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 September 30, 2004
                                       OR

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



                For the transition period from to ______________


                         Commission File Number 0-29798


                              COMPUDYNE CORPORATION
                              ---------------------
             (Exact name of registrant as specified in its charter)


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


              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 November 1, 2004, a total of 8,314,279  shares of Common  Stock,  $.75 par
value, were outstanding.


                                       1
<PAGE>



                     COMPUDYNE CORPORATION AND SUBSIDIARIES
                                      INDEX
                                                                     Page No.
Part I.  Financial Information

   Item 1. Financial Statements - Unaudited

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

      Consolidated Statements of Operations -
      Three Months and Nine Months Ended
      September 30, 2004 and 2003                                        4

      Consolidated Statement of Changes in
      Shareholders' Equity - Nine Months Ended
      September 30, 2004                                                 5

      Consolidated Statements of Cash Flows -
      Nine Months Ended September 30, 2004 and 2003                      6

      Notes to Consolidated Financial Statements                      7-15

   Item 2. Management's Discussion and Analysis of
      Financial Condition and Results of Operations                  16-29

   Item 3. Quantitative and Qualitative Disclosures
      About Market Risk                                                 30

   Item 4. Controls and Procedures                                      31

Part II.  Other Information                                             32

      Signature                                                         33


                                       2



<PAGE>


<TABLE>
<CAPTION>

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

                                                              September 30,           December 31,
                                            ASSETS                 2004                   2003
                                                                ---------              ---------
                                                                         (in thousands)
Current Assets
<S>                                                             <C>                    <C>
       Cash and cash equivalents                                $   2,366              $   1,869
       Marketable securities                                       15,711                   --
       Accounts receivable, net                                    40,578                 41,780
       Contract costs in excess of billings                        17,239                 17,568
       Inventories                                                  5,096                  6,704
       Deferred tax assets                                          1,168                  1,371
       Prepaid expenses and other                                   4,969                  2,322
                                                                ---------              ---------
             Total Current Assets                                  87,127                 71,614

Property, plant and equipment, net                                 11,421                 10,079
Goodwill                                                           23,157                 21,280
Other intangible assets, net                                        9,570                  9,785
Other                                                                 972                    904
                                                                ---------              ---------
           Total Assets                                         $ 132,247              $ 113,662
                                                                =========              =========
                      LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities
       Accounts payable and accrued liabilities                 $  15,053              $  21,078
       Billings in excess of contract costs incurred               12,522                 13,551
       Deferred revenue                                             6,434                  6,036
       Current portion of notes payable                               440                  2,103
                                                                ---------              ---------
             Total Current Liabilities                             34,449                 42,768

Notes payable                                                       3,565                 15,555
Convertible subordinated notes payable                             39,071                   --
Deferred tax liabilities                                            1,709                  1,592
Other                                                                 619                    820
                                                                ---------              ---------
             Total Liabilities                                     79,413                 60,735
                                                                ---------              ---------
Commitments and Contingencies

Shareholders' Equity
       Preferred stock, 2,000,000 shares authorized and unissued       --                     --
       Common stock, par value $.75 per share: 50,000,000 and
         15,000,000  shares  authorized  at September  30, 2004
         and December 31, 2003, respectively;  8,943,856 and
         8,567,680 shares issued at September
         30, 2004 and  December 31, 2003, respectively              6,707                  6,426
       Additional paid-in-capital                                  44,368                 42,755
       Retained earnings                                            5,859                  7,926
       Accumulated other comprehensive loss                           (13)                   (93)
       Treasury stock, at cost; 594,877 shares at
          September 30, 2004 and  December 31, 2003                (4,087)                (4,087)
                                                                ---------              ---------
             Total Shareholders' Equity                            52,834                 52,927
                                                                ---------              ---------
             Total Liabilities and Shareholders' Equity         $ 132,247              $ 113,662
                                                                =========              =========

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

</TABLE>


                                       3
<PAGE>

<TABLE>
<CAPTION>


                                               COMPUDYNE CORPORATION AND SUBSIDIARIES
                                                CONSOLIDATED STATEMENTS OF OPERATIONS
                                                             (unaudited)


                                                            Three Months Ended                   Nine Months Ended
                                                               September 30,                      September 30,
                                                          2004             2003                2004             2003
                                                         -------        -----------         ---------         ---------
                                                                      (in thousands, except per share data)
Revenues:
<S>                                                     <C>               <C>               <C>               <C>
  Services                                              $  26,242         $  46,231         $  87,831         $ 123,382
  Products                                                  7,118             6,905            22,339            24,059
                                                        ---------         ---------         ---------         ---------
      Total revenues                                       33,360            53,136           110,170           147,441

Cost of sales:
  Services                                                 16,788            35,015            59,222            92,333
  Products                                                  7,764             6,110            20,795            19,527
                                                        ---------         ---------         ---------         ---------
      Total cost of sales                                  24,552            41,125            80,017           111,860
                                                        ---------         ---------         ---------         ---------
Gross profit                                                8,808            12,011            30,153            35,581

 Selling, general and administrative expenses               9,288             8,471            26,119            24,125
Research and development                                    2,051             1,683             5,680             5,596
                                                        ---------         ---------         ---------         ---------
(Loss) income from operations                              (2,531)            1,857            (1,646)            5,860
                                                        ---------         ---------         ---------         ---------
Other expense (income)
  Interest expense                                            849               366             2,443             1,079
  Interest income                                            (289)             (149)             (703)             (159)
  Other expense (income)                                      (20)                4                43                 5
                                                        ---------         ---------         ---------         ---------
      Total other expense                                     540               221             1,783               925
                                                        ---------         ---------         ---------         ---------
(Loss) income before income taxes                          (3,071)            1,636            (3,429)            4,935
Income taxes (benefit) expense                             (1,221)              654            (1,362)            1,974
                                                        ---------         ---------         ---------         ---------
 Net (loss) income                                      $  (1,850)        $     982         $  (2,067)        $   2,961
                                                        =========         =========         =========         =========
Earnings (loss) per share:
Basic earnings (loss) per common share                  $    (.23)        $     .12         $    (.26)        $     .38
                                                        =========         =========         =========         =========
Weighted average number of common
shares outstanding                                          8,171             7,923             8,085             7,881
                                                        =========         =========         =========         =========
Diluted earnings (loss) per common share                $    (.23)        $     .12         $    (.26)        $     .36
                                                        =========         =========         =========         =========
Weighted average number of common
shares and equivalents                                      8,171             8,199             8,085             8,140
                                                        =========         =========         =========         =========



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

</TABLE>

                                       4

<PAGE>

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

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

Common stock issued
  in connection with
  acquisition of 90
  Degrees, Inc.                              72         54        585       --          --          --         --
                                                                                                                            639
Stock options exercised                     304        227      1,028       --          --          --         --         1,255

Net loss                                   --         --         --       (2,067)       --          --         --        (2,067)
Other comprehensive income, net of tax:
Ineffectiveness of interest
   rate swap agreement                     --         --         --         --            93        --         --            93
Unrealized loss on
  available for sale
  marketable securities                    --         --         --         --           (13)       --         --           (13)
                                        ----------------------------------------------------------------------------------------
Balance at
  September 30, 2004                      8,944   $  6,707   $ 44,368   $  5,859    $    (13)        595   $ (4,087)   $ 52,834
                                        =======   ========   ========   ========    ========    ========   ========    ========


                             The accompanying notes are an integral part of these financial statements.
</TABLE>


                                       5

<PAGE>


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

                                                                            Nine Months Ended
                                                                             September 30,
                                                                       2004                  2003
                                                                      ------               -------
                                                                           (in thousands)
Cash flows from operating activities:
<S>                                                                  <C>                   <C>
     Net (loss) income                                               $ (2,067)             $  2,961

Adjustments to reconcile net (loss) income to
  net cash provided by operations:
    Depreciation and amortization                                       2,099                 2,016
    Deferred tax asset                                                    267                  --
    (Gain) loss from disposal of property, plant and equipment              3                     5
    Amortization of debt discount                                         129                  --
    Unrealized loss on interest rate swap                                  44                  --
    Amortization of discounts on marketable securities                    (56)                 --

Changes in assets and liabilities:
    Accounts receivable                                                 1,220                (4,750)
    Contract costs in excess of billings                                  329                 3,132
    Inventories                                                         1,608                   715
    Prepaid expenses and other current assets                          (2,647)                 (171)
    Other assets                                                          (68)                    6
    Accounts payable and accrued liabilities                           (6,125)                7,356
    Billings in excess of contract costs incurred                      (1,029)                 (868)
    Deferred revenue                                                      398                   739
    Other liabilities                                                     (46)                 --
                                                                     --------              --------
Net cash flows (used in) provided by operating activities              (5,941)               11,141
                                                                     --------              --------
Cash flows from investing activities:
    Purchase of marketable securities                                 (31,195)                 --
    Redemption of marketable securities                                15,518                  --
    Additions to property, plant and equipment                           (972)                 (622)
    Proceeds from sale of property, plant and equipment                     3                     9
    Net payment for acquisition                                        (3,460)                  (71)
                                                                     --------              --------
Net cash flows used in investing activities                           (20,106)                 (684)
                                                                     --------              --------
Cash flows from financing activities:
    Issuance of common stock                                            1,255                   225
    Warrants exercised                                                   --                     166
    Purchase of treasury stock                                           --                    (167)
    Repayment of bank notes and line of credit                        (13,653)               (8,485)
    Borrowings of convertible subordinated notes payable               38,942                  --
                                                                     --------              --------
Net cash provided by (used in) financing activities                    26,544                (8,261)
                                                                     --------              --------
Net change in cash and cash equivalents                                   497                 2,196
Cash and cash equivalents at beginning of period                        1,869                 1,274
                                                                     --------              --------
Cash and cash equivalents at end of period                           $  2,366              $  3,470
                                                                     ========              ========
Supplemental  disclosures of cash flow information:
  Cash paid during the period  for:
    Interest                                                         $  1,517              $    859
    Income tax, net of refunds                                       $    746              $  1,488
 Common stock issued in connection with acquisition                  $    639              $   --


                             The accompanying notes are an integral part of these financial statements.
</TABLE>

                                       6
<PAGE>



                     COMPUDYNE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

1. SUMMARY OF SIGNIFICANT POLICIES

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

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

New Accounting Pronouncements:

In June 2004 the FASB issued an exposure draft entitled Fair Value  Measurements
that provides  guidance on how to measure fair value of assets and  liabilities.
The objective is to increase the consistency,  reliability, and comparability of
fair value  measurements in applying  general  accepted  accounting  principles.
Valuation  techniques  consistent with the market approach,  income approach and
cost approach are to be considered  for purposes of estimating  fair value.  The
proposed  standard's  effective  date would be  applicable  for awards  that are
granted,  modified,  or settled in cash in interim or annual  periods  beginning
after June 15,  2005.  The  Company is  currently  evaluating  the impact of the
proposed standard.

