    31,354         34,291
        Contract costs in excess of billings                                        14,568         16,087
        Inventories                                                                  5,776          5,165
        Prepaid expenses and other                                                   6,001          5,412
                                                                               -----------     ----------
           Total Current Assets                                                     71,122         85,730

Cash and marketable securities - pledged                                             5,100              -
Property, plant and equipment, net                                                  11,169         12,094
Goodwill                                                                            25,932         25,894
Other intangible assets, net                                                         8,275          8,460
Other                                                                                  676            713
                                                                               -----------     ----------
           Total Assets                                                        $   122,274     $  132,891
                                                                               ===========     ==========

                      LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities
        Accounts payable and accrued liabilities                               $    18,269     $   21,771
        Billings in excess of contract costs incurred                               11,205         13,497
        Deferred revenue                                                             5,110          5,998
        Current portion of notes payable                                               440            440
                                                                               -----------     ----------
           Total Current Liabilities                                                35,024         41,706

Notes payable                                                                        3,265          3,565
Convertible subordinated notes payable, net                                         39,212         39,118
Deferred tax liabilities                                                             2,072          2,072
Other                                                                                  501            599
                                                                               -----------     ----------
           Total Liabilities                                                        80,074         87,060
                                                                               -----------     ----------

Commitments and Contingencies

Shareholders' Equity
        Preferred stock, 2,000,000 shares authorized and unissued                       -               -
        Common stock, par value $.75 per share:  50,000,000 shares
         authorized at June 30, 2005 and December 31, 2004; 8,945,356 and
         8,943,856 shares issued at June 30, 2005 and
         December 31, 2004, respectively                                             6,708          6,707
        Additional paid-in-capital                                                  44,371         44,368
        Accumulated deficit                                                         (3,230)          (272)
        Accumulated other comprehensive income                                          27             14
        Treasury stock, at cost; 831,777 and 721,077 shares
         at June 30, 2005 and December 31, 2004, respectively                       (5,676)        (4,986)
                                                                               -----------     ----------
           Total Shareholders' Equity                                               42,200         45,831
                                                                               -----------     ----------
           Total Liabilities and Shareholders' Equity                          $   122,274      $ 132,891
                                                                               ===========     ==========

</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 June 30,         Six Months Ended June 30,
                                                       2005           2004                2005            2004
                                                  --------------  --------------     --------------  --------------
                                                                (in thousands, except per share data)
<S>                                                       <C>            <C>                 <C>            <C>
Revenues:
 Contract revenues earned                           $     23,263    $    29,093        $     50,523    $    59,015
 Other revenues                                            7,841          8,690              16,887         17,795
                                                  --------------  --------------     --------------  --------------
   Total revenues                                         31,104         37,783              67,410         76,810

Cost of sales                                             20,677         26,636              44,600         55,465
                                                  --------------  --------------     --------------  --------------

Gross profit                                              10,427         11,147              22,810         21,345

Selling, general & administrative expenses                10,295          8,677              20,322         16,831
Research and development                                   2,242          1,874               4,353          3,629
                                                  --------------  --------------     --------------  --------------
(Loss) income from operations                             (2,110)           596              (1,865)           885
                                                  --------------  --------------     --------------  --------------

Other expense (income)
 Interest expense                                            750            845               1,553          1,594
 Interest income                                            (210)          (344)               (438)          (414)
 Other expense (income)                                      (11)           (58)                (22)            63
                                                  --------------  --------------     --------------  --------------
   Total other expense                                       529            443               1,093          1,243
                                                  --------------  --------------     --------------  --------------

(Loss) income before income taxes                         (2,639)           153              (2,958)          (358)
Income taxes expense (benefit)                                 -             63                   -           (141)
                                                  --------------  --------------     --------------  --------------
Net (loss) income                                   $     (2,639)    $       90         $    (2,958)   $      (217)
                                                  ==============  ==============     ==============  ==============

(Loss) income per share:
--------------------------------------------------
Basic (loss) income per common share                $       (.33)    $      .01         $      (.36)   $      (.03)
                                                  ==============  ==============     ==============  ==============

Weighted average number of common
shares outstanding                                         8,118          8,075               8,141          8,042
                                                  ==============  ==============     ==============  ==============

Diluted (loss) income per common share              $       (.33)   $      .01          $     (.36)    $     (.03)
                                                  ==============  ==============     ==============  ==============

Weighted average number of common
shares and equivalents                                     8,118          8,376               8,141          8,042
                                                  ==============  ==============     ==============  ==============

</TABLE>


                                       4

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


<PAGE>



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

<TABLE>
<CAPTION>

                                                                                 Accumulated
                                                         Additional                 Other
                                      Common Stock        Paid-in    Accumulated Comprehensive      Treasury Stock
                                   Shares       Amount    Capital      Deficit      Income       Shares       Amount      Total
                                -----------  ----------  ----------  ----------   -----------  ----------  ----------  -----------
<S>                                   <C>      <C>         <C>         <C>           <C>              <C>   <C>         <C>
Balance at January 1, 2005            8,944    $  6,707    $ 44,368    $   (272)     $     14         721   $  (4,986)  $  45,831
Stock options exercised                   1           1           3                                                             4
Purchase of treasury shares                                                                           111        (690)       (690)
                                -----------  ----------  ----------  ----------   -----------  ----------  ----------  -----------
 Subtotal                             8,945       6,708      44,371        (272)           14         832      (5,676)     45,145
Comprehensive income:
 Net (loss)                                                              (2,958)                                           (2,958)
Other comprehensive
income, net of tax:
Unrealized gain on available for
sale marketable securities                                                                 13                                  13
                                                                                                                       -----------
Comprehensive income                                                                                                       (2,945)
                                -----------  ----------  ----------  ----------   -----------  ----------  ----------  -----------
Balance at June 30, 2005              8,945    $  6,708    $ 44,371    $ (3,230)     $     27         832   $  (5,676)  $  42,200
                                ===========  ==========  ==========  ==========   ===========  ==========  ==========  ===========

</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,
                                                                      2005             2004
                                                                 --------------   --------------
                                                                          (in thousands)
<S>                                                                       <C>              <C>
Cash flows from operating activities:
  Net loss                                                              $(2,958)           $(217)

Adjustments to reconcile net income to
net cash provided by operations:
  Depreciation and amortization                                           1,724            1,367
  Gain from disposal of property, plant and equipment                        (2)              (1)
  Amortization of debt discount                                              94               83
  Unrealized gain on interest rate swap                                      18               68
  Amortization of discount on marketable securities                          (7)            (122)

Changes in assets and liabilities:
  Accounts receivable                                                     2,923            1,630
  Contract costs in excess of billings                                    1,519            2,121
  Inventories                                                              (611)             530
  Prepaid expenses and other current assets                                (599)            (462)
  Other assets                                                               37              125
  Accounts payable and accrued liabilities                               (3,517)          (3,908)
  Billings in excess of contract costs incurred                          (2,292)          (3,182)
  Deferred revenue                                                         (888)          (1,554)
  Other liabilities                                                         (98)             (90)
                                                                 --------------   --------------
Net cash flows used in operating activities                              (4,657)          (3,612)
                                                                 --------------   --------------

Cash flows from investing activities:
  Purchase of marketable securities                                      (7,721)         (31,195)
  Redemption of marketable securities                                    13,237           10,662
  Additions to property, plant and equipment                               (615)            (315)
  Proceeds from sale of property, plant and equipment                         3                1
  Net payment for prior year acquisition                                    (27)               -
                                                                 --------------   --------------
Net cash flows provided by (used in) investing activities                 4,877          (20,847)
                                                                 --------------   --------------

Cash flows from financing activities:
  Issuance of common stock                                                    4              890
  Purchase of treasury shares                                              (690)               -
  Repayment of notes payable                                               (300)         (13,513)
  Borrowings of convertible subordinated notes payable                        -           38,942
                                                                 --------------   --------------
Net cash (used in) provided by financing activities                        (986)          26,319
                                                                 --------------   --------------

Net change in cash and cash equivalents                                    (766)           1,860
Cash and cash equivalents at beginning of period                          5,198            1,869
                                                                 --------------   --------------
Cash and cash equivalents at end of period                               $4,432           $3,729
                                                                 ==============   ==============

</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 ACCOUNTING 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, 2004 has been  derived from the
Company's December 31, 2004 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 in this Form 10-Q are
adequate to make the information presented not misleading.

In the opinion of the Company, the accompanying unaudited consolidated financial
statements reflect all necessary adjustments and reclassifications (all of which
are  of a  normal,  recurring  nature,  unless  otherwise  disclosed)  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, 2004.  Operating results for the three
and six  month  periods  ended  June  30,  2005  and  2004  are not  necessarily
indicative of operating results for the entire fiscal year.

Comprehensive  Income  (Loss)  The  following  table  shows  the  components  of
comprehensive  income (loss), net of income taxes, for the six months ended June
30, 2005 and 2004, in thousands.

<TABLE>
<CAPTION>

                                                                  For the Six Months
                                                                    Ended June 30,
                                                                 2005          2004
                                                             -------------  ------------
<S>                                                                     <C>        <C>
   Net loss                                                   $     (2,958)   $    (217)
   Unrealized gain (loss) on available-for-sale securities              13         (205)
   Ineffectiveness of interest rate swap agreement                       -           93
                                                             -------------  ------------
   Comprehensive loss                                         $     (2,945)   $    (329)
                                                             =============  ============

</TABLE>


Stock-Based Compensation
As of June 30,  2005,  the  Company  continues  to account  for its  stock-based
compensation  plans, using the intrinsic value method and in accordance with the
recognition  and measurement  principles of APB Opinion No. 25,  "Accounting for
Stock Issued to Employees," and related Interpretations. No stock-based employee
compensation  cost is  reflected  in the results of  operations,  as all options
granted had an exercise  price equal to the fair market value of the  underlying
common  stock  on the  date  of  grant.  The  following  table  illustrates,  in
accordance  with the  provisions of SFAS No. 148,  "Accounting  for  Stock-Based
Compensation - Transition and  Disclosure,"  the effect on net income (loss) and
earnings (loss) per share if the Company had applied the fair value  recognition
provisions  of SFAS No. 123R,  "Accounting  for  Stock-Based  Compensation,"  to
stock-based employee compensation.

<TABLE>
<CAPTION>

                                                    For the Three Months Ended       For the Six Months Ended
                                                              June 30,                        June 30,
                                                        2005         2004              2005            2004
                                                   -------------  -------------    -------------  -------------
                                                              (in thousands, except per share data)
<S>                                                  <C>            <C>              <C>            <C>
Net income (loss), as reported                       $    (2,639)   $       90       $    (2,958)   $     (217)
Deduct:  Total stock-based employee compensation
 expense determined under fair value based method
for all awards, net of related tax effects                  (290)         (261)             (566)         (509)
                                                   -------------  -------------    -------------  -------------
Pro forma net loss                                   $    (2,929)   $     (171)      $    (3,524)   $     (726)
                                                   =============  =============    =============  =============

Earnings (loss) per share:
Basic - as reported                                  $      (.33)   $      .01       $      (.36)   $     (.03)
Basic - pro forma                                    $      (.36)   $     (.02)      $      (.43)   $     (.09)

Diluted - as reported                                $      (.33)   $      .01       $      (.36)   $     (.03)
Diluted - pro forma                                  $      (.36)   $     (.02)      $      (.43)   $     (.09)

</TABLE>


                                       7

<PAGE>


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 Ended         For the Six Months Ended
                                            June 30,                          June 30,
                                      2005           2004                2005         2004
                                 -------------  ---------------     ------------  --------------
<S>                                   <C>            <C>                 <C>          <C>
   Expected life in years             5.3            5.5                 5.3          5.5
   Risk-free interest rate            3.8%           3.3%                4.0%         3.2%
   Expected volatility               81.7%          76.6%               82.3%        76.6%

</TABLE>


On May 27, 2005, the Company's shareholders approved amendments to the CompuDyne
Corporation  1996  Stock  Incentive  Compensation  Plan  for  Employees  and the
CompuDyne  Corporation 1996 Stock Option Plan for Non-Employee  Directors ("1996
Plans")  to provide  primarily  for a  definition  of a change in  control.  The
Company  does not believe  the  amendments  have a material  impact on the stock
awards issued under the 1996 Plans.

