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 March 31, 2005
                                       OR

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


     For the transition period from_________________ to ______________


                         Commission File Number 0-29798


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

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


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

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

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                                Yes____ No __X__

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 May 6, 2005, a total of 8,119,979 shares of Common Stock,  $.75 par value,
were outstanding.


                                       1
<PAGE>






33

                     COMPUDYNE CORPORATION AND SUBSIDIARIES
                                      INDEX


                                                            PAGE NO.

Part I.  Financial Information

   Item 1. Financial Statements - Unaudited

      Consolidated Balance Sheets - March 31, 2005
      and December 31, 2004                                      3

      Consolidated Statements of Operations -
      Three Months Ended March 31, 2005 and 2004                 4

      Consolidated Statement of Changes in
      Shareholders' Equity - Three Months Ended
      March 31, 2005                                             5

      Consolidated Statements of Cash Flows -
      Three Months Ended March 31, 2005 and 2004                 6

      Notes to Consolidated Financial Statements              7-14

    Item 2. Management's Discussion and Analysis of
      Financial Condition and Results of Operations          15-26

    Item 3. Quantitative and Qualitative Disclosures
      About Market Risk                                         27

    Item 4. Controls and Procedures                          28-29

Part II.  Other Information                                     30

      Signature                                                 31



                                       2
<PAGE>



                          ITEM 1. FINANCIAL STATEMENTS

                     COMPUDYNE CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                   (unaudited)
<TABLE>
<CAPTION>
                                                                     March 31,  December 31,
ASSETS                                                                 2005         2004
                                                                     --------     ---------
                                                                     (dollars in thousands)
Current Assets
<S>                                                                  <C>          <C>
        Cash and cash equivalents                                    $   4,183    $   5,198
        Marketable securities                                           10,769       19,577
        Cash and marketable securities - pledged                           489         --
        Accounts receivable, net                                        33,325       34,291
        Contract costs in excess of billings                            15,060       16,087
        Inventories                                                      4,894        5,165
        Prepaid expenses and other                                       5,014        5,412
                                                                     ---------    ---------
           Total Current Assets                                         73,734       85,730

Cash and marketable securities - pledged                                 5,510         --
Property, plant and equipment, net                                      11,689       12,094
Goodwill                                                                25,913       25,894
Other intangible assets, net                                             8,352        8,460
Other                                                                      901          713
                                                                     ---------    ---------
           Total Assets                                              $ 126,099    $ 132,891
                                                                     =========    =========
                      LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
        Accounts payable and accrued liabilities                     $  16,605    $  21,771
        Billings in excess of contract costs incurred                   12,276       13,497
        Deferred revenue                                                 6,693        5,998
        Current portion of notes payable                                   440          440
                                                                     ---------    ---------
           Total Current Liabilities                                    36,014       41,706

Notes payable                                                            3,565        3,565
Convertible subordinated notes payable, net                             39,165       39,118
Deferred tax liabilities                                                 2,072        2,072
Other                                                                      514          599
                                                                     ---------    ---------
           Total Liabilities                                            81,330       87,060
                                                                     ---------    ---------
Commitments and Contingencies

Shareholders' Equity
        Preferred stock, 2,000,000 shares authorized and unissued         --           --
        Common stock, par value $.75 per share:  50,000,000 shares
         authorized at March 31, 2005 and December 31, 2004;
         8,943,856 shares issued at March 31, 2005 and
         December 31, 2004                                               6,707        6,707
        Additional paid-in-capital                                      44,368       44,368
        Accumulated deficit                                               (591)        (272)
        Accumulated other comprehensive (loss) income                      (99)          14
        Treasury stock, at cost; 820,377 and 721,077 shares
         at March 31, 2005 and December 31, 2004, respectively          (5,616)      (4,986)
                                                                     ---------    ---------
           Total Shareholders' Equity                                   44,769       45,831
                                                                     ---------    ---------
           Total Liabilities and Shareholders' Equity                $ 126,099    $ 132,891
                                                                     =========    =========
</TABLE>