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

In January 2003 the FASB issued FASB  Interpretation  No. 46,  "Consolidation of
Variable  Interest  Entities" (FIN 46). In December 2003, FIN 46 was replaced by
FASB  Interpretation No. 46(R),  "Consolidation of Variable Interest  Entities".
FIN 46(R)  clarifies the  application  of Accounting  Research  Bulletin No. 51,
"Consolidated  Financial  Statements",  to  certain  entities  in  which  equity
investors do not have the characteristics of a controlling financial interest or
do not have  sufficient  equity at risk for the entity to finance its activities
without additional  subordinated financial support from other parties. FIN 46(R)
requires  an  enterprise  to  consolidate  a  variable  interest  entity if that
enterprise will absorb a majority of the entity's  expected losses,  is entitled
to receive a majority of the entity's expected  residual  returns,  or both. FIN
46(R)  is  effective  for  entities   being   evaluated   under  FIN  46(R)  for
consolidation  no later  than the end of the first  reporting  period  that ends
after March 15,  2004.  The  adoption of this  standard  did not have a material
effect on the  financial  position,  results of  operations or cash flows of the
Company.

                                       7

<PAGE>




Comprehensive Income:
The following table shows the components of comprehensive  (loss) income, net of
income  taxes,  for the nine  months  ended  September  30,  2004 and  2003,  in
thousands.

<TABLE>
<CAPTION>
                                                                         For the Nine Months
                                                                         Ended September 30,
                                                                       2004             2003
                                                                     --------        ---------
<S>                                                                  <C>             <C>
                    Net (loss) income                                $ (2,067)       $   2,961
                    Unrealized loss on available-for-sale securities      (13)              --
                    Ineffectiveness of interest rate swap agreement        93               --
                    Translation adjustment                                 --               (7)
                    Loss on interest rate swap agreement                   --               76
                                                                     --------        ---------
                    Comprehensive (loss) income                      $ (1,987)       $   3,030
                                                                     ========        =========
</TABLE>


Stock-based Compensation:
As of September 30, 2004, the Company  continues to account for its  stock-based
compensation  plans, which are described more fully in the Company's 2003 Annual
Report,  using the intrinsic value method and in accordance with the recognition
and measurement  principles of APB Opinion No. 25,  "Accounting for Stock Issued
to Employees," and related Interpretations. No stock-based employee compensation
cost is reflected in net income,  as all options  granted had an exercise  price
equal to the fair market  value of the  underlying  common  stock on the date of
grant.  The following  table  illustrates,  in accordance with the provisions of
SFAS  No.  148,  "Accounting  for  Stock-Based  Compensation  -  Transition  and
Disclosure,"  the effect on net income and earnings per share if the Company had
applied the fair value recognition  provisions of SFAS No. 123,  "Accounting for
Stock-Based Compensation," to stock-based employee compensation.


<TABLE>
<CAPTION>
                                                                                   For the Three Months
                                                                                    Ended September 30,
                                                                                 2004                2003
                                                                             ------------         ----------
                                                                           (in thousands, except per share data)
<S>                                                                          <C>                  <C>
Net  (loss) income, as reported                                              $     (1,850)        $      982
Deduct:  Total stock-based employee compensation expense determined
under fair value based method for all awards net of related tax effects              (277)              (277)
                                                                             ------------         ----------
Pro forma net (loss) income                                                  $     (2,127)        $      705
                                                                             ============         ==========
Earnings (loss) per share:
Basic - as reported                                                          $       (.23)        $      .12
Basic - pro forma                                                            $       (.26)        $      .09

Diluted - as reported                                                        $       (.23)        $      .12
Diluted - pro forma                                                          $       (.26)        $      .09
</TABLE>


                                       8
<PAGE>


<TABLE>
<CAPTION>
                                                                                 For the Nine Months
                                                                                 Ended September 30,
                                                                                 2004            2003
                                                                             ------------    ------------
                                                                         (in thousands, except per share data)
<S>                                                                          <C>             <C>
Net (loss) income, as reported                                               $     (2,067)   $      2,961
Deduct:  Total stock-based employee compensation expense determined
under fair value based method for all awards net of related tax effects              (784)           (853)
                                                                             ------------   -------------
Pro forma net (loss) income                                                  $     (2,851)   $      2,108
                                                                             ============    ============

Earnings (loss) per share:
Basic - as reported                                                          $       (.26)   $         .38
Basic - pro forma                                                            $       (.35)   $         .27

Diluted - as reported                                                        $       (.26)   $         .36
Diluted - pro forma                                                          $       (.35)   $         .26
</TABLE>


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

<TABLE>
<CAPTION>
                                       For the Three Months        For the Nine Months
                                       Ended September 30,         Ended September 30,
                                      2004             2003        2004            2003
                                    --------         --------    -------         -------
<S>                                    <C>               <C>       <C>              <C>
         Expected life in years        5.3               5.6       5.4              6.8
         Risk-free interest rate       3.4%              3.2%      3.3%             2.9%
         Expected volatility          75.4%             78.8%     76.0%            79.9%
</TABLE>


Reclassifications:
Certain prior period  amounts have been  reclassified  to conform to the current
period's presentation.


2. OPERATING SEGMENT INFORMATION

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


<TABLE>
<CAPTION>
                                                                                            Pre-tax
                                       Revenues              Gross Profit (Loss)         (Loss)/Income
                                 ---------------------      ---------------------     --------------------
                                   2004         2003          2004         2003         2004        2003
                                 --------     --------      -------      --------     --------    --------
<S>                              <C>          <C>           <C>          <C>          <C>         <C>
Institutional Security
      Systems                    $ 11,783     $ 26,357      $ 1,773      $  3,729     $   (806)   $  1,216
Attack Protection                   6,510        6,036         (477)          758       (2,101)       (663)
Federal Security Systems            3,296        4,549          501           934          137         223
Public Safety and Justice          11,771       16,194        7,011         6,590          370         790
CompuDyne Corporate                    --           --           --            --         (671)         70
                                 --------     --------      -------      --------     --------    --------
                                 $ 33,360     $ 53,136      $ 8,808      $ 12,011     $ (3,071)   $  1,636
                                 ========     ========      =======      ========     =========   ========
</TABLE>

                                       9

<PAGE>



35


The following is the  operating  segment  information  for the nine months ended
September 30, 2004 and 2003, in thousands:


<TABLE>
<CAPTION>
                                                                                           Pre-tax
                                        Revenues                Gross Profit            (Loss)/Income
                                 --------------------      ---------------------     ----------------------
                                   2004         2003         2004         2003         2004          2003
                                 --------     --------     --------     --------     --------      --------
<S>                              <C>          <C>          <C>          <C>          <C>           <C>
Institutional Security
      Systems                    $ 41,794     $ 75,497     $  6,522     $ 10,246     $   (683)     $  2,788
Attack Protection                  20,204       20,912        1,524        4,113       (3,236)         (153)
Federal Security Systems           11,242       12,299        1,602        2,059          551           726
Public Safety and Justice          36,930       38,733       20,505       19,163        1,765         1,340
CompuDyne Corporate                  --           --           --           --         (1,826)          234
                                 --------     --------     --------     --------     --------      --------
                                 $110,170     $147,441     $ 30,153     $ 35,581     $ (3,429)     $  4,935
                                 ========     ========     ========     ========     ========      ========
</TABLE>

3. EARNINGS PER SHARE

Earnings per share are presented in accordance with SFAS No. 128,  "Earnings Per
Share." This Statement  requires dual presentation of basic and diluted earnings
per share on the face of the statement of  operations.  Basic earnings per share
is computed using the weighted average number of shares  outstanding  during the
period and excludes any dilutive  effects of options or warrants and convertible
securities.  Diluted  earnings per share is computed using the weighted  average
number of common and  common  stock  equivalent  shares  outstanding  during the
period;  common stock  equivalent  shares are excluded from the  computation  if
their effect is antidilutive. Stock options and warrants to purchase 739,800 and
571,985  shares for the three month  periods  ended  September 30, 2004 and 2003
respectively,  were  not  dilutive  and,  therefore,  were not  included  in the
computation of diluted  earnings per common share.  Additionally,  the 2,897,768
shares issuable upon conversion of the 6.25% Convertible  Subordinated Notes due
January 15,  2011 (the "2011  Notes") are  excluded  for the three month  period
ended  September  30,  2004 as the effect is  antidilutive.  Stock  options  and
warrants to purchase 673,800 and 933,670 shares for the nine month periods ended
September 30, 2004 and 2003 respectively, were not dilutive and, therefore, were
not  included  in  the  computation  of  diluted   earnings  per  common  share.
Additionally,  the 2,897,768  shares  issuable upon conversion of the 2011 Notes
are excluded for the nine month period ended September 30, 2004 as the effect is
antidilutive.