On May 27, 2005, the Company's  shareholders  approved the CompuDyne Corporation
2005  Stock  Incentive   Compensation  Plan  for  Employees  and  the  CompuDyne
Corporation 2005 Stock Option Plan for Non-Employee Directors ("2005 Plans") and
authorized  awards  exercisable  for up to 4,000,000 and 400,000  common shares,
respectively,  under the 2005 Plans.  The 2005 Plans are intended to replace the
1996 Plans, which will expire in 2006, and contain similar provisions.  The 2005
Plans permit the  issuance of either  incentive  stock  awards or  non-qualified
stock awards.

Income Taxes
The effective tax rate was zero for the three and six months ended June 30, 2005
and the effective tax rate was approximately 41.2% and 39.4%, respectively,  for
the three and six months ended June 30,  2004.  The Company has decided to fully
reserve  its net  deferred  tax  assets,  as it has  determined  that due to the
Company's recent operating losses there is uncertainty as to whether more likely
than not the assets will be realized.

Other Recently Issued Accounting Pronouncements

In  May  2005,  the  FASB  issued  SFAS  154,   "Accounting  Changes  and  Error
Corrections" (SFAS 154) which replaces APB Opinion No. 20, "Accounting  Changes"
and SFAS 3, "Reporting  Accounting  Changes in Interim  Financial  Statements-An
Amendment of APB Opinion No. 28." SFAS 154 provides  guidance on the  accounting
for and reporting of accounting  changes and error  corrections.  It establishes
retrospective  application,  or the latest  practicable  date,  as the  required
method for  reporting a change in  accounting  principle  and the reporting of a
correction  of an  error.  SFAS 154 is  effective  for  accounting  changes  and
corrections of errors made in fiscal years beginning after December 15, 2005. We
are currently  evaluating  the effect that the adoption of SFAS 154 will have on
our consolidated results of operations and financial condition but do not expect
it to have a material impact.

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

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

In  December  2004,  the FASB  issued SFAS No.  123R,  "Share-Based  Payment," a
revision  of  SFAS  No.  123,  "Accounting  for  Stock-Based  Compensation"  and
superseding APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS
No.  123R  requires  the Company to expense  grants made under its stock  option
program. That cost will be recognized over the vesting period of the plans. SFAS
No. 123R is effective for the first annual period beginning after June 15, 2005.
The  Company  has not yet  determined  the method of  adoption  or the effect of
adopting SFAS 123R, and has not  determined  whether the adoption will result in
amounts  that are similar to the current pro forma  disclosures  under SFAS 123.
The Company is evaluating the alternatives allowed under the standard, which the
Company is required to adopt beginning in the first quarter of 2006.


                                       8

<PAGE>


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

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

2.   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,  warrants,  or 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  1,557,333  and 651,200  shares for the
three  month  periods  ended  June 30,  2005 and  2004,  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 for both the three month periods ended June 30, 2005
and 2004 as the effect is  antidilutive.  Stock options and warrants to purchase
1,550,233  and 651,200  shares for the six month periods ended June 30, 2005 and
2004, 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 also excluded for both the
six month periods ended June 30, 2005 and 2004 as the effect is antidilutive.

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

<TABLE>
<CAPTION>

                                                                Three Months Ended                Six Months Ended
                                                                    June 30,                         June 30,
                                                               2005           2004              2005           2004
                                                          -------------  --------------    --------------  -------------
                                                                       (in thousands, except per share data)
<S>                                                         <C>             <C>              <C>             <C>
   Net income (loss)                                        $    (2,639)    $        90      $     (2,958)   $      (217)
                                                          =============  ==============    ==============  =============
   Weighted average common shares outstanding                     8,118           8,075             8,141          8,042
   Effect of dilutive stock options and warrants                      -             301                 -              -
                                                          -------------  --------------    --------------  -------------
   Diluted weighted average common shares outstanding             8,118           8,376             8,141          8,042
                                                          =============  ==============    ==============  =============
   Net income (loss) per common share
   Basic                                                    $      (.33)    $       .01      $       (.36)   $      (.03)
   Diluted                                                  $      (.33)    $       .01      $       (.36)   $      (.03)

</TABLE>

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

The 2011 Notes contain contingent participation rights. The participation rights
are contingent  upon the ability,  based on the  undistributed  earnings for the
period, of the Company to declare and distribute dividends per share equal to or
in  excess  of the per share  fair  value of the  Company's  common  stock.  The
contingency  was not met for the three month or six month periods ended June 30,
2005  or June  30,  2004.  Accordingly,  no  undistributed  earnings  have  been
allocated to the 2011 Notes.  At each  reporting  period,  the Company  assesses
whether the contingency criteria have been met and consequently if undistributed
earnings should be allocated to participating securities.


                                       9

<PAGE>


3.   INVESTMENTS IN MARKETABLE SECURITIES

The  Company's  marketable  securities  are  categorized  as  available-for-sale
securities,  as defined by SFAS No. 115,  "Accounting for Certain Investments in
Debt and Equity  Securities." At June 30, 2005 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
cost for marketable securities was determined using the specific  identification
method and  adjusted for  accretion  of  discounts  from the date of purchase to
maturity.  The  accretion  is included in  interest  income.  The fair values of
marketable  securities are estimated  based on the quoted market price for these
securities.

Effective  March 4, 2005, the Company  agreed to pledge to its bank,  marketable
securities  equal to 111.11% of the value of its  outstanding  letters of credit
issued by the Company's bank under the Amended and Restated Credit agreement, or
cash  equal to 100% of the value of its  outstanding  letters  of  credit,  or a
combination thereof.

At June 30, 2005, $5.6 million of cash and marketable securities,  at fair value
($30 thousand  more than was  required),  were pledged to the Company's  bank to
secure the $5.0  million of letters of credit  issued by the bank.  Of this $5.6
million of cash and  marketable  securities,  $489 thousand was  classified as a
current asset, with the remainder classified as a long-term asset.

Marketable securities at June 30, 2005 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 and
         Freddie Mac                                     $ 14,046     $     45    $    -    $ 14,091

</TABLE>

The cost and estimated fair value of current  marketable  securities at June 30,
2005, by contractual maturity,  are shown below. Expected maturities will differ
from contractual maturities because the issuers of the securities have the right
to repay obligations without prepayment penalties. It is the Company's policy to
classify  available-for-sale  securities  that are  available for use in current
operations as a current asset.

                                                               Estimated
         (in thousands)                            Cost        Fair Value
                                                  --------      --------
         Due after one year and beyond            $ 14,046      $ 14,091
                                                  --------      --------
         Total debt securities                    $ 14,046      $ 14,091
                                                  ========      ========

4.   INVENTORIES

Inventories consist of the following, in thousands:

<TABLE>
<CAPTION>
                                                                       June 30,       December 31,
                                                                         2005             2004
                                                                      -----------     -----------
<S>                                                                         <C>            <C>
      Raw materials                                                    $    4,052      $   4,241
      Work in progress                                                      2,646          1,890
      Finished goods                                                          400            396
                                                                      -----------     -----------
      Total inventory                                                       7,098          6,527
      Reserve for excess and obsolete inventory                            (1,322)        (1,362)
                                                                      -----------     -----------
      Inventories, net                                                 $    5,776      $   5,165
                                                                      ===========     ===========

</TABLE>

5.   GOODWILL

The  December  31,  2004 and June 30,  2005  consolidated  financial  statements
include the fair market value of the assets acquired and liabilities assumed and
the related  allocations of the purchase price related to the acquisition of the
assets of 90 Degrees,  Inc. ("90 Degrees") on August 11, 2004. Goodwill recorded
for the 90 Degrees. asset acquisition was approximately $1.9 million.

The December 31, 2004 and June 30, 2005 consolidated  financial  statements also
include the fair market value of the assets acquired and liabilities assumed and
the related  allocations of the purchase price related to the acquisition of the
assets of Copperfire  Software  Solutions,  Inc.  ("Copperfire") on December 15,
2004.  Goodwill  recorded for the Copperfire asset acquisition was approximately
$1.4 million.


                                       10

<PAGE>


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 $25.9 million at June 30, 2005.

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

                                                 June 30,      December 31,
                                                   2005            2004
                                                ----------       --------
      Attack Protection                         $      728       $    728
      Public Safety & Justice                       25,204         25,166
                                                ----------       --------
                                                $   25,932       $ 25,894
                                                ==========       ========

6.   INTANGIBLE ASSETS

The  December  31,  2004 and June 30,  2005  consolidated  financial  statements
include the fair market value of the assets acquired and liabilities assumed and
the related  allocations of the purchase price related to the acquisition of the
assets of 90 Degrees on August 11,  2004.  Intangible  assets for the 90 Degrees
asset acquisition are approximately $60 thousand.

The  December  31,  2004 and June 30,  2005  consolidated  financial  statements
include the fair market value of the assets acquired and liabilities assumed and
the related  allocations of the purchase price related to the acquisition of the
assets of Copperfire on December 15, 2004.  Intangible assets for the Copperfire
asset acquisition are approximately $60 thousand.

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

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

Intangible assets consist of the following, in thousands:

<TABLE>
<CAPTION>

                                                      June 30,      December 31,       Amortizable
                                                        2005              2004            Lives
                                                 ------------       ------------        ------------
<S>                                                     <C>                <C>             <C>
                                                                                       (in years)
         Trade names                                $   5,673           $  5,673       Indefinite
         Customer relationships                         2,500              2,500           14
         Backlog                                          300                300     Fully amortized
         Other                                          1,185              1,305          1-20
                                                 ------------       ------------
                                                        9,658              9,778
         Less:  accumulated amortization               (1,383)            (1,318)
                                                 ------------       ------------
                                                    $   8,275           $  8,460
                                                 ============       ============

</TABLE>

Amortization  expense  for the  Company's  intangible  assets for the six months
ended June 30, 2005 was $184 thousand. The following schedule lists the expected
amortization  expense  for each of the next five years  ending  December  31, in
thousands:

              Year
              ----
              2005 (remaining)          $      125
              2006                             265
              2007                             257
              2008                             225
              2009                             225
                                        ----------
              Total                     $    1,097
                                        ==========


                                       11

<PAGE>


7.   NOTES PAYABLE AND LINE OF CREDIT

<TABLE>
<CAPTION>

                                                                                     June 30,            December 31,
                                                                                       2005                  2004
                                                                                    ----------            ----------
                                                                                           (in thousands)
<S>                                                                                 <C>                   <C>
Industrial revenue bond, interest payable quarterly at a variable rate of 1.65%
to 3.26% (2.60% at June 30, 2005) principal payable in quarterly installments of
$35,000. The bond is fully collateralized
by a $1.4 million letter of credit and a bond guarantee agreement.                  $    1,400            $   1,400

Industrial revenue bond, interest payable quarterly at a variable rate
of 1.62% to 3.15% (2.43% at June 30, 2005)  principal payable
in yearly installments of $300,000 until 2013 when the installments become
$100,000.  The bond is fully collateralized
by a $2.3 million letter of credit and a bond guarantee agreement.                       2,305                 2,605

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                40,250
                                                                                    ----------            ----------

         Total notes payable                                                            43,955                44,255
         Less convertible subordinated notes discount                                    1,038                 1,132
                                                                                    ----------            ----------
           Subtotal                                                                     42,917                43,123
         Less amount due within one year                                                   440                   440
                                                                                    ----------            ----------
                                                                                    $   42,477            $   42,683
                                                                                    ==========            ==========

</TABLE>

Maturities of notes payable are as follows, in thousands:

                     Year Ending December 31,               Amount
                     ------------------------             ----------
                              2005 (remaining)              $    140
                              2006                               440
                              2007                               440
                              2008                               440
                              2009                               440
                              Thereafter                      42,055
                                                          ----------
                                                            $ 43,955

On January 22,  2004,  the  Company  completed  an  offering  of $40.25  million
principal  amount of the 2011 Notes.  The 2011 Notes bear  interest at a rate of
6.25% per annum,  payable  semi-annually,  and are  convertible  into  shares of
common stock at a conversion price of $13.89 per share,  subject to adjustments.
The 2011 Notes are  subordinated  to all other  liabilities of the Company.  The
June 30, 2005 carrying value is listed below, in thousands.