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


                                       3
<PAGE>



                     COMPUDYNE CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (unaudited)


<TABLE>
<CAPTION>

                                            Three Months Ended March 31,
                                                2005          2004
                                               --------    ---------
                                       (in thousands, except per share data)
Revenues:
<S>                                            <C>         <C>
  Contract revenues earned                     $ 32,478    $ 36,436
  Other revenues                                  3,828       2,591
                                               --------    --------
     Total revenues                              36,306      39,027
Cost of sales                                    23,923      28,829
                                               --------    --------
Gross profit                                     12,383      10,198

Selling, general and administrative expenses     10,027       8,162
Research and development                          2,111       1,755
                                               --------    --------
Income from operations                              245         281
                                               --------    --------
Other expense (income)
  Interest expense                                  803         749
  Interest income                                  (228)        (78)
  Other expense (income)                            (11)        121
                                               --------    --------
     Total other expense                            564         792
                                               --------    --------
(Loss) before income taxes                         (319)       (511)
Income taxes expense (benefit)                        -        (204)
                                               --------    --------
Net loss                                       $   (319)   $   (307)
                                               ========    ========
(LOSS) PER SHARE:

Basic (loss) per common share                  $   (.04)   $   (.04)
                                               ========    ========
Weighted average number of common
shares outstanding                                8,163       8,009
                                               ========    ========
Diluted (loss) per common share                $   (.04)   $   (.04)
                                               ========    ========
Weighted average number of common
shares and equivalents                            8,163       8,009
                                               ========    ========

</TABLE>


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


                                       4
<PAGE>



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


<TABLE>
<CAPTION>
                                                                         Accumulated
                                                                            Other
                                                 Additional             Comprehensive
                                 Common Stock     Paid-in  Accumulated      Income     Treasury Stock
                                Shares   Amount   Capital    Deficit        (Loss)    Shares     Amount     Total
                                ---------------   -------     ------      ----------  ------   ---------  ---------
<S>                             <C>    <C>      <C>        <C>           <C>         <C>       <C>        <C>
Balance at December 31, 2004      8,944  $6,707   $44,368     $ (272)      $     14      721   $ (4,986)  $ 45,831
Purchase of treasury shares                                                               99       (630)      (630)
                                -----------------------------------------------------------------------------------
  Subtotal                        8,944   6,707    44,368       (272)            14      820     (5,616)    45,201
Comprehensive income:
  Net (loss)                                                    (319)                                         (319)
Other comprehensive
 income, net of tax:
Unrealized (loss) on
available for
 sale marketable securities                                                   (113)                           (113)
                                                                                                          ---------
Comprehensive (loss)                                                                                          (432)
                                -----------------------------------------------------------------------------------
Balance at March 31, 2005         8,944  $6,707   $44,368     $ (591)      $    (99)     820   $ (5,616)  $ 44,769
                                =======  ======   =======     ======      ==========  ======   =========  =========

</TABLE>


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


                                       5
<PAGE>



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


<TABLE>
<CAPTION>
                                                                            Three Months Ended March 31,
                                                                                   2005       2004
                                                                                ---------   ----------
                                                                                   (in thousands)
Cash flows from operating activities:
<S>                                                                             <C>         <C>
   Net (loss)                                                                   $   (319)   $   (307)

Adjustments to reconcile net income to net cash provided by operations:
   Depreciation and amortization                                                     877         704
   (Gain) from disposal of property, plant and equipment                              (3)         (1)
   Amortization of debt discount                                                      47          36
   Unrealized loss on interest rate swap                                            --           126
   Amortization of discount on marketable securities                                   5        --