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


<TABLE>
<CAPTION>
                                                                   Three Months Ended              Nine Months Ended
                                                                   Ended September 30,            Ended September 30,
                                                                 2004             2003           2004              2003
                                                               -------         --------         -------          -------
<S>                                                            <C>              <C>             <C>              <C>
Net (loss) income                                              $(1,850)         $   982         $(2,067)         $ 2,961
                                                               =======          =======         =======          =======
Weighted average common shares outstanding                       8,171            7,923           8,085            7,881
Effect of dilutive stock options and warrants                     --                276            --                259
                                                               -------          -------         -------          -------
Diluted weighted average common shares outstanding               8,171            8,199           8,085            8,140
                                                               =======          =======         =======          =======
Net (loss) income per common share
     Basic                                                     $  (.23)         $   .12         $  (.26)         $   .38
     Diluted                                                   $  (.23)         $   .12         $  (.26)         $   .36
</TABLE>

                                       10

<PAGE>



The 2011 Notes contain contingent participation rights. The participation rights
are contingent  upon the ability,  based on the  undistributed  earnings for the
period, of the Company to declare and distribute dividends per share equal to or
in excess of the per share fair value of the Company's common stock. The Company
does not believe  this  contingency  was met for the three and nine months ended
September 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.


4.     INVENTORIES

Inventories consist of the following, in thousands:


                      September 30,    December 31,
                          2004            2003
                         ------          ------

Raw materials            $3,355          $3,745
Work in progress          1,224           2,310
Finished goods              517             649
                         ------          ------
                         $5,096          $6,704
                         ======          ======


5.       GOODWILL

The September  30, 2004  unaudited  consolidated  financial  statements  include
preliminary  estimates  of the fair  market  value of the  assets  acquired  and
liabilities assumed and the related allocations of the purchase price related to
the  acquisition  of 90  Degrees,  Inc.  (see Note  10).  Final  valuations  and
allocations,  which are expected to be  completed  by June 30, 2005,  may differ
from  the  amounts  included  herein.  Currently  goodwill  is  estimated  to be
approximately $1.9 million.

The Company  reviews the carrying value of goodwill  annually  during the fourth
quarter of the year or whenever events or changes in circumstances indicate that
the carrying  value may not be  recoverable,  utilizing a  discounted  cash flow
model.  Changes  in  estimates  of future  cash  flows  caused by items  such as
unforeseen  events or changes in market  conditions could negatively  affect the
reporting  unit's  fair value and result in an  impairment  charge.  The Company
cannot predict the occurrence of events that might adversely affect the reported
value of goodwill of $23.2 million at September 30, 2004 and of $21.3 million at
December 31, 2003.

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


                                    September 30,     December 31,
                                        2004             2003
                                      --------         ---------

Institutional Security Systems        $    739         $     739
Attack Protection                          728               728
Federal Security Systems                    --                --
Public Safety & Justice                 21,690            19,813
                                      ---------        ---------
                                      $ 23,157         $  21,280
                                      ========         =========
6. INTANGIBLE ASSETS

The September  30, 2004  unaudited  consolidated  financial  statements  include
preliminary  estimates  of the fair  market  value of the  assets  acquired  and
liabilities assumed and the related allocations of the purchase price related to
the  acquisition  of 90  Degrees,  Inc.  (see Note  10).  Final  valuations  and
allocations, which are expected to be completed by June 30, 2005 may differ from
the amounts included herein.  Currently,  intangible  assets are estimated to be
approximately $60 thousand.

                                       11
<PAGE>


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:



                                       September 30, December 31, Amortizable
                                            2004        2003        Lives
                                          --------    --------    --------
                                                                  (in years)
     Trade name                           $  6,913    $  6,913    Indefinite
     Customer relationships                  2,500       2,500          14
     Backlog                                   300         300           2
     Other                                   1,280       1,220      2 - 20
                                          --------    --------
                                            10,993      10,933
     Less: accumulated amortization         (1,423)     (1,148)
                                          --------    --------
                                          $  9,570    $  9,785
                                          ========    ========

Amortization  expense for the Company's intangible assets for the three and nine
month  periods  ended  September  30, 2004 was $75 thousand  and $275  thousand,
respectively. The following schedule lists the expected amortization expense for
each of the years ending December 31, in thousands:


                           Year
                           -----
                           2004 (remaining)          $    80
                           2005                          290
                           2006                          245
                           2007                          240
                           2008                          225
                                                     -------
                           Total                     $ 1,080
                                                     =======


7. PRODUCT WARRANTIES

Included in accounts  payable and accrued  liabilities  are  estimated  expenses
related  to  warranties  made at the  time  products  are sold or  services  are
rendered.  These accruals are established  using  historical  information on the
nature,  frequency,  and average cost of warranty  claims.  The Company warrants
numerous  products,  the terms of which vary  widely.  In  general,  the Company
warrants  its  products  against  defect  and  specific  non-performance.  As of
September 30, 2004, the Company had a product  warranty accrual in the amount of
$402 thousand.

                                               Product Warranty Liabilities
                                               ----------------------------
                                                      (in thousands)
                                                      -------------
 Beginning balance at January 1, 2004                     $   517
 Plus:  accruals for product warranties                       195
 Less:  warranty changes/claims                              (310)
                                                          --------
 Ending balance at September 30, 2004                     $   402
                                                          =======


8. INVESTMENTS IN MARKETABLE SECURITITES

The  Company's  marketable  securities  are  categorized  as  available-for-sale
securities,  as defined by Statement of Financial  Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." At September
30,  2004  all  of the  Company's  investments  in  marketable  securities  were
classified as available-for-sale,  and as a result, were reported at fair value.
Unrealized  gains and losses are  reported as a component of  accumulated  other
comprehensive  income  in  shareholders'  equity.  The  amortized  costs of debt
securities is adjusted for  accretion of discounts  from the date of purchase to
maturity.  The accretion is included in interest income on the investments.  The
cost for marketable securities was determined using the specific  identification
method.  The fair values of marketable  securities  are  estimated  based on the
quoted market price for these securities.


                                       12

<PAGE>

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


<TABLE>
<CAPTION>
                                                                              Gross Unrealized
                                                                       ----------------------------
                                                         Cost             Gains            Losses         Fair Value
                                                     ----------        -----------      -----------       ----------
<S>                                                 <C>               <C>               <C>                <C>
         Collateralized mortgage obligations
           (CMO's) consisting of securities
           issued by Fannie Mae,
           Freddie Mac,  and Ginnie Mae              $  15,733         $        --      $        22       $  15,711
</TABLE>



The cost and  estimated  fair value of current debt  securities at September 30,
2004, by contractual maturity,  are shown below. Expected maturities will differ
from contractual  maturities  because the issuers of the securities may have the
right to repay obligations  without  prepayment  penalties.  It is the Company's
policy to classify  available-for-sale  securities that are available for use in
current operations as a current asset.

                                                                    Estimated
         (in thousands)                             Cost            Fair Value
                                                 ----------        -----------
         Due in one year or less                 $       --        $        --
         Due after one year and beyond               15,733             15,711
                                                 ----------        -----------
         Total debt securities                   $   15,733        $    15,711
                                                 ==========        ===========


9. NOTES PAYABLE AND LINE OF CREDIT

<TABLE>
<CAPTION>

                                                                                       September 30,     December 31,
                                                                                           2004              2003
                                                                                        -----------       ----------
                                                                                               (in thousands)
<S>                                                                                     <C>               <C>
Industrial revenue bond,  interest payable quarterly at a variable rate of 1.14%
to  1.83%  (1.83%  at  September  30,  2004)  principal   payable  in  quarterly
installments of $35,000. The bond is fully collateralized by a $1.4 million
letter of credit and a bond guarantee agreement                                         $     1,400       $   1,540

Industrial revenue bond,  interest payable quarterly at a variable rate of 1.01%
to 1.82% (1.82% at September 30, 2004) principal payable in yearly  installments
of $300,000. The bond is fully collateralized by a $2.6 million letter of
credit and a bond guarantee agreement.                                                        2,605            2,905

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

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

</TABLE>

                                       13
<PAGE>

<TABLE>
<CAPTION>

                                                                                       September 30,     December 31,
                                                                                           2004              2003
                                                                                        -----------       ----------
                                                                                               (in thousands)
<S>                                                                                     <C>               <C>
Note  payable to Bank,  interest at LIBOR plus a fixed  credit  spread of 2.50%,
(3.62% at December 31, 2003) collateralized by virtually all of the Company's
assets, repaid in full in January 2004.                                                         --             1,663
                                                                                         ----------       ----------
          Total notes payable and line of credit                                             44,255           17,658
          Less convertible subordinated notes discount                                        1,179               --
                                                                                        -----------       ----------
             Subtotal                                                                        43,076           17,658
          Less amount due within one year                                                       440            2,103
                                                                                        -----------       ----------
                                                                                        $    42,636       $   15,555
                                                                                        ===========       ==========
</TABLE>


Maturities of notes payable are as follows, in thousands:


              Year Ending December 31,              Amount
              ------------------------            ----------
                       2004 (remaining)           $        --
                       2005                               440
                       2006                               440
                       2007                               440
                       2008                               440
                       Thereafter                      42,495
                                                  -----------
                                                  $    44,255
                                                  ===========

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


           Face value                         $   40,250
           Underwriters discounts, net             1,179
                                              ----------
                                              $   39,071
                                              ==========

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

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

The Company  incurred $452  thousand of debt issuance  costs for the 2011 Notes.
These costs are recorded as  non-current  assets and are amortized on a straight
line basis to interest  expense  over the term of the 2011 Notes.  In  addition,
underwriters'  discounts  totaled $1.3  million and are  amortized on a straight
line basis to interest expense over the term of the 2011 Notes. Interest expense
recorded for the total of the deferred  financing costs and debt discount on the
2011 Notes  totaled $63 thousand and $182 thousand for the three months and nine
months ended September 30, 2004, respectively.