                           Face value                          $   40,250
                           Underwriters discounts, net              1,038
                                                              ------------
                                                               $   39,212

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

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


                                       12

<PAGE>


The debt issuance  costs for the 2011 Notes are recorded as  non-current  assets
and are amortized on a straight-line  basis to interest expense over the term of
the 2011 Notes. In addition,  underwriters'  discounts  totaled $1.3 million and
are amortized on a straight-line  basis to interest expense over the term of the
2011  Notes.  Interest  expense  recorded  for the  total of the  deferred  debt
issuance  costs  and  underwriters'  discounts  on the 2011  Notes  totaled  $63
thousand  and $63  thousand  for the three  months ended June 30, 2005 and 2004,
respectively,  and $126 thousand and $119 thousand for the six months ended June
30, 2005 and 2004, respectively.

On March 31, 2004, the Company signed an Amended and Restated  Credit  Agreement
for a $25.0  million  secured  working  capital line of credit.  This  agreement
provided for borrowings against eligible accounts receivable and inventories and
contained various financial  covenants,  including among other things, a minimum
fixed charge coverage ratio,  maximum debt to earnings before  interest,  taxes,
depreciation  and amortization  ("EBITDA")  ratio,  minimum EBITDA  covenant,  a
minimum  consolidated  tangible net worth covenant,  a maximum permitted capital
expenditures covenant,  and a covenant restricting the payment of dividends.  Of
this line of credit,  $10.0  million  matures on March 1, 2007 and $15.0 million
was to mature on March 1, 2005.  At June 30, 2005,  $5.0  million was  committed
principally as letters of credit securing the Industrial Revenue Bonds.

On October 29, 2004 and March 4, 2005,  the Company and its banks  entered  into
amendments  to the  credit  agreement  pursuant  to which the banks  waived  the
Company's  non-compliance  with its fixed charge  coverage  ratio covenant as of
September 30, 2004 and  non-compliance  with its minimum  EBITDA  covenant as of
December 31, 2004, respectively.  In addition, the Company and its banks amended
the credit  agreement to  eliminate  the $15.0  million line of credit  maturing
March 2005 and to require  borrowings  under its $10.0 million line of credit to
be collateralized by pledged marketable securities equal to 111.11% of the value
of such  borrowings  or cash equal to the value of such  borrowings.  The credit
agreement was also amended to eliminate the quarterly  minimum  EBITDA  covenant
for the  Company's  fiscal years  ending after  December 31, 2004 and to provide
that the minimum fixed charge  coverage ratio  covenant,  maximum debt to EBITDA
ratio covenant and the minimum consolidated tangible net worth covenant will not
become  effective  until March 31, 2006. On May 3, 2005,  the  Company's  lender
confirmed  in writing  that  there  will not be any event of  default  under the
various credit agreements,  by virtue of the Company's failure to timely file an
amendment to its Annual Report on Form 10-K for the year ended December 31, 2004
(the "2004  10-K") to  provide  management's  report on  internal  control  over
financial  reporting  as of  December  31,  2004 and the  related  report of the
Company's   independent   registered  public  accounting  firm  on  management's
assessment of the  effectiveness  of internal  control over financial  reporting
(together,  the "404 Report") required by Section 404 of the  Sarbanes-Oxley Act
of 2002.  The 404 Report was filed with the SEC on Form 10-K/A on June 27, 2005.
The Company was in compliance with the required bank covenants at June 30, 2005.

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

In January  2004,  the interest rate swap ceased to be a  highly-effective  cash
flow  hedge  when  the  related  debt  was  repaid.  Consequently,  the  amounts
previously  recorded in other  comprehensive  income as changes in fair value of
the interest rate swap were  recognized in earnings for the year ended  December
31, 2004. Upon determination of the hedge ineffectiveness the cumulative loss on
the fair value of the interest rate swap was $155 thousand, which was recognized
in other income.  The change in fair value of the interest rate swap for the six
months ended June 30, 2005 was a gain of $19 thousand,  resulting in a remaining
liability for the investment of $2 thousand.  Future changes in the value of the
interest rate swap will be recognized in earnings.

8.   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,  2005 the  Company  had a product  warranty  accrual  in the  amount of $335
thousand.  The changes in the product  warranty  liability  are displayed in the
following table, in thousands:

Beginning balance at January 1, 2005             $ 359
Plus:  accruals for product warranties             161
Less:  warranty charges/claims                    (185)
                                                 -----
Ending balance at June 30, 2005                  $ 335
                                                 =====


                                       13

<PAGE>


9.   OPERATING SEGMENT INFORMATION

The following is the operating  segment  information  for the three months ended
June 30, 2005 and 2004, in thousands:

<TABLE>
<CAPTION>

                                              Revenues                     Pre-tax Income (Loss)
                                   ------------------------------     ------------------------------
                                         2005           2004             2005           2004
                                   -------------  ---------------     -------------  ---------------
<S>                                  <C>            <C>                 <C>             <C>
Institutional Security Systems       $  11,728      $  13,954           $    (532)      $    (84)
Attack Protection                        6,065          6,741                (840)          (456)
Integrated Electronic Systems            1,888          4,371                  16            214
Public Safety and Justice               11,423         12,717                 400            960
CompuDyne Corporate                          -              -              (1,683)          (481)
                                   -------------  ---------------     -------------  ---------------
                                     $  31,104      $  37,783           $  (2,639)      $    153
                                   =============  ===============     =============  ===============

The following is the operating segment information for the six months ended June
30, 2005 and 2004, in thousands:


                                              Revenues                     Pre-tax Income (Loss)
                                   ------------------------------     ------------------------------
                                         2005           2004                2005           2004
                                   -------------  ---------------     -------------  ---------------
Institutional Security Systems       $  27,460      $  30,011           $     698       $    123
Attack Protection                       12,963         13,694                (341)        (1,135)
Integrated Electronic Systems            3,907          7,946                   8            414
Public Safety and Justice               23,080         25,159                 (82)         1,395
CompuDyne Corporate                          -              -              (3,241)        (1,155)
                                   -------------  ---------------     -------------  ---------------
                                     $  67,410      $  76,810           $  (2,958)      $   (358)
                                   =============  ===============     =============  ===============

</TABLE>

10.  CONTINGENCIES

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

In addition to claims with prime  contractors,  the Company may also make claims
against customers and customers may make claims against the Company.

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

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

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

On May 4, 2005,  the Company  received a notice from the Listing  Qualifications
Department of The Nasdaq Stock Market stating that, due to the Company's failure
to timely file the 404 Report,  the Company was no longer in compliance with the
requirements of Marketplace Rule 4310(c)(14) (the "Rule"). The Rule requires the


                                       14

<PAGE>


Company to file with Nasdaq copies of all reports  required to be filed with the
Securities  and Exchange  Commission  (the "SEC") on or before the date they are
required to be filed with the SEC.

On June 27, 2005,  the Company filed its Form 10-K/A with the SEC containing the
404 Report.  On June 30, 2005, the Nasdaq Listing  Qualifications  Panel advised
CompuDyne  that  CompuDyne had remedied its filing  delinquency  and was in full
compliance with Nasdaq Market Place Rules.

The Company  entered into the  Management  Compensation  Plan effective June 28,
2005 with  certain  members of  management.  The  Management  Compensation  Plan
provides  for cash  bonuses  and  acceleration  of all  vesting  of  unexercised
unvested stock awards upon the occurrence of a change in control,  as defined in
the agreement,  for eligible  employees.  A change in control, as defined in the
agreement,  did not  occur  during  the six  months  ended  June  30,  2005  and
therefore,  the  Company  did not record a  liability  or  related  compensation
expense for the Management Compensation Plan.

The Company,  as a government  contractor,  is from time to time subject to U.S.
Government  investigations  relating to its operations.  Government  contractors
that are found to have  violated  the  False  Claims  Act,  or are  indicted  or
convicted for  violations of other  federal  laws, or are  considered  not to be
responsible   contractors,   may  be  suspended  or  debarred  from   government
contracting  for some  period of time.  Such  convictions  could also  result in
fines.  Suspension  or  debarment  could have a material  adverse  effect on the
Company.


                                       15

<PAGE>


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

Introduction

Overview of CompuDyne Corporation

CompuDyne  Corporation was  reincorporated in Nevada in 1996. We were originally
incorporated in 1952. We believe that we are a leading  provider of products and
services to the public security markets.  We operate in four distinct  segments:
Institutional  Security Systems ("ISS");  Attack Protection  ("AP");  Integrated
Electronic Systems ("IES"); and Public Safety and Justice ("PS&J").

The  Institutional  Security  Systems  segment is  headquartered  in Montgomery,
Alabama and operates under the trade name Norment  Security  Group  ("Norment").
This segment provides physical and electronic  security products and services to
the corrections  industry  (prisons and jails) and to the courthouse,  municipal
and commercial markets. ISS typically serves as a subcontractor, responsible for
their portion of the 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 240 systems installed at more than 65
facilities, most of which are military installations.

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

The Attack Protection  segment is one of the country's largest  manufacturers of
bullet,  blast and attack resistant windows and doors designed for high security
applications such as embassies, courthouses, Federal buildings, banks, corporate
headquarters  and other  facilities  that insist on having the highest  level of
protection  currently  available.  We believe that we are a premier  provider of
Underwriters  Laboratory  ballistic standard UL-752 Level 8 security windows and
doors,  the highest rating level of commercial  ballistic  security  windows and
doors.  Our attack  resistant  windows and doors are integrated and structurally
secure  products with  specifically  designed  frames and  encasements  that are
integral  parts of the structure in which they are installed.  Existing  product
installations  number in the  thousands  and range from the  Middle  East to the
White House. AP is a significant  supplier of bullet and blast resistant windows
and doors to United  States  embassies  throughout  the  world.  AP works  under
contracts  from prime  contractors  who have  direct  contracts  with the United
States  Department of State,  the segment's  largest client.  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 Integrated  Electronic  Systems (formerly known as Federal Security Systems)
segment consists of CompuDyne-Integrated Electronics Division, LLC. Its customer
base  includes  the  military,   governmental  agencies,  and  state  and  local
governmental  units. IES 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.  IES provides  central  station  oversight  and control of multiple and
separate  facilities  as well as security  and public  life  safety  systems and
equipment.  This segment also 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  CompuDyne-Public  Safety and
Justice,  Inc.  (formerly  Tiburon,  Inc.),  CorrLogic,  LLC,  and the  recently
acquired  assets of 90 Degrees,  Inc.  ("90  Degrees)  and  Copperfire  Software
Solutions, Inc. ("Copperfire"). PS&J's software systems are used in a wide range
of  applications  within  the  public  safety and  criminal  justice  sectors of
governmental  units,  including  police,  fire and  emergency  medical  services
computer-aided dispatch systems, and police, fire, jail, prosecution,  probation
and court records management systems. We believe we are also a leading developer
of inmate management and institutional  medical software systems.  We specialize
in the development,  implementation  and support of complex,  integrated  inmate
management  software systems,  including inmate medical  management systems that
improve the efficiency and accuracy of correctional facility operations.