Changes in assets and liabilities:
   Accounts receivable                                                               966         539
   Contract costs in excess of billings                                            1,027       2,801
   Inventories                                                                       271         830
   Prepaid expenses and other current assets                                         471         463
   Other assets                                                                     (188)        150
   Accounts payable and accrued liabilities                                       (5,166)     (3,975)
   Billings in excess of contract costs incurred                                  (1,221)     (2,460)
   Deferred revenue                                                                  695        (576)
   Other liabilities                                                                 (85)       --
                                                                                --------    --------
Net cash flows used in operating activities                                       (2,623)     (1,670)
                                                                                --------    --------
Cash flows from investing activities:
   Purchase of marketable securities                                              (3,739)    (22,212)
   Redemption of marketable securities                                             6,650        --
   Additions to property, plant and equipment                                       (364)       (167)
   Proceeds from sale of property, plant and equipment                                 3           1
   Net payment for acquisition                                                       (18)       --
                                                                                --------    --------
Net cash flows provided by (used in) investing activities                          2,532     (22,378)
                                                                                --------    --------
Cash flows from financing activities:
   Issuance of common stock                                                         --           252
   Purchase of treasury shares                                                      (630)       --
   Restricted cash                                                                  (294)       --
   Repayment of bank notes and line of credit                                       --       (13,213)
   Borrowings of convertible subordinated notes payable                             --        38,942
                                                                                --------    --------
Net cash (used in) provided by financing activities                                 (924)     25,981
                                                                                --------    --------
Net change in cash and cash equivalents                                           (1,015)      1,933
Cash and cash equivalents at beginning of period                                   5,198       1,869
                                                                                --------    --------
Cash and cash equivalents at end of period                                      $  4,183    $  3,802
                                                                                ========    ========
Supplemental  disclosures  of cash flow  information:
 Cash paid  during  the  period for:
   Interest                                                                     $  1,296    $    135
   State income tax, net of refunds                                             $    204    $    187
   Federal tax refund                                                           $   (766)   $   --
</TABLE>




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


                                       6
<PAGE>



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


1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation:
The  accompanying  unaudited  consolidated  financial  statements  of  CompuDyne
Corporation and its subsidiaries  (the "Company") have been prepared pursuant to
the rules  and  regulations  of the  Securities  and  Exchange  Commission.  The
consolidated  balance  sheet as of December  31, 2004 has been  derived from the
Company's December 31, 2004 audited financial  statements.  Certain  information
and note disclosures  included in the annual financial  statements,  prepared in
accordance with accounting principles generally accepted in the United States of
America, have been condensed or omitted pursuant to those rules and regulations,
although the Company  believes that the  disclosures  made in this Form 10-Q are
adequate to make the information presented not misleading.

In the opinion of management,  the accompanying unaudited consolidated financial
statements reflect all necessary adjustments and reclassifications (all of which
are  of a  normal,  recurring  nature,  unless  otherwise  disclosed)  that  are
necessary for the fair  presentation of the periods  presented.  It is suggested
that these consolidated  unaudited  financial  statements be read in conjunction
with the consolidated financial statements and the notes thereto included in the
Company's  annual report filed with the  Securities  and Exchange  Commission on
Form 10-K for the year ended December 31, 2004.  Operating results for the three
month  periods ended March 31, 2005 and 2004 are not  necessarily  indicative of
operating results for the entire fiscal year.

STOCK-BASED COMPENSATION
As of March 31,  2005,  the Company  continues  to account  for its  stock-based
compensation  plans, using the intrinsic value method and in accordance with the
recognition  and measurement  principles of APB Opinion No. 25,  "Accounting for
Stock Issued to Employees," and related Interpretations. No stock-based employee
compensation  cost is  reflected  in the results of  operations,  as all options
granted had an exercise  price equal to the fair market value of the  underlying
common  stock  on the  date  of  grant.  The  following  table  illustrates,  in
accordance  with the  provisions of SFAS No. 148,  "Accounting  for  Stock-Based
Compensation - Transition and  Disclosure,"  the effect on net income (loss) and
earnings (loss) per share if the Company had applied the fair value  recognition
provisions of SFAS No. 123(R),  "Accounting  for Stock-Based  Compensation,"  to
stock-based employee compensation.