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


                                       14
<PAGE>


On March 31, 2004, the Company signed an Amended and Restated  Credit  Agreement
for its $25.0 million secured working capital line of credit.  The new agreement
provides for borrowings against eligible accounts receivable and inventories. Of
this line of credit  $10.0  million  matures on March 1, 2007 and $15.0  million
matures on March 1, 2005.  At  September  30, 2004 $5.3  million  was  committed
principally  as letters of credit  securing the  Industrial  Revenue  Bonds.  On
October  29, 2004 the Company  and its banks  amended  its credit  agreement  to
eliminate  the $15.0  million  line of credit  maturing  on March 1, 2005 and to
require borrowing under its $10.0 million line of credit to be collateralized by
pledged marketable securities.

The bank borrowings contain various financial  covenants,  including among other
things,  maintenance of fixed charge coverage ratios,  interest coverage ratios,
maximum  senior  debt to  earnings  before  interest,  taxes,  depreciation  and
amortization  ("EBITDA") ratios,  maximum permitted capital expenditures,  and a
restriction against paying dividends. The Company was not in compliance with the
fixed  charge  ratio  of its  bank  covenants  at  September  30,  2004,  and in
conjunction  with the  October  29,  2004  amendment  received a waiver from its
banks.

The interest rate on the line of credit is variable based on the  performance of
the Company and ranges from LIBOR + 1.00% to Prime + 0.75%.  The Company  incurs
commitment  fees  equal to a range of  0.20%  to 0.35% on any  unused  balances,
defined as the difference  between the total amount of its $10.0 million line of
credit less amounts borrowed, and outstanding under letters of credit.

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 nine months ended  September 30,
2004. Upon determination of the hedge ineffectiveness the cumulative loss on the
fair value of the interest rate swap was $155 thousand,  which was recognized in
other  income.  The change in fair value of the interest rate swap for the three
and nine months  ended  September  30, 2004 was a gain of $24  thousand and $111
thousand, respectively, resulting in a remaining liability for the investment of
$44  thousand.  Future  changes in the value of the  interest  rate swap will be
recognized in earnings.


10.      ACQUISITION

On August 10, 2004 the Company  acquired  the net assets of 90 Degrees,  Inc. In
consideration  for the $3.3  million  in cash and  72,278  shares  of  CompuDyne
Corporation   restricted   common   stock   exchanged,   the  Company   acquired
approximately  $2.2 million in software,  $60 thousand of intangible assets, net
receivables and liabilities of $38 thousand and $1.9 million in goodwill.  Final
valuations and allocations,  which is expected to be completed by June 30, 2005,
may differ from these amounts. 90 Degrees, Inc. historical results of operations
are immaterial.


11. COMMITMENTS AND CONTINGENCIES

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


                                       15

<PAGE>

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

OVERVIEW

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

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

Included in the  Institutional  Security  Systems  segment is the TrenTech  line
which designs, manufactures and integrates electronic security systems. TrenTech
integrates  generally  available  products and software as well as designing its
own  proprietary  systems.  TrenTech has developed a  sophisticated  proprietary
video badging system, with approximately 234 systems installed at 63 facilities,
including 58 military installations.

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

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

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

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


                                       16
<PAGE>

The Public Safety and Justice segment consists of two subsidiaries  known to the
industry as  CorrLogic  and  Tiburon.  We believe  that  CorrLogic  is a leading
developer of inmate  management  and  institutional  medical  software  systems.
CorrLogic specializes in the development, implementation and support of complex,
integrated  inmate  management   software  systems,   including  inmate  medical
management  that improves the efficiency and accuracy of  correctional  facility
operations.  CorrLogic's  focus is entirely  on  information  solutions  for the
corrections industry.

During the third quarter of 2004, we expanded our offerings in the Public Safety
and Justice sector by completion of our acquisition of the assets of 90 Degrees,
Inc. 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.

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,  as they
relate to management,  identify forward-looking statements. Although the Company
makes such statements  based on current  information and assumptions it believes
to be reasonable,  there can be no assurance that actual results will not differ
materially from those expressed or implied by such  forward-looking  statements.
Actual  results  could  differ   materially  from  those   contemplated  by  the
forward-looking  statements as a result of certain important factors,  including
but not limited to, demand for the Company's  products,  competitive factors and
pricing  pressures,  changes in legal and  regulatory  requirements,  government
budget  problems,  the ability to  successfully  grow the Company by  completing
acquisitions,  the  ability  to remain in  compliance  with its bank  covenants,
delays in government procurement  processes,  ability to obtain bid, payment and
performance bonds on various of the Company's projects,  technological change or
difficulties,  the  ability  to  refinance  debt when it  becomes  due,  product
development   risks,   commercialization   difficulties,   adverse   results  in
litigation,  the level of product returns, the amount of remedial work needed to
be performed,  and general economic conditions.  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 find ourselves in very  challenging  times.  We now have three major areas of
emphasis:  the first is  increasing  the  amount of our  backlog;  the second is
migrating to a business model with a more  predictable  revenue stream;  and the
third is finding  attractive  acquisition  candidates  to enhance  our  existing
businesses.

During 2003 and the first quarter of 2004,  as depicted in the following  chart,
we saw the amount of our backlog  decline.  During the second and third quarters
of 2004 we  experienced  increases  in our  backlog for the first time since the
fourth  quarter of 2002.  Although  this  increase was a relatively  modest $6.5
million,  or 4.9% of our  March  31,  2004  backlog,  we view the fact  that the
backlog  has  stopped  declining  and in  fact  started  to  increase  as a very
important   milestone  and  an  early  indicator  that  the  difficult  economic
environment  we have been  operating  under during the past two years appears to
have stabilized.


<TABLE>
<CAPTION>
                        Institutional                  Federal           Public
                          Security           Attack            Security          Safety and        Total
(in thousands)            Systems          Protection          Systems           Justice           Backlog
                        ------------------------------------------------------------------------------------
<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 30, 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
</TABLE>


                                       17
<PAGE>


Historically, approximately over 75% of our revenues were generated from sources
where the ultimate customer is a state or local government unit. During the last
few years due to the general economic slowdown,  state and local budgets,  which
we are dependent on for our revenue sources,  have come under intense  pressure.
Most  states are  currently  running in a deficit  situation,  as are many local
governments. This has caused many of them to delay and in some cases cancel many
infrastructure  projects  until such time as their  economic  fortunes  rebound.
Until the economy has  improved  for several  quarters and until state and local
budgets  improve,  we would  anticipate our backlog levels  continuing to remain
under  pressure.  To address this area of focus we are actively  bidding on jobs
and  keeping  our  offerings  in front of our  customers  so that when or if the
current  government  budget  cycle turns  around we will be well  positioned  to
capitalize  on new  opportunities.  As noted above,  the modest  increase in our
backlog at September 30, 2004 preliminarily  indicates to us that the markets we
serve are  stabilizing  and we are hopeful that our future backlogs will reflect
this trend.

Our second area of focus surrounds  reengineering  our business model so that it
contains a greater  degree of recurring  revenue.  As indicated in the following
table,  approximately  12.9% of our revenue is generated from recurring  revenue
sources  (primarily  maintenance  revenues),  and the majority of these revenues
occur in our Public Safety and Justice  segment.  We define one-time  revenue as
revenue derived from discrete projects,  from which we do not expect to generate
incremental  revenue upon the  completion  of the project.  We define  recurring
revenue as sources of revenue from which we anticipate  receiving revenue in the
current,  as well as future periods,  for example annual  renewable  maintenance
contracts.


<TABLE>
<CAPTION>
                                                      Nine Months Ended September 30, 2004
                                                  --------------------------------------------
           (in thousands)       One-time Revenue    %    Recurring Revenue   %          Total
                                ----------------  -----  ----------------- -----    ----------
<S>                                  <C>           <C>      <C>              <C>       <C>
Institutional Security Systems       $37,948       34.5     $  3,846         3.5       $41,794
Attack Protection                     20,204       18.3           --         --         20,204
Federal Security Systems              11,242       10.2           --         --         11,242
Public Safety and Justice             26,515       24.1       10,415        9.4         36,930
                                     -------       ----      -------       -----    ----------
     Total                           $95,909       87.1%    $ 14,261       12.9%      $110,170
                                     =======       ====      =======       =====    ==========
</TABLE>

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

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

The first is a business that would either prove additive or complementary to our
current  offerings in the Public  Safety and Justice  segment.  We envision this
segment as being a growth  segment for our business.  Our assessment is that the
demands of our nation's first  responders will grow in the  foreseeable  future.
Furthermore,  this business is characterized by strong recurring  revenues which
as discussed above is one of our key business drivers.

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

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

                                       18
<PAGE>


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

In this regard,  on August 11, 2004, we acquired the assets of 90 Degrees,  Inc.
of Yakima,  Washington.  90 Degrees is a provider of mission  critical  fire and
emergency  medical  information  management  systems  for public,  military  and
private public safety agencies. 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  Public  Safety  &  Justice  product  offerings,  the  open  web-based
technology  from 90 Degrees  will  advance our current  fire and rescue  product
offerings.


RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003

Revenues.  The Company had revenues of $33.4  million and $53.1  million for the
three  months  ended  September  30,  2004 and  2003,  respectively.  This was a
decrease of $19.8 million or 37.2%.