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

Cautionary Statement Regarding Forward-Looking Information

Certain  statements  made  in  this  Form  10-Q  with  regard  to the  Company's
expectations as to future revenues,  expenses,  financial  position and industry
conditions,  the Company's ability to secure new contracts, its goals for future
operations,   implementation  of  business  strategy  and  other  future  events
constitute  "forward-looking  statements"  within  the  meaning  of the  federal
securities  laws.  When  used in this Form  10-Q,  words  such as  "anticipate,"
"believe,"  "estimate,"  "expect,"  "intend"  and similar  expressions  identify
forward-looking statements.  Although the Company makes such statements based on
current  information and assumptions it believes to be reasonable,  there can be
no assurance that actual results will not differ materially from those expressed
or implied by such  forward-looking  statements.  Actual  results  could  differ
materially from those contemplated by the forward-looking statements as a result
of certain  important  factors,  including but not limited to, capital  spending
patterns  of the  security  market and the demand  for the  Company's  products,
competitive  factors  and  pricing  pressures,  changes in legal and  regulatory
requirements,  government budget problems,  the ability to successfully grow the
Company by completing acquisitions, the ability to remain in compliance with its
bank covenants,  delays in government procurement  processes,  ability to obtain
bid,  payment  and  performance  bonds on  various  of the  Company's  projects,
technological  change or  difficulties,  the ability to  refinance  debt when it
becomes due, product development risks, commercialization difficulties,  adverse
results in litigation, the level of product returns, the amount of remedial work
needed to be performed, costs of compliance with Sarbanes-Oxley requirements and
the impact of the failure to comply  with such  requirements,  risks  associated
with internal  control  weaknesses  identified in complying  with Section 404 of
Sarbanes-Oxley, and general economic conditions. Risks inherent in the Company's
business and with respect to future  uncertainties  are further described in our
other filings with the Securities Exchange Commission.

Management Outlook

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

     o    The first is increasing the amount of our backlog.

     o    The second is  migrating to a business  model with a more  predictable
          revenue stream.

     o    The third is to improve our cost structure  (including  evaluating our
          strategy  to  determine  if we would  benefit  from  focusing on fewer
          segments), quality, and customer and employee satisfaction.

We are continuing to experience a weakness in our overall  backlog.  Our backlog
is a key  indicator  of what our future  revenues  will look like.  Our  backlog
peaked at December 31, 2002, at which time it exceeded $204 million. Although it
saw a slight  increase at the ends of the second and third quarters in 2004, the
June 30, 2005  quarter is the first  recent  quarter in which we  experienced  a
significant  quarter-over-quarter  increase, when backlog stood at approximately
$131 million, as shown in the following table:


                                       17

<PAGE>


<TABLE>
<CAPTION>


                               Institutional                      Integrated          Public
                                 Security           Attack        Electronics       Safety and          Backlog
    (in thousands)                Systems         Protection        Systems           Justice            Total
                              ----------------------------------------------------------------------------------
<S>                              <C>               <C>              <C>               <C>               <C>
December 31, 2002                $ 99,527          $ 18,478         $ 11,440          $ 74,867          $204,312
March 31, 2003                   $ 91,602          $ 14,827         $ 11,667          $ 66,007          $184,103
June 30, 2003                    $ 81,916          $ 16,552         $ 10,643          $ 72,621          $181,732
September 31, 2003               $ 68,780          $ 14,375         $ 11,528          $ 65,962          $160,645
December 31, 2003                $ 57,258          $ 10,043          $ 8,326          $ 63,727          $139,354
March 31, 2004                   $ 52,147          $ 12,905          $ 9,269          $ 57,332          $131,653
June 30, 2004                    $ 62,765          $ 17,761          $ 6,296          $ 50,065          $136,887
September 30, 2004               $ 59,524          $ 19,351          $ 9,018          $ 50,215          $138,108
December 31, 2004                $ 49,324          $ 20,803          $ 8,299          $ 48,434          $126,860
March 31, 2005                   $ 42,700          $ 20,139          $ 8,395          $ 44,488          $115,722
June 30, 2005                    $ 56,492          $ 19,466          $ 9,105          $ 46,045          $131,108

</TABLE>

Historically,  approximately  90% of our revenues  were  generated  from sources
where the ultimate client is a federal,  state or local government unit.  During
the last few  years,  due to the  general  economic  slowdown,  state  and local
budgets,  which we are  dependent  on for our revenue  sources,  have come under
intense pressure.  Most states were running in a deficit situation, as were many
local  governments.  This caused many of them to delay and in some cases  cancel
many infrastructure projects until such time as their economic fortunes rebound.
In recent  months,  tax  revenues  have been  improving  resulting  in increased
activity  preparatory to the issuance of bids and ultimately the awarding of new
projects.  In addition, we have increased our sales and marketing efforts with a
specific objective of marketing to the commercial sector which inherently offers
faster project implementation schedules.

Our second area of focus is the  reengineering  of our business model so that it
contains  a  greater  percentage  of  recurring  revenue.  As  indicated  in the
following table, approximately 14.4% of our first six months of 2005 revenue was
generated from recurring revenue sources (primarily maintenance  revenues),  and
the  majority  of these  revenues  occurred  in our Public  Safety  and  Justice
segment.  We define one-time revenue as revenue derived from discrete  projects,
from which we do not expect to generate  incremental revenue upon the completion
of the project.  We define recurring revenue as sources of revenue from which we
anticipate  receiving  revenue in the current,  as well as future  periods,  for
example annual renewable maintenance contracts.

<TABLE>
<CAPTION>

                                                         Six Months Ended June 30, 2005
                                                         ------------------------------

       (in thousands)                  One-time Revenue      %       Recurring Revenue     %          Total
                                       -----------          ----        -----------      -----       --------
<S>                                         <C>             <C>                <C>         <C>        <C>
Institutional Security Systems         $    25,228          37.4        $     2,232        3.3       $ 27,460
Attack Protection                           12,963          19.2                  -          -         12,963
Integrated Electronic Systems                3,877           5.8                 30          -          3,907
Public Safety and Justice                   15,663          23.2              7,417       11.1         23,080
                                       -----------          ----        -----------      -----       --------
     Total                             $    57,731          85.6        $     9,679       14.4       $ 67,410
                                       ===========          ====        ===========      =====       ========

</TABLE>

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

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


                                       18

<PAGE>


current heightened regulatory  environment,  we are evaluating our structure and
strategy to determine if a less decentralized, or other organizational structure
would  result in lower  selling,  general  and  administrative  costs and we are
evaluating  our strategy to determine if we would benefit from focusing on fewer
segments.

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

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

On May 2, 2005, we filed a Form 8-K disclosing that the we failed to timely file
an amendment to our Annual  Report on Form 10-K for the year ended  December 31,
2004 to provide management's report on internal control over financial reporting
as of December  31, 2004 and the related  report of our  independent  registered
public  accounting  firm on  management's  assessment  of the  effectiveness  of
internal control over financial reporting (together,  the "404 Report") required
by Section 404 of the Sarbanes-Oxley Act of 2002.

On May 4, 2005, we received a notice from the Listing Qualifications  Department
of The Nasdaq  Stock  Market  stating that due to our failure to timely file the
404 Report, we were no longer in compliance with the requirements of Marketplace
Rule 4310(c)(14). The Rule requires us to file with Nasdaq copies of all reports
required to be filed with the  Securities  and Exchange  Commission on or before
the date they are required to be filed with the SEC.

On June 27, 2005,  the Company filed its Form 10-K/A with the SEC containing the
404 Report.  On June 30, 2005, the Nasdaq Listing  Qualifications  Panel advised
CompuDyne  that  CompuDyne had remedied its filing  delinquency  and was in full
compliance with Nasdaq Market Place Rules.

Results of Operations

THREE MONTHS ENDED JUNE 30, 2005 AND 2004

Revenues.  The Company had revenues of $31.1  million and $37.8  million for the
three months ended June 30, 2005 and June 30, 2004, respectively, representing a
decrease of $6.7 million or 17.7%. As discussed  below,  this decrease  occurred
throughout the Company's  segments,  with much of this decline  occurring in our
IES segment.

Revenues from the  Institutional  Security Systems segment were $11.7 million in
the three months ended June 30, 2005, a decrease from $14.0 million for the same
period  of  2004   representing  a  decrease  of  $2.2  million  or  16.0%.  The
Institutional   Security  Systems  segment  is  largely  a  construction  driven
business.  Much of its  revenue  is  obtained  by  working  on new and  retrofit
construction  projects  in the  corrections  industry,  as opposed to sources of
recurring revenue.  As such, the decrease in revenue experienced by this segment
is  largely  attributable  to our  working on less  projects  than we did in the
previous  year.  The  principal  reason for the  decline  was that  backlog  had
decreased  from $99.5  million at December 31, 2002 to $57.3 million at December
31, 2003  resulting  in less work  available  to be  performed in the year ended
December 31, 2004  compared to the year ended  December  31,  2003.  Backlog was
$49.3  million  and  $56.5  million  at  December  31,  2004 and June 30,  2005,
respectively. The years 2003 and 2004 were slow bidding periods for the Company.
Although  the gross  amount of  construction  spending in the  corrections  area
remained  relatively  flat between 2003 and 2004, the types of projects that the
Company solicits,  namely large-scale medium to maximum security  installations,
declined  significantly in 2003 and 2004. This situation was further  compounded
by the general state and local  governmental  budget deficits which caused these
governmental  units to  rethink  and  delay  many of their  pending  corrections
projects.

Revenues  from the  Attack  Protection  segment  were $6.1  million in the three
months ended June 30, 2005, a decrease  from $6.7 million for the same period of
2004  representing a decrease of $0.7 million or 10.0%. 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,


                                       19

<PAGE>


which encompasses fiber optic intrusion detection systems.  For the three months
ended June 30, 2005 the Norshield  line  experienced a 7.7% increase in revenues
as compared to the three months  ended June 30,  2004,  whereas the Fiber SenSys
line  experienced a 40.0%  decrease in revenues for the comparable  period.  The
Company  continues to see heightened  interest for its Fiber SenSys products and
expects sales for these items to experience sustainable growth. The slow-down in
the government  building process  experienced during 2002 and 2003 has reversed.
Projects are now being released for construction, and thus the Attack Protection
segment is experiencing increased bidding activity for its products. During 2003
the  Company  furnished  bids to supply  its  products  for  eight  new  embassy
projects.  At the time, this was the largest number of embassy projects bid in a
single  calendar  year for this  segment.  The Company was awarded four of these
embassy projects, for a total CompuDyne contract value of $7.0 million, and lost
the remaining four embassy project bids to  competitors.  During 2004, we bid on
fifteen  new  embassy  projects.  Through  June 30, 2005 the Company was awarded
seven of these embassy projects for a total contract value of $9.6 million,  and
lost seven embassy project bids to competitors,  with one project still awaiting
award. In 2005,  preliminary  indications  show twenty six embassy  projects are
being planned. We believe that this increased level of new embassy  construction
will continue for the next several years.