<TABLE>
<CAPTION>
                                                                            For the Three Months Ended March 31,
                                                                                 2005                2004
                                                                             ------------        ------------
                                                                            (in thousands, except per share data)
<S>                                                                            <C>                <C>
Net (loss), as reported                                                        $  (319)           $  (307)
Deduct:  Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax effects          (234)              (249)
                                                                               --------         ------------
Pro forma net (loss)                                                           $  (553)           $  (556)
                                                                               ========           ========
(Loss) per share:
Basic - as reported                                                            $   (.04)          $  (.04)
Basic - pro forma                                                              $   (.07)          $  (.07)

Diluted - as reported                                                          $   (.04)          $  (.04)
Diluted - pro forma                                                            $   (.07)          $  (.07)
</TABLE>

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

                                                   For the Three Months Ended
                                                            March 31,
                                                      2005           2004
                                                     ------          -----
               Expected life in years                  5.3            5.5
               Risk-free interest rate                 4.2%           2.8%
               Expected volatility                    82.8%          76.6%


                                       7
<PAGE>

INCOME TAXES
The  effective  tax rate was zero for the three  months ended March 31, 2005 and
the effective tax rate was approximately  39.9% for the three months ended March
31, 2004.  The Company has decided to fully reserve its net deferred tax assets,
as it has  determined  it is not more  likely  than not that the  asset  will be
realized due to the Company's recent operating losses.

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

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

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

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

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

2.     EARNINGS PER SHARE

Earnings per share are presented in accordance with SFAS No. 128,  "Earnings Per
Share." This Statement  requires dual presentation of basic and diluted earnings
per share on the face of the statement of  operations.  Basic earnings per share
is computed using the weighted average number of shares  outstanding  during the
period and excludes any dilutive  effects of options,  warrants,  or convertible
securities.  Diluted  earnings per share is computed using the weighted  average
number of common and  common  stock  equivalent  shares  outstanding  during the
period;  common stock  equivalent  shares are excluded from the  computation  if
their effect is antidilutive.  Stock options and warrants to purchase  1,442,533
shares for 2005 and 1,361,427 shares for 2004 were not dilutive and,  therefore,
were not  included in the  computation  of diluted  earnings  per common  share.
Additionally,  the  2,897,768  shares  issuable  upon  conversion  of the  6.25%
Convertible  Subordinated  Notes due  January  15,  2011 (the "2011  Notes") are
excluded for both 2005 and 2004 as the effect is antidilutive.


                                       8
<PAGE>








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


<TABLE>
<CAPTION>
                                                                               Three Months Ended
                                                                                    March 31,
                                                                             2005              2004
                                                                      -------------------------------------
                                                                      (in thousands, except per share data)
<S>                                                                       <C>                <C>
            Net (loss)                                                     $   (319)         $   (307)
                                                                           =========         =========
            Weighted average common shares outstanding                        8,163             8,009
            Effect of dilutive stock options and warrants                         -                 -
                                                                           ---------         ---------
            Diluted weighted average common shares outstanding                8,163             8,009
                                                                           =========         =========
            Net (loss) per common share
            Basic                                                          $   (.04)         $   (.04)
            Diluted                                                        $   (.04)         $   (.04)
</TABLE>


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

The 2011 Notes contain contingent participation rights. The participation rights
are contingent  upon the ability,  based on the  undistributed  earnings for the
period, of the Company to declare and distribute dividends per share equal to or
in  excess  of the per share  fair  value of the  Company's  common  stock.  The
contingency  was not met for the three  months ended March 31, 2005 or March 31,
2004.  Accordingly,  no  undistributed  earnings have been allocated to the 2011
Notes. At each reporting  period,  the Company  assesses whether the contingency
criteria have been met and  consequently  if  undistributed  earnings  should be
allocated to participating securities.