Revenues from the  Institutional  Security Systems segment were $11.8 million in
the three months ended September 30, 2004, a decrease from $26.4 million for the
same  period  of 2003.  This was a  decrease  of $14.6  million  or  55.3%.  The
Institutional   Security  Systems  segment  is  largely  a  construction  driven
business.  Much of its  revenue  is  obtained  by  working  on new and  retrofit
construction  projects  in the  corrections  industry,  as opposed to sources of
recurring revenue.  As such, the decrease in revenue experienced by this segment
is  largely  attributable  to its  working on less  projects  than it did in the
previous year.  The principal  reason for the decrease was backlog had decreased
from $99.5  million at December  31, 2002 to $57.3  million at December 31, 2003
thus  resulting  in less work  available  to be  performed in 2004 and the third
quarter of 2004 than in 2003 and the third  quarter of 2003.  At  September  30,
2004,  the backlog for the  Institutional  Security  System's  segment was $59.5
million which was a $3.2 million decrease over the previous quarter. The bidding
in years 2003  through  2004 has been slow for the  Company.  Although the gross
amount of construction spending in the corrections area remained relatively flat
during 2002,  2003 and the first nine months of 2004, the types of projects that
the  Company   solicits,   namely   large-scale   medium  to  maximum   security
installations,  declined  in 2003  and the  first  nine  months  of  2004.  This
situation was further compounded by state and local governmental budget deficits
which are causing  these  governmental  units to rethink and delay many of their
pending corrections projects.

Revenues  from the  Attack  Protection  segment  were $6.6  million in the three
months  ended  September  30, 2004,  an increase  from $6.0 million for the same
period of 2003.  This was an  increase  of $0.6  million  or 7.9%.  The  Company
purchased  an  existing  75,000  square foot  factory for the Attack  Protection
segment  on 20 acres of land in  close  proximity  to its  existing  factory  in
Montgomery,  Alabama. This capacity increase was largely driven by the Company's
expectation that the demands for its products,  principally its bullet and blast
resistant windows and doors would accelerate significantly in the post September
11, 2001  world.  Throughout  2002,  2003 and the first nine months of 2004 this
anticipated  increase in demand did not  materialize  leaving  the segment  with
significant  excess  capacity.  This  segment is composed  of two chief  product
offerings,  namely  Norshield,  which  encompasses  bullet  and blast  resistant
windows and doors and ancillary  products,  and Fiber SenSys,  which encompasses
its fiber optic  intrusion  detection  systems.  During the three  months  ended
September  30, 2004 compared to the three months ended  September 30, 2003,  the
Norshield line experienced a 16.3% decline in revenues, whereas the Fiber SenSys
line  experienced  a 206.3%  increase in revenue.  The Company  continues to see
heightened  interest for its Fiber SenSys  products and expects  sales for these
items to  continue  to  experience  sustainable  growth.  The  slow-down  in the
government  building process experienced during 2002 and early 2003 has appeared
to stabilize.  Now it appears that projects are being released for construction,
and thus  the  Attack  Protection  segment  is  experiencing  increased  bidding
activity  for its  products.  During the fourth  quarter  of 2003,  the  Company
furnished  bids to supply its  products for eight new embassy  projects.  At the
time,  this was the largest number of embassy  projects bid in a single calendar
year for this segment. As of September 30, 2004, the Company was awarded five of
these embassy projects,  for a total CompuDyne  contract value of $11.2 million,
lost two embassy  projects and the eighth has yet to be awarded.  To date during
the  second  half of 2004 we have  bid on 13 new  embassy  projects  for a total
CompuDyne  contract value of  approximately  $32 million.  In 2005,  preliminary
indications  show 20 embassy projects will be available for bid. All indications
are that this increased level of new embassy  construction will continue for the
next several years.

                                       19
<PAGE>

Revenues  from the Federal  Security  Systems  segment  were $3.3 million in the
three months ended September 30, 2004, a decrease from $4.6 million for the same
period of 2003. This was a decrease of $1.3 million or 27.5%.  Substantially all
of this  segment's  revenue is backlog  driven.  The  Federal  Security  Systems
Segment  ended 2002 with a backlog level of $11.4  million.  Backlog at December
31, 2003 decreased to $8.3 million and at September 30, 2004 was $9.0 million.

Revenues  from the Public  Safety and Justice  segment were $11.8 million in the
three months ended  September  30, 2004, a decrease  from $16.2  million for the
same period of 2003.  This was a decrease of $4.4  million or 27.3%.  During the
third quarter of 2003,  PS&J shipped $4.8 million of hardware to a large client.
Although  PS&J ships  certain  hardware  components  to clients on an occasional
basis,  shipment of this magnitude of hardware,  done to accommodate our client,
is an unusual and nonroutine event.

Expenses.  Cost of  goods  sold of  $24.6  million  in the  three  months  ended
September 30, 2004 was down $16.6 million,  or 40.3%,  from $41.1 million during
the same period of 2003.  This  decrease  was a result of a  decreased  costs of
goods  sold of $12.6  million at the  Institutional  Security  Systems  segment,
largely  attributable  to the  decreased  sales  of this  segment.  The  smaller
percentage  decrease in sales as compared to the percentage  decrease in cost of
goods sold  resulted in an  increased  gross profit  percentage  of 26.4% in the
three months ended September 30, 2004 as compared to 22.6% in 2003.

Cost of  goods  sold in the  Institutional  Security  Systems  segment  of $10.0
million in the three months ended  September 30, 2004 were down $12.6 million or
55.8% from $22.6 million for the same period of 2003. This decrease was slightly
more than the related  sales  decrease of this segment of 55.3%  resulting in an
increase in the gross profit  percentage to 15.0% from 14.1% in the three months
ended  September  30,  2004.  During  2002,  the West  Coast  operations  of the
Institutional Security Systems segment identified that the costs to complete its
projects were expected to be significantly higher than was previously projected.
This was a result of significant cost overruns on many of these projects. As the
work on the projects  progressed and as these projects  neared  completion,  the
Institutional Security Systems segment identified additional cost overruns which
would cause the costs to complete  these  projects to  increase,  resulting in a
higher  cost of goods sold in 2003 as a result of these  changes in  estimate to
complete.

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

                  Second Half of 2002                  $ 2,215,725
                  First Half of 2003                     1,728,829
                  Third Quarter of 2003                    437,717
                  Fourth Quarter of 2003                   821,646
                  First Half of 2004                       334,841
                  Third Quarter of 2004                     60,913
                                                       -----------
                    Total West Coast Margin Reductions $ 5,599,671
                                                       ===========

As a result,  as these  projects are being brought to  completion  and the final
billings made, the revenue generated by them is resulting in little margin or in
some cases losses as the  additional  cumulative  cost  overruns of $5.6 million
were being  identified  and  realized.  To address this  situation,  the Company
implemented more centralized controls and replaced certain personnel at its West
Coast  operations.  As of September  30, 2004, we believe that  additional  cost
overruns to complete  these  projects  will be minimal,  and as of September 30,
2004, all known probable losses have been accrued for.



                                       20
<PAGE>

Cost of goods sold in the Attack Protection segment of $7.0 million in the three
months ended  September  30, 2004 was up $1.7 million or 32.4% from $5.3 million
during the same period of 2003.  This increase was in spite of the related sales
decrease of this  segment of 7.9%,  resulting  in a 19.9%  decrease in the gross
profit  percentage to (7.3%) from 12.6% in the three months ended  September 30,
2003. We are actively  working to better  utilize the 75,000 square foot factory
the Company purchased in Montgomery, Alabama. The Airteq manufacturing operation
in Oregon was relocated and consolidated into this facility. This was done in an
effort to enhance the  utilization  of our owned  facilities in Alabama and thus
absorb  some  of  our  excess  manufacturing  capacity.   Although  not  a  huge
contributor,  this did in fact result in further  utilization  of  approximately
12,000 square feet of  previously  unused  manufacturing  space in this plant in
Alabama. In addition, we identified a quality problem with the windows and doors
being  installed  on one  active  and  current  project.  As a  result  of  this
identified  problem,  we were  forced  to take  remedial  action in the field to
repair this defect.  During the quarter ending September 30, 2004 we were forced
to increase our estimated  cost to complete  this project by $1.1 million.  This
was in  addition to $947  thousand  write  downs  recorded  during the first and
second quarters of 2004. We now anticipate  losing $1.4 million on this project.
As this project is brought to completion, any future revenues recognized will be
without any margin.

Cost of goods sold in the Federal  Security  Systems  segment of $2.8 million in
the three months ended  September  30, 2004 were down $0.8 million or 22.7% from
$3.6  million  during the same period of 2003.  This  decrease was less than the
related sales decrease of this segment of 27.5%  resulting in a 5.3% decrease in
the gross  profit  percentage  to 15.2%  from  20.5% in the three  months  ended
September 30, 2003.  Substantially  all of the projects  awarded in this segment
are discrete projects.

Cost of goods sold in the Public  Safety and Justice  segment of $4.8 million in
the three months ended  September  30, 2004 were down $4.8 million or 50.4% from
$9.6 million  during the same period of 2003.  During the third quarter of 2003,
PS&J  shipped $4.8 million of hardware to a large  client.  Although  PS&J ships
certain hardware components to clients on an occasional basis,  shipment of this
magnitude  of  hardware,  done to  accommodate  our  client,  is an unusual  and
nonroutine  event.  The absence of these  hardware sales in the third quarter of
2004 contributed to the decline in cost of goods sold in 2004.

Selling,  general and  administrative  expenses  was $9.3  million for the three
months ended  September  30, 2004, an increase of $0.8 million or 9.7% from $8.5
million for the same period of 2003. A  significant  portion of this increase is
related  to  additional  costs  incurred  by the  Company  related to legal fees
incurred in connection  with  responding to a complaint filed by a Public Safety
and Justice segment  customer,  expenses  incurred in connection with evaluating
potential acquisitions,  recruiting fees incurred to fill the recently hired COO
position  and  other  senior  management   positions  and  to  comply  with  new
requirements mandated by the Sarbanes-Oxley Act and the SEC.