Revenues from the Integrated Electronic Systems segment were $1.9 million in the
three  months  ended June 30,  2005,  a decrease  from $4.4 million for the same
period of 2004  representing  a decrease of $2.5 million or 56.8%. A significant
portion of this segment's  revenue is backlog  driven.  Backlog at both December
31,  2003 and  December  31, 2004 was $8.3  million.  IES'  revenue  decline was
largely due to certain government clients, for which the segment receives repeat
business,  having had their budgets significantly  reduced. In addition, IES had
planned to work on one significant  project in the first half of 2005 which, due
to  customer  imposed  delays  due  to  its  falling  behind  on  infrastructure
construction, was not available to be worked on.

Revenues  from the Public  Safety and Justice  segment were $11.4 million in the
three months ended June 30,  2005,  a decrease  from $12.7  million for the same
period of 2004 representing a decrease of $1.3 million or 10.2%. The decline was
primarily the result of lower backlogs. It should be noted that although we made
two  acquisitions  in this  segment in 2004 (90 Degrees and  Copperfire),  these
acquisitions  had little impact on Public  Safety and Justice's  revenues due to
their relatively small size.

Expenses. Cost of sales of $20.7 million in the three months ended June 30, 2005
were down $6.0  million or 22.4% from $26.6  million  during the same  period of
2004.  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 33.5% for the three months ended June 30, 2005 as compared to 29.5% in 2004.

Cost of  goods  sold in the  Institutional  Security  Systems  segment  of $10.1
million for the three months ended June 30, 2005 were down $1.6 million or 13.3%
from $11.7 million  during the same period of 2004.  This decrease was less than
the  related  sales  decrease  of this  segment  of 16.0%,  resulting  in a 2.6%
decrease in the gross profit  percentage to 13.5% from 16.1% in the three months
ended June 30, 2005. Starting in 2002 and continuing through 2004, Institutional
Security Systems' senior management  identified  managerial problems at its West
Coast  operations and determined that numerous  problems existed there including
that the costs to complete its projects  were going to be  significantly  higher
than was previously projected. This was a result of significant cost overruns on
many  of  these  projects.   As  the  work  on  the  projects  progressed,   the
Institutional Security Systems segment identified additional cost overruns which
would cause the costs to complete  these projects to increase as a result of the
changes in the estimates to complete.  Although the problem projects  identified
in 2002 are  substantially  all  complete,  the  problems  in the ISS West Coast
operations  continued into 2003,  2004 and 2005. We realized that the management
changes made in 2002 did not  adequately  address the root problems  identified,
and as a result,  projects  started  after 2002  continued  to  experience  cost
overruns due to a lack of appropriate oversight. Staff and management changes in
ISS are ongoing.  We have revised our estimates to complete  these  projects and
believe that all future costs on these projects have been adequately  considered
through June 30, 2005. It should be noted that as the West Coast office is being
downsized  to  a  sales  and  support  office,  new  profitable  projects  which
previously  would have been  executed by this office have been and will continue
to be transferred  to the ISS  Montgomery  office  division  headquarters  where
execution  will occur.  This has left the West Coast office to run the remaining
projects  which have little or no gross  margin in them.  Therefore,  since this
office  will be  performing  work on which no  profit is  available  to be made,
combined with the fact that the office has fixed overhead costs, will cause this
office to lose money through 2005.

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


                                       20

<PAGE>


          Second Half of 2002                           $ 2,698
          First Quarter of 2003                             595
          Second Quarter of 2003                          1,079
          Third Quarter of 2003                             541
          Fourth Quarter of 2003                          1,872
          First Quarter of 2004                           1,271
          Second Quarter of 2004                          1,139
          Third Quarter of 2004                           1,516
          Fourth Quarter of 2004                          2,166
          First Quarter of 2005                             740
          Second Quarter of 2005                            472
                                                        -------
                  Total West Coast Losses               $14,089
                                                        =======

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

Cost of goods sold in the Attack  Protection  segment  of $4.7  million  for the
three  months  ended June 30,  2005  decreased  $1.0  million or 17.2% from $5.7
million  during the same period of 2004.  This  decrease  was  greater  than the
related sales decrease of this segment of 10.0%, resulting in a 6.7% increase in
the gross  profit  percentage  to 22.8% from 16.1% during the three months ended
June 30, 2004. Fiber SenSys sales have a higher margin than does the windows and
door component of the Attack Protection segment.

Cost of goods sold in the Integrated  Electronic Systems segment of $1.5 million
in the three  months  ended June 30, 2005  decreased  $2.2 million or 58.8% from
$3.8 million during the same period of 2004.  This decrease was consistent  with
the  related  sales  decrease  of this  segment  of 56.8%,  resulting  in a 4.0%
increase in the gross profit  percentage to 18.0% from 14.0% in the three months
ended June 30, 2004.  Substantially  all of the projects awarded in this segment
are discrete projects.

Cost of goods sold in the Public Safety and Justice  segment of $4.3 million for
the three  months  ended June 30, 2005 was down $1.2  million or 22.0% from $5.5
million  during 2004.  This decrease was more than the related sales decrease of
this  segment  of  10.2%,  resulting  in a 5.7%  increase  in the  gross  profit
percentage  to 62.4%  from  56.7%  in the  three  months  ended  June 30,  2004.
Substantially all of the projects awarded in this segment are discrete projects.

Selling,  general and  administrative  expenses were $10.3 million for the three
months  ended June 30,  2005,  an  increase  of $1.6  million or 18.6% from $8.7
million  for the same  period  of 2004.  Much of this  increase  is  related  to
additional  costs  incurred  by the  Company  related  to  compliance  with  new
requirements  mandated  by the  Sarbanes-Oxley  Act and  the  SEC.  The  Company
expended  approximately  $0.4  million to perform its 2003 audit,  which did not
require  a report  under  Section  404 of  Sarbanes-Oxley.  This was paid to our
independent  registered  public  accounting  firm for audit  and  audit  related
services.  For the 2004 audit,  the Company has expended or accrued $3.1 million
for  external  third  party  costs to  complete  its 2004  audit and its SOX 404
report. Of this amount,  approximately  $2.3 million was paid to our independent
registered  public accounting firm for audit and audit related services with the
balance paid to various  consultants and others who have assisted the Company in
the 404 process.  Expenses related to audit and SOX 404 of $1.4 million and $0.2
million were  recorded  during the three month  periods  ended June 30, 2005 and
2004, respectively, for services provided or accrued for during these periods.

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

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

The  amortization  of  the  above  assets  resulted  in  the  Company  recording
amortization  expense  related  to these  assets of $57  thousand  for the three
months ended June 30, 2005, which is included in operating expenses.


                                       21

<PAGE>


Research and  development  expenses were $2.2 million for the three months ended
June 30,  2005,  an increase of $0.4  million or 19.6% from $1.9 million for the
same period of 2004. Being a technology-driven  enterprise, the Company's Public
Safety and  Justice  segment  continually  updates  and  enhances  its  software
offerings,  thus incurring  significant research and development costs.

Interest  expense was $0.8  million for the three months ended June 30, 2005 and
June 30,  2004.  The  following  table  compares  the  weighted  average  of the
Company's three months ended June 30, 2005 and 2004 interest bearing borrowings,
in thousands, and the related rates charged thereon:

                                 Monthly Weighted           Monthly Weighted
                                  Average - 2005             Average - 2004
                                  Amount    Rate           Amount        Rate
Industrial revenue bonds         $  3,705    3.8%         $  4,145        3.5%
Subordinated borrowings          $ 40,250    6.3%         $ 40,250        6.3%
Swap hedge agreement             $  1,353    1.9%         $  4,059        3.9%

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

Amortization and write-off
  of deferred financing charges  $     67                 $   145

Taxes on Income. The effective tax rate was zero for the three months ended June
30, 2005 and the effective tax rate was approximately 41.2% for the three months
ended June 30, 2004.  The Company has decided to fully  reserve its net deferred
tax assets,  as it has  determined  that due to the Company's  recent  operating
losses there is  uncertainty  as to whether more likely than not the assets will
be realized.

Net Income (Loss).  The Company reported a net loss of $2.6 million in the three
months  ended June 30, 2005 and net income of $90  thousand in the three  months
ended June 30, 2004. The net loss in the three months ended June 30, 2005 is due
primarily  to lower  revenue  and higher  selling,  general  and  administrative
expenses.  Diluted  earnings  per share  was a loss of $.33 in the three  months
ended June 30, 2005 and diluted  earnings per share was $.01 in the three months
ended June 30, 2004. The weighted  average  number of common shares  outstanding
and equivalents used in computing EPS was 8.1 million in 2005 and 8.4 million in
2004.

SIX MONTHS ENDED JUNE 30, 2005 AND 2004

Revenues.  The Company had revenues of $67.4  million and $76.8  million for the
six months ended June 30, 2005 and June 30, 2004,  respectively,  representing a
decrease of $9.4 million or 12.2%.  As discussed  below,  the decrease  occurred
throughout the Company's  segments,  with much of this decline  occurring in our
IES segment.

Revenues from the  Institutional  Security Systems segment were $27.5 million in
the six months ended June 30, 2005, a decrease  from $30.0  million for the same
period  of  2004   representing   a  decrease  of  $2.6  million  or  8.5%.  The
Institutional   Security  Systems  segment  is  largely  a  construction  driven
business.  Much of its  revenue  is  obtained  by  working  on new and  retrofit
construction  projects  in the  corrections  industry,  as opposed to sources of
recurring revenue.  As such, the decrease in revenue experienced by this segment
is  largely  attributable  to our  working on less  projects  than we did in the
previous  year.  The  principal  reason for the  decline  was that  backlog  had
decreased  from $99.5  million at December 31, 2002 to $57.3 million at December
31, 2003  resulting  in less work  available  to be  performed in the year ended
December 31, 2004  compared to the year ended  December  31,  2003.  Backlog was
$49.3  million  and  $56.5  million  at  December  31,  2004 and June 30,  2005,
respectively. The years 2003 and 2004 were slow bidding periods for the Company.
Although  the gross  amount of  construction  spending in the  corrections  area
remained  relatively  flat between 2003 and 2004, the types of projects that the
Company solicits,  namely large-scale medium to maximum security  installations,
declined  significantly in 2003 and 2004. This situation was further  compounded
by the general state and local  governmental  budget deficits which caused these
governmental  units to  rethink  and  delay  many of their  pending  corrections
projects.

Revenues from the Attack Protection segment were $13.0 million in the six months
ended June 30, 2005, a decrease  from $13.7  million for the same period of 2004
representing  a decrease of $0.7 million or 5.3%. In 2002 the Company  purchased
an existing 75,000 square foot factory for the Attack  Protection  segment on 20
acres of land in close proximity to its existing factory in Montgomery, Alabama.
This capacity increase was largely driven by the Company's  expectation that the
demands for its products, principally its bullet and blast resistant windows and
doors  would  accelerate  significantly  in the post  September  11, 2001 world.


                                       22

<PAGE>


Throughout 2002, 2003, 2004 and 2005 this anticipated increase in demand did not
materialize  leaving the segment with significant excess capacity.  This segment
is composed of two chief product offerings,  namely Norshield, which encompasses
bullet and blast resistant windows and doors and ancillary  products,  and Fiber
SenSys,  which encompasses fiber optic intrusion detection systems.  For the six
months ended June 30, 2005 the  Norshield  line  experienced  an 8.9% decline in
revenues as compared to the six months  ended June 30,  2004,  whereas the Fiber
SenSys line  experienced a 2.0% increase in revenues for the comparable  period,
bolstered by its largest  order ever.  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 reversed. Projects are now
being  released  for  construction,  and thus the Attack  Protection  segment is
experiencing  increased  bidding  activity for its  products.  During 2003,  the
Company furnished bids to supply its products for eight new embassy projects. At
the time,  this was the  largest  number  of  embassy  projects  bid in a single
calendar  year for this  segment.  The Company was awarded four of these embassy
projects,  for a total  CompuDyne  contract value of $7.0 million,  and lost the
remaining  four embassy  project  bids to  competitors.  During 2004,  we bid on
fifteen  new  embassy  projects.  Through  June 30, 2005 the Company was awarded
seven of these embassy projects for a total contract value of $9.6 million,  and
lost seven embassy project bids to competitors,  with one project still awaiting
award. In 2005,  preliminary  indications  show twenty six embassy  projects are
being planned. We believe that this increased level of new embassy  construction
will continue for the next several years.