Research and  Development  expenses were $2.1 million for the three months ended
September  30, 2004,  an increase of $0.4 million or 21.9% from $1.7 million for
the same period of 2003.  Being a technology  driven  enterprise,  the Company's
Public Safety and Justice segment is required to continually  update and enhance
its software offerings causing it to incur significant  research and development
costs.

Interest  expense  increased to $849  thousand for the three month period ending
September 30, 2004 from $366 thousand for the three month period ended September
30, 2003 due to an increase in borrowings and overall higher interest rates. The
following  table  compares the  weighted  average of the  Company's  three month
period  ended  September  30,  2004 and  September  30,  2003  interest  bearing
borrowings and the related rates charged thereon.


<TABLE>
<CAPTION>
                                  Monthly Weighted        Monthly Weighted
                                   Average - 2004          Average - 2003
                               Amount          Rate     Amount          Rate
                               ------          ----     ------          ----
                                   (in thousands)         (in thousands)
<S>                            <C>                      <C>             <C>
Bank borrowings                $    --          --      $15,580         3.2%
Industrial revenue bonds       $ 4,052         2.7%     $ 4,492         4.0%
Subordinated borrowings        $40,250         6.3%          --           --
Swap hedge agreement           $ 3,382         3.4%     $ 6,088         3.9%
</TABLE>

                                       21
<PAGE>

<TABLE>
<CAPTION>
                                                  Monthly Weighted        Monthly Weighted
                                                  Average - 2004          Average - 2003
                                                  Amount     Rate         Amount      Rate
                                                  ------     ----         ------      ----
                                                   (in thousands)          (in thousands)
<S>                                               <C>        <C>          <C>        <C>
In addition the Company recorded the following
  interest expense:

Amortization and write-off
    of deferred financing charges                    $   145             $  77
</TABLE>

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

Net Income.  The Company  reported net (loss) income of ($1.8)  million and $1.0
million in the third quarters of 2004 and 2003,  respectively.  Diluted earnings
per share  decreased  to ($.23)  in the third  quarter  of 2004 from $.12 in the
third quarter of 2003. The weighted average number of common shares  outstanding
and equivalents  used in computing EPS increased in the third quarter of 2004 as
compared to the third quarter of 2003 to 8.2 million from 8.1 million in 2003.


NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003

Revenues.  The Company had revenues of $110.2 million and $147.4 million for the
nine months ended September 30, 2004 and September 30, 2003, respectively.  This
was a decrease of $37.3 million or 25.3%.

Revenues from the  Institutional  Security Systems segment were $41.8 million in
the nine months ended  September 30, 2004, a decrease from $75.5 million for the
same  period  of 2003.  This was a  decrease  of $33.7  million  or  44.6%.  The
Institutional   Security  Systems  segment  is  largely  a  construction  driven
business.  Much of its  revenue  is  obtained  by  working  on new and  retrofit
construction  projects  in the  corrections  industry,  as opposed to sources of
recurring revenue.  As such, the decrease in revenue experienced by this segment
is  largely  attributable  to its  working on less  projects  than it did in the
previous year.  The principal  reason was because its backlog had decreased from
$99.5  million at December  31, 2002 to $57.3  million at December 31, 2003 thus
resulting  in less work  available  to be  performed in the first nine months of
2004 as compared to the first nine months of 2003.  At September  30, 2004,  the
backlog for the Institutional  Security System's segment was $59.5 million which
was a $2.3 million increase over the December 31, 2003 backlog amount.  The year
2003 and 2004 has been a slow bidding period for the Company. Although the gross
amount of construction spending in the corrections area remained relatively flat
between 2002, 2003 and the first nine months of 2004, the types of projects that
the  Company   solicits,   namely   large-scale   medium  to  maximum   security
installations,  declined  in 2003  and the  first  nine  months  of  2004.  This
situation was further  compounded  by the general  state and local  governmental
budget deficits which are causing these  governmental units to rethink and delay
many of their pending corrections projects.

Revenues from the Attack Protection segment was $20.2 million in the nine months
ended  September  30, 2004, a decrease from $20.9 million for the same period of
2003.  This was a decrease of $0.7  million or 3.4%.  The Company  purchased  an
existing  75,000  square foot  factory for the Attack  Protection  segment on 20
acres of land in close proximity to its existing factory in Montgomery, Alabama.
This capacity increase was largely driven by the Company's  expectation that the
demands for its products, principally its bullet and blast resistant windows and
doors  would  accelerate  significantly  in the post  September  11, 2001 world.
Throughout  2002,  2003 and the  first  nine  months  of 2004  this  anticipated
increase in demand did not  materialize  leaving the  segment  with  significant
excess capacity. This segment is composed of two chief product offerings, namely
Norshield,  which  encompasses  bullet and blast resistant windows and doors and
ancillary  products,  and  Fiber  SenSys,  which  encompasses  its  fiber  optic
intrusion  detection  systems.  During the nine months ended  September 30, 2004
compared to September 30, 2003 the Norshield line experienced a 22.8% decline in
revenues,  whereas  the Fiber  SenSys  line  experienced  a 108.1%  increase  in
revenues.  The Company continues to see heightened interest for its Fiber SenSys
products and expects sales for these items to continue to experience sustainable
growth. The slow-down in the government building process experienced during 2002
and 2003 has appeared to stabilize.  It appears that projects are being released
for  construction,  and thus  the  Attack  Protection  segment  is  experiencing
increased  bidding activity for its products.  During the fourth quarter of 2003
the  Company  furnished  bids to supply  its  products  for  eight  new  embassy
projects.  At the time, this was the largest number of embassy projects bid in a
single calendar year for this segment. As of September 30, 2004, the Company was
awarded five of these embassy projects,  for a total CompuDyne contract value of
$11.2 million,  lost two embassy  projects and the eighth has yet to be awarded.
To date during the second half of 2004,  we have bid on 13 new embassy  projects
for a total  CompuDyne  contract value of  approximately  $32 million.  In 2005,
preliminary  indications show 20 embassy projects will be available for bid. All
indications  are that this  increased  level of new  embassy  construction  will
continue for the next several years.


                                       22
<PAGE>

Revenues from the Federal Security Systems segment was $11.2 million in the nine
months ended  September  30, 2004,  a decrease  from $12.3  million for the same
period of 2003. This was a decrease of $1.1 million or 8.6%.  Substantially  all
of this  segment's  revenue is backlog  driven.  The  Federal  Security  Systems
Segment  ended 2002 with a backlog level of $11.4  million.  Backlog at December
31, 2003 was $8.3 million and at September 30, 2004 was $9.0 million.

Revenues  from the Public  Safety and Justice  segment was $36.9  million in the
nine months ended September 30, 2004, a decrease from $38.7 million for the same
period of 2003.  This was a decrease of $1.8  million or 4.7%.  During the third
quarter of 2003,  PS&J  shipped  $4.8  million of  hardware  to a large  client.
Although  PS&J ships  certain  hardware  components  to clients on an occasional
basis,  shipment of this magnitude of hardware,  done to accommodate our client,
is an unusual and nonroutine event.

Expenses. Cost of goods sold of $80.0 million in the nine months ended September
30, 2004 were down $31.8  million or 28.5% from $111.9  million  during the same
period of 2003.  This decrease was a result of decreased  costs of goods sold of
$30.0  million  at  the   Institutional   Security  Systems   segment,   largely
attributable  to the  decreased  sales of this segment.  The smaller  percentage
decrease in sales as compared to the  percentage  decrease in cost of goods sold
resulted in an increased  gross profit  percentage  of 27.4% for the nine months
ended September 30, 2004 as compared to 24.1% in 2003.

Cost of  goods  sold in the  Institutional  Security  Systems  segment  of $35.3
million for the nine months ended  September 30, 2004 were down $30.0 million or
45.9% from $65.3 million during the same period of 2003.  This decrease was more
than the related  sales  decrease of this  segment of 44.6%  resulting in a 2.0%
increase in the gross profit  percentage  to 15.6% from 13.6% in the nine months
ended  September  30,  2003.  During  2002,  the West  Coast  operations  of the
Institutional Security Systems segment identified that the costs to complete its
projects was going to be  significantly  higher than was  previously  projected.
This was a result of significant cost overruns on many of these projects. As the
work on the projects  progressed  and as these  projects  neared  completion the
Institutional Security Systems segment identified additional cost overruns which
would cause the costs to complete  these  projects  to increase  resulting  in a
higher  cost of goods  sold in 2003 as a result of the  charges in  estimate  to
complete.

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

                  Second Half of 2002           $ 2,215,725
                  First Half of 2003              1,728,829
                  Third Quarter of 2003             437,717
                  Fourth Quarter of 2003            821,646
                  First Half of 2004                334,841
                  Third Quarter of 2004              60,913
                                               ------------
                    Total West Coast
                      Margin Reductions         $ 5,599,671
                                               ============


                                       23
<PAGE>

As a result,  as these  projects are being brought to  completion  and the final
billings collected,  the revenue generated by them is resulting in little margin
or in some cases  losses as the  additional  cumulative  costs  overruns of $5.6
million were being  identified  and  realized.  To address this  situation,  the
Company implemented more centralized  controls and replaced certain personnel at
its West Coast  operations.  As of September 30, 2004 we believe that additional
cost overruns to complete  these  projects will be minimal,  and as of September
30, 2004 all known probable losses have been accrued for.

Cost of goods sold in the Attack  Protection  segment of $18.7  million  for the
nine months ended  September 30, 2004 increased $1.9 million or 11.2% from $16.8
million  during the same period of 2003.  This  increase  occurred in spite of a
sales  decrease of this segment of 3.4%,  resulting  in a 12.1%  decrease in the
gross  profit  percentage  to 7.5%  from  19.7%  during  the nine  months  ended
September 30, 2003. We are actively  working to better utilize the 75,000 square
foot  factory  the  Company  purchased  in  Montgomery,   Alabama.   The  Airteq
manufacturing  operation  in Oregon was  relocated  and  consolidated  into this
facility.  This was done in an effort to enhance  the  utilization  of our owned
facilities in Alabama and thus absorb some of our excess manufacturing capacity.
Although not a huge contributor,  this did in fact result in further utilization
of approximately  12,000 square feet of previously unused manufacturing space in
this plant in Alabama.  In addition we  identified  a quality  problem  with the
windows and doors being installed on one active and current project. As a result
of this identified  problem, we were forced to take remedial action in the field
to repair this  defect.  During the first nine months of  September  30, 2004 we
were forced to increase  our  estimated  cost to complete  this  project by $2.0
million  thus  causing  this  project  to  become  a  negative  margin  project.
Cumulative  write downs on this project amount to $2.3 million.  As this project
is brought to  completion  any future  revenue  recognized  will be without  any
margin.

Cost of goods sold in the Federal  Security  Systems  segment of $9.6 million in
the nine months ended  September  30, 2004  decreased  $0.6 million or 5.9% from
$10.2  million  during the same period of 2003.  This decrease was more than the
related sales decrease of this segment of 8.6%,  resulting in a 2.5% decrease in
the  gross  profit  percentage  to 14.3%  from  16.7% in the nine  months  ended
September 30, 2003.  Substantially  all of the projects  awarded in this segment
are discrete projects.

Cost of goods sold in the Public Safety and Justice segment of $16.4 million for
the nine months  ended  September  30, 2004 was down $3.1  million or 16.1% from
$19.6  million  during the same period of 2003.  This decrease was more than the
related sales decrease of this segment of 4.7%,  resulting in a 6.0% increase in
the  gross  profit  percentage  to 55.5%  from  49.5% in the nine  months  ended
September  30,  2003.  During the fourth  quarter of 2003 our Public  Safety and
Justice segment  received a complaint  alleging that we breached our contract to
provide a public safety software system to a customer. As a result we recorded a
$1.6 million pre-tax  charge.  During the second quarter of 2004 this matter was
settled  resulting  in a recovery by the segment of $0.3  million of the accrued
charge, which was reflected as a reduction of its cost of sales.

Selling,  general and  administrative  expenses  was $26.1  million for the nine
months ended  September 30, 2004, an increase of $2.0 million or 8.3% from $24.1
million  for the same  period  of 2003.  Much of this  increase  is  related  to
additional  costs  incurred by the Company  related to legal fees in  connection
with  responding  to and settling  the  complaint  filed by a Public  Safety and
Justice  segment  customer,  expenses  incurred in  connection  with  evaluating
potential acquisitions,  recruiting fees incurred to fill the recently hired COO
position  and  other  senior  management   positions  and  to  comply  with  new
requirements mandated by the Sarbanes-Oxley Act and the SEC.

Research  and  Development  expenses  was $5.7 million for the nine months ended
September  30,  2004,  an increase of $0.1 million or 1.5% from $5.6 million for
the same period of 2003.  Being a technology  driven  enterprise,  the Company's
Public Safety and Justice segment is required to continually  update and enhance
its  software  offerings,  thus  causing it to incur  significant  research  and
development costs.

Interest  expense  increased to $2.4  million for the nine month  period  ending
September 30, 2004 from $1.1 million for the nine month period ending  September
30, 2003 due to increase in borrowings and overall higher  interest  rates.  The
following  table  compares  the  weighted  average of the  Company's  nine month
periods  ended  September  30,  2004 and  September  30, 2003  interest  bearing
borrowings and the related rates charged thereon.



                                       24
<PAGE>

<TABLE>
<CAPTION>
                                                            Monthly Weighted      Monthly Weighted
                                                             Average - 2004        Average - 2003
                                                            Amount      Rate     Amount         Rate
                                                             ------     ----     ------         ----
                                                             (in thousands)         (in thousands)
<S>                                                         <C>         <C>      <C>            <C>
Bank borrowings                                             $   822     1.4%     $17,330        2.6%
Industrial revenue bonds                                    $ 4,214     3.2%     $ 4,752        3.8%
Subordinated borrowings                                     $40,250     6.3%        --            --
Swap hedge agreement                                        $ 4,059     3.7%     $ 6,755        3.7%

In addition the Company recorded
the following interest expense:
Amortization and write-off
    of deferred financing charges                           $   418              $   178
</TABLE>


Taxes on Income.  The effective tax rate (benefit) was  approximately 40% during
both the nine month periods ended September 30, 2004 and September 30, 2003.

Net Income.  The Company  reported net (loss) income of ($2.1)  million and $3.0
million  in the  first  nine  months  of 2004 and  2003,  respectively.  Diluted
earnings  per share  decreased  to a loss of ($.26) in the first nine  months of
2004 from $.36 in the first nine months of 2003. The weighted  average number of
common shares outstanding and equivalents used in computing EPS increased to 8.2
million in 2004 from 8.1 million in 2003.


LIQUIDITY AND CAPITAL RESOURCES

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

As of  September  30,  2004,  the Company had working  capital of $52.7  million
compared  with $28.8  million as of  December  31,  2003.  The most  significant
changes in working capital were due to the receipt of the cash proceeds from the
2011 Notes financing, offset in part by the concurrent pay down of the Company's
debt, with the balance invested in available-for-sale marketable securities.

Net cash used by operating  activities was $5.9 million in the first nine months
of 2004 versus $11.1 million provided by operating  activities in the first nine
months of 2003.

Net cash used for  investing  activities  was $20.1  million  in the first  nine
months of 2004  compared  to net cash used of $684  thousand  in the first  nine
months  of  2003.  In the  first  nine  months  of 2004,  the net of  marketable
securities bought and redeemed was $15.5 million.

Net cash provided by financing activities amounted to $26.6 million in the first
nine months of 2004  compared  with a net cash use of $8.3  million in the first
nine months of 2003.  $13.5 million of our bank  borrowings were repaid from the
proceeds of the issuance of the 2011 Notes.





                                       25
<PAGE>



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

                             Long-Term Debt
         December 31:        --------------
2004                            $    --
2005                                440
2006                                440
2007                                440
2008                                440
Thereafter                       42,495
                                -------
Totals                          $44,255
                                =======

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

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

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

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

On October 29, 2004,  the Company and its banks amended its credit  agreement to
eliminate  the $15.0  million  line of credit  maturing  on March 1, 2005 and to
require  borrowings under its $10.0 million line of credit to be  collateralized
by pledged  marketable  securities.  The Company was not in compliance  with its
fixed charge  coverage  ratio  covenant at September 30, 2004 and in conjunction
with the October 29, 2004 amendment received a waiver from its bank.

The  Company's  total  outstanding  borrowings at September 30, 2004 amounted to
approximately $44.2 million. The 2011 Notes accounted for $40.2 million of these
borrowings.  The remaining  amount of $4.0 million  resulted from  borrowings at
variable rates and consisted of two industrial  revenue bonds outstanding in the
amounts of $1.4  million and $2.6  million.  The  interest  rate  charged to the
Company at September  30, 2004 for its  industrial  revenue  bonds was 1.83% and
1.82% respectively.  The variable interest rate for these borrowings  fluctuated
between  1.01% and 1.83%  during the first  nine  months of 2004 based on weekly
market  conditions.  These  bonds are fully  collateralized  by bank  letters of
credit issued under the Credit  Agreement.  The Company's banks consider letters
of credit as outstanding  borrowings when considering the amount of availability
the Company has remaining under its line of credit and in determining the amount
of marketable securities needed to be pledged as collateral.

Other than the Company's  letters of credit,  which  amounted to $5.3 million at
September  30,  2004,  the  Company  has no other  material  off  balance  sheet
liabilities.

The Company  had $4.7  million of unused  availability  under its line of credit
after execution of the October amendment.  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.



                                       26
<PAGE>


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


Additional Considerations

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

TOTAL BACKLOG
CompuDyne's total backlog amounted to $138.1 million at September 30, 2004. This
was a decrease of 0.9% from the  Company's  December  31, 2003 backlog of $139.4
million.  The break down of the Company's  backlog by segment is as follows,  in
thousands:

                                 September 30,              December, 31,
                                     2004                        2003
                                   --------                    --------
Institutional Security Systems     $ 59,524                    $ 57,258
Attack Protection                    19,351                      10,043
Federal Security Systems              9,018                       8,326
Public Safety and Justice            50,215                      63,727
                                   --------                    --------
         Totals                    $138,108                    $139,354
                                   ========                    ========

Included in the backlog of the Public  Safety and Justice  segment at  September
30, 2004 and December 31, 2003 is $6.0 million and $12.0 million,  respectively,
representing  awards  received by the segment,  for which the customers have not
yet entered into signed contracts. These awards are expected to result in signed
contracts over the next twelve months.

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

PERCENTAGE OF COMPLETION ACCOUNTING AND REVENUE RECOGNITION
Approximately 75% of the Company's revenues are derived from long term contracts
where  revenue  is  recognized  under the  percentage  of  completion  method of
accounting.  The  Company's  software  related  contracts  utilize  labor  hours
incurred to date on a project,  divided by the total  expected  project hours to
determine  the   completion   percentage.   The  Company's   manufacturing   and
construction  contracts utilize costs incurred to date on a project,  divided by
the total expected project costs to determine the completion percentage. Both of
these methods require considerable  judgment and, as such, the estimates derived
at any point in time could  differ  significantly  from  actual  results.  These
estimates 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.



                                       27
<PAGE>

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

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

GOODWILL AND INTANGIBLE ASSETS
The Company  reviews the carrying value of goodwill and  unamortized  intangible
assets either  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 reporting unit's fair value and result in
an impairment  charge.  The Company cannot predict the occurrence of events that
might adversely affect the reported value of goodwill and intangible assets that
totaled approximately $32.7 million, net, at September 30, 2004.