Revenues from Integrated  Electronic Systems were $3.9 million in the six months
ended June 30,  2005,  a decrease  from $7.9 million for the same period of 2004
representing a decrease of $4.0 million or 50.8%. A significant  portion of this
segment's  revenue is backlog  driven.  Backlog at both  December  31,  2003 and
December  31, 2004 was $8.3  million.  IES'  revenue  decline was largely due to
certain  government  clients,  for which the segment  receives repeat  business,
having had their budgets significantly  reduced. In addition, IES had planned to
work on one significant project in the first half of 2005 which, due to customer
imposed delays due to its falling behind on infrastructure construction, was not
available to be worked on.

Revenues  from the Public  Safety and Justice  segment were $23.1 million in the
six months  ended June 30,  2005,  a decrease  from $25.2  million  for the same
period of 2004  representing a decrease of $2.1 million or 8.3%. The decline was
primarily the result of lower backlogs. It should be noted that although we made
two  acquisitions  in this  segment in 2004 (90 Degrees and  Copperfire),  these
acquisitions  had little impact on Public  Safety and Justice's  revenues due to
their relatively small size.

Expenses.  Cost of sales of $44.6  million in the six months ended June 30, 2005
were down $10.9  million or 19.6% from $55.4  million  during the same period of
2004.  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 33.8% for the six months ended June 30, 2005 as compared to 27.8% in 2004. In
2004,  the  windows  and  door  component  of  the  Attack  Protection   segment
experienced  significant  operating   inefficiencies  and  difficulties.   These
inefficiencies  and difficulties,  which did not recur in 2005, reduced the 2004
gross profit percentage.

Cost of  goods  sold in the  Institutional  Security  Systems  segment  of $22.3
million for the six months  ended June 30, 2005 were down $3.0  million or 11.7%
from $25.3  million  during the same period of 2004.  This  decrease was greater
than the related  sales  decrease of this  segment of 8.5%,  resulting in a 2.9%
increase in the gross  profit  percentage  to 18.7% from 15.8% in the six months
ended June 30, 2005. This increase in gross profit percentage also resulted from
certain of this  segment's  customers  terminating  contracts  for  convenience,
resulting  in the  recognition  of $1.3  million in gross margin due to contract
closeout activities. Starting in 2002 and continuing through 2004, Institutional
Security Systems' senior management  identified  managerial problems at its West
Coast  operations and determined that numerous  problems existed there including
that the costs to complete its projects  were going to be  significantly  higher
than was previously projected. This was a result of significant cost overruns on
many  of  these  projects.   As  the  work  on  the  projects  progressed,   the
Institutional Security Systems segment identified additional cost overruns which
would cause the costs to complete  these projects to increase as a result of the
changes in the estimates to complete.  Although the problem projects  identified
in 2002 are  substantially  all  complete,  the  problems  in the ISS West Coast
operations  continued into 2003,  2004 and 2005. We realized that the management
changes made in 2002 did not  adequately  address the root problems  identified,
and as a result,  projects  started  after 2002  continued  to  experience  cost
overruns due to a lack of appropriate oversight. Staff and management changes in
ISS are ongoing.  We have revised our estimates to complete  these  projects and
believe that all future costs on these projects have been adequately  considered
through June 30, 2005. It should be noted that as the West Coast office is being
downsized  to  a  sales  and  support  office,  new  profitable  projects  which
previously  would have been  executed by this office have been and will continue
to be transferred  to the ISS  Montgomery  office  division  headquarters  where
execution  will occur.  This has left the West Coast office to run the remaining
projects  which have little or no gross  margin in them.  Therefore,  since this
office  will be  performing  work on which no  profit is  available  to be made,
combined with the fact that the office has fixed overhead costs, will cause this
office to lose money through 2005.

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


                                       23

<PAGE>


                Second Half of 2002                     $ 2,698
                First Quarter of 2003                       595
                Second Quarter of 2003                    1,079
                Third Quarter of 2003                       541
                Fourth Quarter of 2003                    1,872
                First Quarter of 2004                     1,271
                Second Quarter of 2004                    1,139
                Third Quarter of 2004                     1,516
                Fourth Quarter of 2004                    2,166
                First Quarter of 2005                       740
                Second Quarter of 2005                      472
                                                        -------
                        Total West Coast Losses         $14,089
                                                        =======

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

Cost of goods sold in the Attack Protection  segment of $9.2 million for the six
months ended June 30, 2005  decreased  $2.5 million or 21.2% from $11.7  million
during the same period of 2004.  This  decrease was far greater than the related
sales  decrease of this segment of 5.3%,  resulting  in a 14.3%  increase in the
gross profit percentage to 28.9% from 14.6% during the six months ended June 30,
2004. Significant factors contributing to this increase in gross profit included
the fact that in 2004,  significant  operating  inefficiencies  and difficulties
were  experienced  by the windows and door  component  of the Attack  Protection
segment.  These  inefficiencies  and difficulties,  which did not recur in 2005,
reduced the 2004 gross profit  percentage.  In addition,  one of this  segment's
customers  terminated its contracts for convenience  during the first quarter of
2005  resulting  in the  recognition  of $0.2  million  in gross  margin  due to
contract closeout activities.

Cost of goods sold in the Integrated  Electronic Systems segment of $3.3 million
in the six months ended June 30, 2005  decreased $3.6 million or 52.0% from $6.8
million during the same period of 2004.  This decrease was  consistent  with the
related sales decrease of this segment of 50.8%, resulting in a 2.1% increase in
the gross profit percentage to 15.9% from 13.9% in the six months ended June 30,
2004.  Substantially  all of the  projects  awarded in this segment are discrete
projects.

Cost of goods sold in the Public Safety and Justice  segment of $9.8 million for
the six  months  ended June 30,  2005 was down $1.9  million or 16.1% from $11.7
million  during 2004.  This decrease was more than the related sales decrease of
this  segment  of  8.3%,  resulting  in a  4.0%  increase  in the  gross  profit
percentage  to  57.6%  from  53.6%  in the  six  months  ended  June  30,  2004.
Substantially all of the projects awarded in this segment are discrete projects.

Selling,  general and  administrative  expenses  were $20.3  million for the six
months  ended June 30,  2005,  an increase  of $3.5  million or 20.7% from $16.8
million  for the same  period  of 2004.  Much of this  increase  is  related  to
additional  costs  incurred  by the  Company  related  to  compliance  with  new
requirements  mandated  by the  Sarbanes-Oxley  Act and  the  SEC.  The  Company
expended  approximately  $0.4  million to perform its 2003 audit,  which did not
require a SOX 404 report.  This was paid to our  independent  registered  public
accounting firm for audit and audit related  services.  For the 2004 audit,  the
Company has expended or accrued  $3.1 million for external  third party costs to
complete its 2004 audit and its SOX 404 report.  Of this  amount,  approximately
$2.3 million was paid to our independent  registered  public accounting firm for
audit and audit related  services  with the balance paid to various  consultants
and others who have assisted the Company in the 404 process. Expenses related to
audit and SOX 404 of $2.5  million and $0.4  million  were  recorded  during the
periods  ended June 30, 2005 and 2004,  respectively,  for services  provided or
accrued for during these periods.

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

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

The  amortization  of  the  above  assets  resulted  in  the  Company  recording
amortization  expense  related to these assets of $114 thousand in the first six
months of 2005, which is included in operating expenses.


                                       24

<PAGE>


Research  and  development  expenses  were $4.4 million for the six months ended
June 30,  2005,  an increase of $0.7  million or 19.4% from $3.6 million for the
same period of 2004. Being a technology-driven  enterprise, the Company's Public
Safety and  Justice  segment  continually  updates  and  enhances  its  software
offerings,  thus incurring  significant research and development costs.

Interest expense remained at $1.6 million for the six months ended June 30, 2005
and six months ended June 30, 2004.  The following  table  compares the weighted
average of the  Company's  six  months  ended  June 30,  2005 and 2004  interest
bearing borrowings, in thousands, and the related rates charged thereon:

                                   Monthly Weighted            Monthly Weighted
                                    Average - 2005              Average - 2004
                                  Amount        Rate           Amount      Rate
                                  ------        ----           ------      ----
Bank borrowings                     $      -     - %          $  1,233      2.1%
Industrial revenue bonds            $  3,855    3.4%          $  4,295      3.4%
Subordinated borrowings             $ 40,250    6.3%          $ 40,250      6.3%
Swap hedge agreement                $  1,691    2.1%          $  4,397      3.8%

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

Amortization and write-off
  of deferred financing charges     $    134                  $    273

Taxes on Income.  The  effective tax rate was zero for the six months ended June
30, 2005 and the effective tax rate was  approximately  39.4% for the six months
ended June 30, 2004.  The Company has decided to fully  reserve its net deferred
tax assets,  as it has  determined  that due to the Company's  recent  operating
losses there is  uncertainty  as to whether more likely than not the assets will
be realized.

Net Loss.  The  Company  reported  a net loss of $3.0  million in the six months
ended June 30, 2005 and a net loss of $0.2  million in the six months ended June
30, 2004. The net loss in the six months ended June 30, 2005 is due primarily to
lower revenue and higher selling, general and administrative  expenses.  Diluted
earnings  per share was a loss of $.36 in the six months ended June 30, 2005 and
diluted  earnings  per share was a loss of $.03 in the six months ended June 30,
2004. The weighted  average number of common shares  outstanding and equivalents
used in computing EPS was 8.1 million in 2005 and 8.0 million in 2004.

Liquidity and Capital Resources

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

As of June 30, 2005, the Company had working  capital of $36.1 million  compared
with $44.0 million as of December 31, 2004.

Net cash used in operating  activities  was $4.7 million in the six months ended
June 30, 2005 versus $3.6 million used in operating activities in the six months
ended June 30, 2004. The largest component of cash used in operating  activities
was a decrease in accounts  payable and accrued  liabilities of $3.5 million,  a
decrease  in  billings in excess of  contract  costs  incurred of $2.3  million,
partially  offset by an increase in receivables  of $2.9 million.  This decrease
was largely caused by the decline in revenues  experienced by the Company during
2004 and the first half of 2005.

Net cash  provided by  investing  activities  was $4.9 million in the six months
ended June 30, 2005 compared to net cash used of $20.8 million in the six months
ended  June  30,  2004.  In the six  months  ended  June  30,  2005,  the net of
marketable  securities  bought  and  redeemed  was an  increase  of cash of $5.5
million.  In the six months ended June 30, 2004 the net  purchase of  marketable
securities was $20.5 million.


                                       25

<PAGE>


Net cash used in financing activities amounted to $1.0 million in the six months
ended June 30, 2005 compared with a net cash provided by financing activities of
$26.3  million in the six months  ended  June 30,  2004.  The amount in 2004 was
primarily  provided  through  the  issuance  of the  2011  Notes  offset  by the
repayment of $13.5 million of our bank borrowings.

The following  table  summarizes the long term debt and related  interest of the
Company as of June 30, 2005 and the payments due by period, in thousands.