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

In June 2004 the FASB issued an exposure draft entitled Fair Value  Measurements
that provides  guidance on how to measure fair value of assets and  liabilities.
The objective is to increase the consistency,  reliability, and comparability of
fair value  measurements in applying  general  accepted  accounting  principles.
Valuation  techniques  consistent with the market approach,  income approach and
cost approach are to be considered  for purposes of estimating  fair value.  The
proposed  standard's  effective  date would be  applicable  for awards  that are
granted,  modified,  or settled in cash in interim or annual  periods  beginning
after June 15,  2005.  The  Company is  currently  evaluating  the impact of the
proposed standard.

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

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

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

MARKET RISK
The Company is exposed to market risk related to changes in interest rates.  The
Company  entered  into an interest  rate swap  agreement on June 26, 2001 in the
initial  notional  amount of $11.5  million.  The  notional  amount of this swap
agreement  declines by $676 thousand on a quarterly basis until it becomes $0 on
October 1, 2005. At September 30, 2004 the notional amount of the swap agreement
had  declined  to $2.7  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 nine months  ended  September  30,  2004.  Upon
determination  of the hedge  ineffectiveness,  the  cumulative  loss on the fair
value of the interest rate swap was $155 thousand, which was recognized in other
income.  The change in fair value of the interest rate swap for the three months
ended  September  30,  2004 was a gain of $24  thousand,  and the change in fair
value of the interest rate swap for the nine months ended September 30, 2004 was
a gain of $111 thousand,  resulting in a remaining  liability for the investment
of $44 thousand.  Future  changes in the value of the interest rate swap will be
recognized in earnings.


                                       28
<PAGE>


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

RECENT ACCOUNTING PRONOUNCEMENTS
In June 2004 the FASB issued an exposure draft entitled Fair Value  Measurements
that provides  guidance on how to measure fair value of assets and  liabilities.
The objective is to increase the consistency,  reliability, and comparability of
fair value  measurements in applying  general  accepted  accounting  principles.
Valuation  techniques  consistent with the market approach,  income approach and
cost approach are to be considered  for purposes of estimating  fair value.  The
proposed  standard's  effective  date would be  applicable  for awards  that are
granted,  modified,  or settled in cash in interim or annual  periods  beginning
after June 15,  2005.  The  Company is  currently  evaluating  the impact of the
proposed standard.

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

In January 2003 the FASB issued FASB  Interpretation  No. 46,  "Consolidation of
Variable Interest  Entitites" (FIN 46). In December 2003, FIN 46 was replaced by
FASB  Interpretation No. 46(R),  "Consolidation of Variable Interest  Entities".
FIN 46(R)  clarifies the  application  of Accounting  Research  Bulletin No. 51,
"Consolidated  Financial  Statements",  to  certain  entities  in  which  equity
investors do not have the characteristics of a controlling financial interest or
do not have  sufficient  equity at risk for the entity to finance its activities
without additional  subordinated financial support from other parties. FIN 46(R)
requires  an  enterprise  to  consolidate  a  variable  interest  entity if that
enterprise will absorb a majority of the entity's  expected losses,  is entitled
to receive a majority of the entity's expected  residual  returns,  or both. FIN
46(R)  is  effective  for  entities   being   evaluated   under  FIN  46(R)  for
consolidation  no later  than the end of the first  reporting  period  that ends
after March 15,  2004.  The  adoption of this  standard  did not have a material
effect on the  financial  position,  results of  operations or cash flows of the
Company.


                                       29
<PAGE>



                                     ITEM 3
           QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE RISK

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

The information below summarizes our sensitivity to market risks associated with
fluctuations  in interest rates as of September 30, 2004. To the extent that the
Company's  financial  instruments expose the Company to interest rate risk, they
are presented in the table below.  The table  presents  principal cash flows and
related  interest rates by year of maturity of the Company's  notes payable with
variable rates of interest in effect at September 30, 2004.

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

          Financial Instruments by Expected Maturity Date

<TABLE>
<CAPTION>
     Notes Payable
      Year Ending        Variable     Average Variable           Fixed           Average Fixed
      December 31         Rate ($)     Interest Rate             Rate ($)        Interest Rate
      -----------        ----------    --------------         -------------     --------------
<S>                      <C>           <C>                    <C>                <C>
        2004 (remaining) $       --           1.82%           $         --                --
        2005                440,000           1.82%                     --                --
        2006                440,000           1.82%                     --                --
        2007                440,000           1.82%                     --                --
        2008                440,000           1.82%                     --                --
        Thereafter        2,245,000           1.82%              40,250,000             6.25%
                          ---------                           -------------
        Total            $4,005,000           1.82%           $  40,250,000             6.25%
        Fair Value       $4,005,000           1.82%           $  40,250,000             6.25%

<CAPTION>

Interest Rate Swaps
    Year Ending           Variable        Average      Average
    December 31           Rate ($)       Pay Rate    Receive Rate
    -----------          ----------      --------   -------------
<S>                      <C>             <C>         <C>
        2004 (remaining) $  676,470           4.90%       1.98%
        2005              2,029,420           4.90%       1.98%
        2006                     --             --           --
        2007                     --             --           --
        2008                     --             --           --
        Thereafter               --             --           --
                          --------
        Total            $2,705,890           4.90%       1.98%
        Fair Value       $  (43,977)


</TABLE>


                                       30

<PAGE>



                                     ITEM 4
                             CONTROLS AND PROCEDURES


EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

The Company's management,  including the Company's President and Chief Executive
Officer,  Executive  Vice  President,  Chief  Financial  Officer and  Treasurer,
conducted an  evaluation as of September  30, 2004 of the  effectiveness  of the
Company's  disclosure  controls and procedures (as defined in Rule 13a-15(e) and
Rule  15d-15(e)).  Based on that  evaluation,  the President and Chief Executive
Officer,  Executive  Vice  President,  Chief  Financial  Officer  and  Treasurer
concluded that the disclosure controls and procedures were effective in ensuring
that all  material  information  required  to be  disclosed  in the  reports the
Company files and submits under the Securities and Exchange Act of 1934 has been
made known to them on a timely basis and that such information has been properly
recorded, processed, summarized and reported, as required.

CHANGES IN INTERNAL CONTROLS

There have been no significant  changes in the Company's  internal controls over
financial  reporting  during the most  recent  fiscal  quarter  that  materially
affected,  or are reasonably likely to materially affect, the Company's internal
controls over financial reporting.

SARBANES-OXLEY SECTION 404 COMPLIANCE

Section  404 of the  Sarbanes-Oxley  Act of 2002 (the  "Act")  will  require the
Company to include an  internal  control  report from  management  in its Annual
Report on Form  10-K for the year  ended  December  31,  2004 and in  subsequent
Annual  Reports  thereafter.  The  internal  control  report  must  include  the
following:  (1) a statement of management's  responsibility for establishing and
maintaining adequate internal control over financial reporting,  (2) a statement
identifying the framework used by management to conduct the required  evaluation
of the effectiveness of the Company's internal control over financial reporting,
(3)  management's  assessment of the  effectiveness  of the  Company's  internal
control over financial reporting as of December 31, 2004,  including a statement
as to whether or not internal control over financial reporting is effective, and
(4) a statement that the Company's independent public accounting firm has issued
an  attestation  report on  management's  assessment  of internal  control  over
financial reporting.

Management  acknowledges  its  responsibility  for  establishing and maintaining
internal  controls over  financial  reporting and seeks to  continually  improve
those controls.  In addition, in order to achieve compliance with Section 404 of
the Act within the required timeframe, the Company has been conducting a process
to document and evaluate its internal  controls over financial  reporting  since
2003.  In this  regard,  the Company has  dedicated  internal  resources,  hired
additional staff,  engaged outside  consultants and adopted a detailed work plan
to: (i) assess and  document the  adequacy of internal  control  over  financial
reporting;  (ii) take steps to improve control  processes where required;  (iii)
validate  through testing that controls are functioning as documented;  and (iv)
implement a continuous  reporting and improvement  process for internal  control
over  financial  reporting.  The Company  believes its process for  documenting,
evaluating  and  monitoring  its internal  control over  financial  reporting is
consistent with the objectives of Section 404 of the Act.

During 2004, the Company  continued to document,  evaluate and commenced testing
of its internal controls.  The Company's  documentation and testing to date have
identified  certain  gaps in the  documentation,  design  and  effectiveness  of
internal controls over financial reporting that the Company is in the process of
remediating.  Given the risks  inherent in the design and  operation of internal
controls over  financial  reporting,  the Company can provide no assurance as to
its, or its independent  public  accounting  firm's  conclusions at December 31,
2004 with respect to the  effectiveness of its internal  controls over financial
reporting.

It should be noted  that any  system of  controls,  however  well  designed  and
operated,  can provide only  reasonable,  and not absolute,  assurance  that the
objectives of the control system are met. In addition, the design of any control
system is based in part upon certain  assumptions about the likelihood of future
events.  Because of these and other  inherent  limitations  of control  systems,
there can be no assurance  that any design will succeed in achieving  its stated
goals under all potential future conditions, regardless of how remote.


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<PAGE>



                           PART II - OTHER INFORMATION


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

On August 11, 2004,  the Company  issued 72,278 shares of its common stock,  par
value $0.75 per share to 90 Degrees,  Inc. as a portion of the consideration for
the  Company's  acquisition  of the assets of 90  Degrees,  Inc.  Such shares of
common stock were issued without  registration under the Securities Act of 1933,
as amended,  in reliance on the exemption from the Securities Act's registration
requirements provided by Section 4(2) of the Securities Act for transactions not
involving any public offering.


Item 6:  Exhibits.

Exhibits -

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

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<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: November 8, 2004                        /s/ Martin Roenigk
                                              -------------------------
                                              Martin Roenigk
                                              Chief Executive Officer


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


                                       33