<TABLE>
<CAPTION>

                                Long-Term Debt     Interest on Contractual Obligations
                                --------------     -----------------------------------
<S>                                     <C>                      <C>
       December 31:
           2005 (remaining)         $   140                    $ 1,304
           2006                         440                      2,596
           2007                         440                      2,586
           2008                         440                      2,575
           2009                         440                      2,564
       Thereafter                    42,055                      3,317
                                    -------                    -------
       Totals                       $43,955                    $14,942
                                    =======                    =======

</TABLE>

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

On January 22, 2004, the Company  completed the offering of the 2011 Notes.  The
offering was for $40.25 million principal  amount.  The 2011 Notes bear interest
at the rate of 6.25% per annum, payable semi-annually,  and are convertible into
shares of common stock at a conversion  price of $13.89 per share.  The proceeds
from the  2011  Notes  were  used to repay  substantially  all of the  Company's
outstanding borrowings.

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

On October 29, 2004 and March 4, 2005,  the  Company and its bank  entered  into
amendments  to its  credit  agreement  pursuant  to which  the bank  waived  the
Company's  non-compliance  with its fixed charge  coverage  ratio covenant as of
September 30, 2004 and  non-compliance  with its minimum  EBITDA  covenant as of
December 31, 2004, respectively.  In addition, the Company and its banks amended
the credit  agreement to eliminate its $15 million line of credit maturing March
2005 and to  require  borrowings  under  its $10  million  line of  credit to be
collateralized  by cash or in the case of  marketable  securities  by securities
equal to 111.11% of the value of such borrowings.  The credit agreement was also
amended to eliminate the  quarterly  minimum  EBITDA  covenant for the Company's
fiscal  years  ending  after  December  31, 2004 and to provide that the minimum
fixed charge coverage ratio covenant,  maximum debt to EBITDA ratio covenant and
the minimum  consolidated  tangible net worth covenant will not become effective
until March 31, 2006. This line matures on March 1, 2007.

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

The  Company's  total  outstanding  borrowings  at June  30,  2005  amounted  to
approximately $44.0 million, net of broker's discounts. The 2011 Notes accounted
for $39.2 million, net of broker's discounts, of these borrowings. The remaining
amount of $3.7 million  resulted from borrowings at variable rates and consisted
of two industrial  revenue bonds  outstanding in the amounts of $1.4 million and
$2.3 million.  The average interest rate charged to the Company at June 30, 2005
for its industrial  revenue bonds was 2.5%. The variable interest rate for these
borrowings  fluctuated  between 1.62% and 3.26% during the six months ended June
30, 2005 based on weekly market conditions. These bonds are fully collateralized
by bank  letters  of credit  issued  under the  Company's  bank  agreement.  The
Company's  banks  consider  letters  of credit as  outstanding  borrowings  when
considering the amount of availability  the Company has remaining under its line
of credit and in determining  the amount of marketable  securities  needed to be
pledged as collateral.


                                       26

<PAGE>


Other than the Company's  letters of credit,  which  amounted to $5.0 million at
June 30, 2005, the Company has no other material off balance sheet liabilities.

At June 30, 2005 the Company had $5.0 million of unused availability, subject to
the pledge of collateral  under its line of credit.  As a result of the variable
nature of the interest rate on the Company's  bank  borrowings,  any increase in
the amount of outstanding  borrowings  and/or  decreases in the Company's EBITDA
(an increase in the "leverage ratio") will result in the Company's interest rate
increasing and thus the amount of interest expense incurred also increasing.

The Company  anticipates  that cash generated from  operations and its currently
available  cash will enable the Company to meet its liquidity,  working  capital
and capital  expenditure  requirements during the next 12 months and beyond. The
Company,  however, may require additional financing to pursue 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.

On May 2, 2005, we filed a Form 8-K disclosing  that we failed to timely file an
amendment to our Annual Report on Form 10-K for the year ended December 31, 2004
to provide  management's  report on internal control over financial reporting as
of December 31, 2004 and the related report of our independent registered public
accounting  firm on  management's  assessment of the  effectiveness  of internal
control  over  financial  reporting  (together,  the "404  Report")  required by
Section 404 of the  Sarbanes-Oxley  Act of 2002.  On May 3, 2005,  the Company's
lender  confirmed in writing  that there will not be any event of default  under
the various credit  agreements,  by virtue of the Company's  failure to file its
report required by Section 404 of Sarbanes-Oxley in a timely manner.

On May 4, 2005, we received a notice from the Listing Qualifications  Department
of The Nasdaq  Stock  Market  stating that due to our failure to timely file the
404 Report, we were no longer in compliance with the requirements of Marketplace
Rule 4310(c)(14). The Rule requires us to file with Nasdaq copies of all reports
required to be filed with the  Securities  and Exchange  Commission on or before
the date they are required to be filed with the SEC.

On June 27, 2005,  the Company filed its Form 10-K/A with the SEC containing the
404 Report.  On June 30, 2005, the Nasdaq Listing  Qualifications  Panel advised
CompuDyne  that  CompuDyne had remedied its filing  delinquency  and was in full
compliance with Nasdaq Market Place Rules.

Another  consequence of not filing the 404 Report timely as noted above includes
our  inability to use a shorter form  registration  document for one year in the
event we were to engage in an  offering  of our  securities.  This could have an
adverse impact on our ability to raise capital and the cost of raising capital.

Additional Considerations

Cost Containment
Due to current economic  conditions,  and in light of a very strong  competitive
environment,  the Company  recognizes that its ability to increase the prices it
charges its clients is limited. In addition, in light of the escalating selling,
general and administrative  costs largely associated with the current heightened
regulatory environment, we are evaluating our strategy to determine if a revised
strategy would result in lower selling,  general and administrative  costs. As a
result, in order to enhance our profitability, the Company will continue to seek
ways to reduce its costs.

Total Backlog
CompuDyne's  backlog  amounted  to $131  million at June 30,  2005.  This was an
increase of 3.3% from the Company's December 31, 2004 backlog of $126.9 million.
The break down of the Company's backlog by segment is as follows, in thousands:

                                          June 30,          December 31,
                                            2005               2004
                                         ----------         ----------
        Institutional Security Systems     $ 56,492             49,324
        Attack Protection                    19,466             20,803
        Integrated Electronic Systems         9,105              8,299
        Public Safety and Justice            46,045             48,434
                                         ----------         ----------
                 Total                   $  131,108         $  126,860
                                         ==========         ==========


                                       27

<PAGE>


Included  in the backlog of the Public  Safety and  Justice  segment at June 30,
2005 and  December  31, 2004 is $11.9  million and $5.1  million,  respectively,
representing  awards  received by the segment for which the clients have not yet
entered  into signed  contracts.  These  awards are expected to result in signed
contracts over the next twelve months.

Corporate Reorganization
As part of the Company's  efforts to better  manage its costs,  during the first
quarter of 2005 the Company  implemented a corporate  reorganization  whereby it
converted several corporate entities into LLCs (Limited Liability Corporations).
This activity was designed to improve the Company's tax reporting  structure and
should  help  better  manage the  Company's  state  income tax  obligations.  In
conjunction  with this  reorganization,  our  Federal  Security  Systems  group,
formerly   known   as   Quanta   Systems    Corporation,    was   re-formed   as
CompuDyne-Integrated  Electronics  Division,  LLC,  and our  Public  Safety  and
Justice group,  formerly known as Tiburon, was renamed  CompuDyne-Public  Safety
and Justice, Inc. In addition,  CorrLogic,  Inc. was converted to CorrLogic, LLC
and Fiber SenSys,  Inc. was  converted to Fiber SenSys,  LLC. The impact of this
reorganization  is not  expected  to have a material  effect on  operations.  In
addition,  in light of the escalating selling,  general and administrative costs
largely associated with the current heightened  regulatory  environment,  we are
evaluating our structure to determine if another organizational  structure would
result in lower selling, general and administrative costs.

Critical Accounting Policies and Estimates
A complete description of the Company's significant  accounting policies appears
in the  Company's  Annual  Report on Form 10-K for the year ended  December  31,
2004.

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

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

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

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

Warranty  reserves  are  estimated  and  made at the time  products  are sold or
services are rendered.  They are established using historical information on the
nature,  frequency  and average cost of 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.

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

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

Goodwill and Intangible Assets.
The Company  reviews the carrying  value of goodwill and  intangible  assets not
subject to  amortization  annually during the fourth quarter of the year or when
events or changes in  circumstances  indicate that the carrying value may not be
recoverable,  utilizing a  discounted  cash flow model.  Changes in estimates of
future cash flows caused by items such as unforeseen events or changes in market
conditions could negatively affect the Company's reporting units' fair value and
result in an impairment  charge.  The carrying  value of goodwill and intangible
assets not subject to amortization totaled  approximately $25.9 million and $5.6


                                       28

<PAGE>


million,  respectively,  and intangible  assets subject to amortization  totaled
approximately  $2.7 million,  net, at June 30, 2005.  The Company cannot predict
the occurrence of events that might adversely affect these values.

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

Economic  Conditions  and the After Effect of the September  11, 2001  Terrorist
Attacks
Much of the work CompuDyne performs is for state and local  governmental  units.
These entities have been severely impacted by recent economic conditions and the
resulting  contraction of the tax bases of these  governmental  units.  This has
caused these  governmental  units to carefully  evaluate their budgets and defer
expenses and projects where possible.  Much of the work of the Company's  Public
Safety and Justice,  and  Institutional  Security Systems segments is contracted
with these state and local governmental units. As a result,  these segments have
seen delays in new work  available  to be bid and worked on. In  addition,  even
work that had been  contracted  for was sometimes  deferred by the customer into
the future. In recent months, it appears the state and local government revenues
have been improving, resulting in increased activity preparatory to the issuance
of requests for new bids and ultimately, the Company expects the awarding of new
projects.  It  appears  to us that we are in the  early  stages  of an  economic
recovery.

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

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

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
September 30, 2005. At June 30, 2005 the notional  amount of the swap  agreement
had  declined  to $0.7  million  at a fixed rate of 4.9%.  In  January  2004 the
interest  rate swap  ceased to be a  highly-effective  cash flow  hedge when the
related debt was repaid. Consequently,  the amounts previously recorded in other
comprehensive  income as changes in fair  value of the  interest  rate swap were
recognized in earnings for the year ended December 31, 2004. Upon  determination
of the  hedge  ineffectiveness,  the  cumulative  loss on the fair  value of the
interest rate swap was $155 thousand, which was recognized in other expense. The
change in fair value of the interest rate swap for the six months ended June 30,
2005 was a gain of $19  thousand,  resulting  in a remaining  liability  for the
investment of $2 thousand. Future changes in the value of the interest rate swap
will be recognized in earnings.

On January 22,  2004,  the  Company  completed  an  offering  of $40.25  million
principal  amount of the 2011 Notes. The 2011 Notes bear interest at the rate of
6.25% per annum,  payable  semi-annually,  and are  convertible  into  shares of
common  stock at a  conversion  price of $13.89 per share.  The  Company  used a
portion of the proceeds of this note offering to pay down outstanding borrowings
under its variable rate bank notes. Subsequent to the pay-down of its bank notes
the only  variable  rate  borrowing  remaining  outstanding  at June 30, 2005 is
approximately  $3.7 million of industrial  revenue  bonds.  Since this borrowing
bears  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  May  2005,  the  FASB  issued  SFAS  154,   "Accounting  Changes  and  Error
Corrections" (SFAS 154) which replaces APB Opinion No. 20, "Accounting  Changes"
and SFAS 3, "Reporting  Accounting  Changes in Interim  Financial  Statements-An
Amendment of APB Opinion No. 28." SFAS 154 provides  guidance on the  accounting
for and reporting of accounting  changes and error  corrections.  It establishes
retrospective  application,  or the latest  practicable  date,  as the  required
method for  reporting a change in  accounting  principle  and the reporting of a
correction  of an  error.  SFAS 154 is  effective  for  accounting  changes  and


                                       29

<PAGE>


corrections of errors made in fiscal years beginning after December 15, 2005. We
are currently  evaluating  the effect that the adoption of SFAS 154 will have on
our consolidated results of operations and financial condition but do not expect
it to have a material impact.

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

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

In  December  2004,  the FASB  issued SFAS No.  123R,  "Share-Based  Payment," a
revision  of  SFAS  No.  123,  "Accounting  for  Stock-Based  Compensation"  and
superseding APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS
No. 123R requires the Company to expense  grants made under its stock option and
employee  stock purchase plan  programs.  That cost will be recognized  over the
vesting  period of the plans.  SFAS No. 123R is  effective  for the first annual
period  beginning  after June 15, 2005.  The Company has not yet  determined the
method of adoption or the effect of adopting SFAS 123R,  and has not  determined
whether the adoption  will result in amounts that are similar to the current pro
forma  disclosures  under SFAS 123. The Company is evaluating  the  alternatives
allowed under the standard,  which the Company is required to adopt beginning in
the first quarter of 2006.

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


                                       30

<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 following information  summarizes our sensitivity to market risks associated
with  fluctuations in interest rates as of June 30, 2005. 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, 2005.

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

          Financial Instruments by Expected Maturity Date

<TABLE>
<CAPTION>

               Notes Payable             Variable                              Fixed
                Year Ending              Rate ($)      Average Variable         Rate ($)      Average Fixed
                 December 31          (in thousands)    Interest Rate       (in thousands)    Interest Rate
              ---------------        ---------------   --------------      --------------     -------------
<S>                                         <C>             <C>                  <C>               <C>
              2005 (remaining)            $   140           2.49%              $     -              -
              2006                            440           2.49%                    -              -
              2007                            440           2.49%                    -              -
              2008                            440           2.49%                                   -
                                                                                     -
              2009                            440           2.49%                                   -
                                                                                     -
              Thereafter                    1,805           2.49%                40,250            6.25%
                                     ---------------                      --------------
              Total                       $ 3,705           2.49%              $ 40,250            6.25%
              Fair Value                  $ 3,705           2.49%              $ 33,500           11.00%


             Interest Rate Swaps        Variable
                Year Ending              Rate ($)     Average Variable        Average
                 December 31          (in thousands)      Pay Rate          Receive Rate
              ---------------        ---------------   --------------      --------------
              2005 (remaining)              $  676             4.90%                3.49%
                                            -------
              Total                         $  676             4.90%                3.49%
              Fair Value                    $    2

</TABLE>

                                       31

<PAGE>


                         ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Company  maintains  disclosure  controls and procedures that are designed to
ensure that  information  required to be  disclosed  in the  Company's  periodic
Securities Exchange Act of 1934 ("Exchange Act") reports is recorded, processed,
summarized,  and reported  within the time periods  specified in the SEC's rules
and forms,  and that such  information is accumulated  and  communicated  to the
Company's management,  including its Chief Executive Officer and Chief Financial
Officer, as appropriate,  to allow timely decisions regarding required financial
disclosure.

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

Management's Report on Internal Control over Financial Reporting

Management  of the  Company is  responsible  for  establishing  and  maintaining
adequate  internal  control  over  financial  reporting  (as  defined  in  Rules
13a-15(f)  and  15d-15(f)  under the  Exchange  Act).  As of December  31, 2004,
management  conducted  an  assessment  of the  effectiveness  of  the  Company's
internal control over financial reporting based on the framework  established in
Internal  Control--Integrated  Framework  issued by the  Committee of Sponsoring
Organizations  of the  Treadway  Commission.  A material  weakness  is a control
deficiency, or combination of control deficiencies,  that results in more than a
remote  likelihood  that a  material  misstatement  of  the  annual  or  interim
financial  statements  will  not  be  prevented  or  detected.   Management  has
identified the following material weaknesses.

As of June 30, 2005,  the Company did not maintain a  sufficient  complement  of
personnel  with an  appropriate  level of accounting  knowledge,  experience and
training in the application of accounting  principles  generally accepted in the
United  States of  America  (GAAP)  commensurate  with the  Company's  financial
reporting  requirements to support the size,  complexity,  operating activities,
and  locations  of  the  Company.  This  material  weakness  contributed  to the
following individual material weaknesses as of December 31, 2004:

(1)  The Company did not maintain  effective  controls over the  accounting  for
     income taxes,  including  income taxes payable,  deferred income tax assets
     and  liabilities  and the related income tax provision.  Specifically,  the
     Company did not have effective controls over the reconciliation between the
     tax and financial  reporting bases of the Company's  assets and liabilities
     with its deferred income tax assets and  liabilities.  Additionally,  there
     was a lack of oversight and review over the income taxes payable,  deferred
     income tax assets and  liabilities  and the  related  income tax  provision
     accounts by accounting  personnel with appropriate  expertise in income tax
     accounting.  Additionally,  this  control  deficiency  could  result  in  a
     misstatement  of the income taxes payable,  deferred  income tax assets and
     liabilities and the related income tax provision accounts that would result
     in a material  misstatement to annual or interim financial  statements that
     would not be prevented or detected. Accordingly,  management has determined
     that this control deficiency constitutes a material weakness.

(2)  The Company did not  maintain  effective  controls  over  certain  contract
     revenues,  contract  costs in excess of billings and  accounts  receivable.
     Specifically,  the  Company  did  not  have  effective  controls  over  the
     accounting for  non-routine  change orders to customer  contracts to ensure
     that  change  orders  were   accounted   for  in   accordance   with  GAAP.
     Additionally, this control deficiency could result in a misstatement of the
     contract  revenues,  contract  costs in excess  of  billings  and  accounts
     receivable accounts that would result in a material  misstatement to annual
     or interim  financial  statements  that would not be prevented or detected.
     Accordingly,   management  has  determined  that  this  control  deficiency
     constitutes a material weakness.

These material  weaknesses  have  previously  been reported for the period ended
December 31, 2004.  Because of these  material  weaknesses  which  existed as of
December 31, 2004 and June 30, 2005,  management  has concluded that the Company
did not maintain effective internal control over financial  reporting as of June
30,  2005,  based on the  criteria  established  in Internal  Control-Integrated
Framework issued by the COSO.


                                       32

<PAGE>


Remediation of Material Weaknesses

To address the material  weaknesses  described above, the Company:  (1) plans to
ensure  that  the  Company  will  have  sufficient   personnel  with  knowledge,
experience and training in the application of the Company's  financial reporting
requirements  by reviewing and adapting the structure of the divisional  finance
organization   including  the  hiring  of  additional   experienced   personnel.
Additionally,  the Company  plans to ensure  that  personnel  are  appropriately
skilled  and that  staffing  is  adequate  to support  the  Company's  financial
reporting  responsibilities,  (2) engaged an outside tax consultant,  other than
from the  Company's  independent  registered  public  accounting  firm,  and has
implemented  an ongoing  training  program to enhance  the  capabilities  of its
internal  tax  personnel,  and  (3)  instituted  new  procedures  requiring  the
accounting for all significant,  non-routine  transactions to be approved by the
Corporate Accounting group.

Changes in Internal Control Over Financial Reporting

There  has been no change  in the  Company's  internal  control  over  financial
reporting  that  occurred  during  the  quarter  ended  June 30,  2005  that has
materially affected, or is reasonably likely to materially affect, such internal
control over financial reporting.


                                       33

<PAGE>


PART II - OTHER INFORMATION

Item 4:  Submission of Matters to a Vote of Security Holders.

Proposal  #2 -  Amendment  of the 1996  Stock  Incentive  Compensation  Plan for
Employees.

At the Annual Meeting of Shareholders on May 27, 2005, the shareholders approved
the Amendment to the Amended and Restated 1996 Stock Incentive Compensation Plan
for  Employees  providing  that,  in the  event of a change  in  control  of the
Corporation,  all  outstanding  awards issued under the 1996 Employee Plan shall
become fully vested and exercisable. The votes were cast as follows:

 For - 4,145,400 Against - 498,086 Abstain - 15,071 Broker Non-Vote - 2,950,498

Proposal  #3 -  Proposal  of the  2005  Stock  Incentive  Compensation  Plan for
Employees.

At the Annual Meeting of Shareholders on May 27, 2005, the shareholders approved
the CompuDyne Corporation 2005 Stock Incentive  Compensation Plan for Employees.
The votes were cast as follows:

For - 2,712,905 Against - 1,930,118 Abstain - 15,534 Broker Non-Vote - 2,950,498

Proposal  #4 -  Amendment  of  the  1996  Stock  Option  Plan  for  Non-Employee
Directors.

At the Annual Meeting of Shareholders on May 27, 2005, the shareholders approved
the  amendment to the 1996 Stock  Option Plan for  Non-Employee  Directors.  The
amendment to the 1996 Directors Plan provides that a non-employee  director will
only be entitled to receive an option to purchase  10,000 shares of Common Stock
at the Annual Meeting of the Stockholders of the Corporation,  provided that the
non-employee  director  has  served  in such  capacity  for at  least  4  (four)
consecutive   calendar  months  prior  to  the  Annual  Meeting,  and  that  any
non-employee  director who  previously  was an employee of the  Corporation or a
subsidiary qualifies as an "independent  director," for purposes of receiving an
option grant.

In addition,  the amendment to the 1996  Directors  Plan  provides  that, in the
event of a change in control of the Corporation,  all outstanding  awards issued
under the 1996  Directors  Plan shall become fully vested and  exercisable.  The
votes were cast as follows:

 For - 4,163,829 Against - 462,406 Abstain - 32,322 Broker Non-Vote - 2,950,498

Proposal #5 - Proposal of the 2005 Stock Option Plan for Non-Employee Directors.

At the Annual Meeting of Shareholders on May 27, 2005, the shareholders approved
the CompuDyne  Corporation  Stock Option Plan for  Non-Employee  Directors.  The
votes were cast as follows:

For - 2,711,944 Against - 1,911,858 Abstain - 34,755 Broker Non-Vote - 2,950,498

Item 6:  Exhibits.

Exhibits -

          10.0 Amendment to the CompuDyne  Corporation 1996 Stock Incentive Plan
               for Employees,  herein  incorporated by reference to Registrant's
               Proxy  Statement dated April 29, 2005 for its 2005 Annual Meeting
               of Shareholders.
          10.1 Amendment  to  the  1996  Stock  Option  Plan  for   Non-Employee
               Directors, herein incorporated by reference to Registrant's Proxy
               Statement  dated April 29,  2005 for its 2005  Annual  Meeting of
               Shareholders.
          10.2 2005 Stock  Incentive  Compensation  Plan for  Employees,  herein
               incorporated by reference to  Registrant's  Proxy Statement dated
               April 29, 2005 for its 2005 Annual Meeting of Shareholders.
          10.3 2005  Stock  Option  Plan  for  Non-Employee  Directors,   herein
               incorporated by reference to  Registrant's  Proxy Statement dated
               April 29, 2005 for its 2005 Annual Meeting of Shareholders.
          10.4 CompuDyne  Corporation  Retention  Plan for  Selected  Employees,
               herein  incorporated  by  Registrant's  Form 8-K filed on July 1,
               2005.
          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.


                                       34

<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:  August 9, 2005                    /s/ Martin Roenigk
                                         ------------------
                                         Martin Roenigk
                                         Chief Executive Officer


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


                                       35