3.     INVESTMENTS IN MARKETABLE SECURITIES

The  Company's  marketable  securities  are  categorized  as  available-for-sale
securities,  as defined by SFAS No. 115,  "Accounting for Certain Investments in
Debt and Equity Securities." At March 31, 2005 all of the Company's  investments
in marketable securities were classified as available-for-sale, and as a result,
were  reported  at fair  value.  Unrealized  gains and losses are  reported as a
component of accumulated other comprehensive income in shareholders' equity. The
cost for marketable securities was determined using the specific  identification
method and  adjusted for  accretion  of  discounts  from the date of purchase to
maturity.  The  accretion  is included in  interest  income.  The fair values of
marketable  securities are estimated  based on the quoted market price for these
securities.

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

At March 31,  2005,  $6.0  million of cash and  marketable  securities,  at fair
value, ($100 thousand more than was required) were pledged to the Company's bank
to secure the $5.3 million of letters of credit issued by the bank. Of this $6.0
million of cash and  marketable  securities,  approximately  $500  thousand  was
classified  as a current  asset,  with the  remainder  classified as a long-term
asset.

Marketable  securities  at March  31,  2005 are  summarized,  in  thousands,  as
follows:

<TABLE>
<CAPTION>
                                                                          Gross Unrealized
                                                            Cost         Gains       Losses      Fair Value
                                                         ----------   ----------- -----------    ----------
         Collateralized mortgage obligations
          (CMO's) consisting of
          securities issued by Fannie Mae,
<S>                                                      <C>            <C>          <C>           <C>
          Freddie Mac, and Ginnie Mae                    $  16,639      $    -       $    165      $16,474
</TABLE>

The cost and estimated fair value of current marketable  securities at March 31,
2005, by contractual maturity,  are shown below. Expected maturities will differ
from contractual maturities because the issuers of the securities have the right
to repay obligations without prepayment penalties. It is the Company's policy to
classify  available-for-sale  securities  that are  available for use in current
operations as a current asset.

<TABLE>
<CAPTION>
                                                               Estimated
         (In Thousands)                       Cost             Fair Value
                                             -------           ----------
<S>                                          <C>                <C>
         Due after one year and beyond       $16,639            $ 16,474
                                             -------            --------
         Total debt securities               $16,639            $ 16,474
                                             =======            ========
</TABLE>


                                       9
<PAGE>

4.     INVENTORIES

Inventories consist of the following, in thousands:

<TABLE>
<CAPTION>
                                                     March 31,  December 31,
                                                       2005        2004
                                                    ---------   ----------

<S>                                                  <C>         <C>
      Raw materials                                  $ 4,204     $  4,241
      Work in progress                                 1,750        1,890
      Finished goods                                     284          396
                                                    --------    ----------
      Total inventory                                  6,238        6,527
      Reserve for excess and obsolete inventory       (1,344)      (1,362)
                                                    --------    ----------
      Inventory, net                                 $ 4,894     $   5,165
                                                     =======     =========
</TABLE>


5.     GOODWILL

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

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

The Company  reviews the carrying value of goodwill  annually  during the fourth
quarter of the year or whenever events or changes in circumstances indicate that
the carrying  value may not be  recoverable,  utilizing a  discounted  cash flow
model.  Changes  in  estimates  of future  cash  flows  caused by items  such as
unforeseen  events or changes in market  conditions could negatively  affect the
reporting  unit's  fair value and result in an  impairment  charge.  The Company
cannot predict the occurrence of events that might adversely affect the reported
value of goodwill of $25.9 million at March 31, 2005.

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

<TABLE>
<CAPTION>
                                   March 31,  December 31,
                                      2005        2004
                                   ---------   --------
<S>                                <C>         <C>
      Attack Protection            $     728   $    728
      Public Safety & Justice         25,185     25,166
                                   ---------   ---------
                                   $  25,913   $ 25,894
                                   =========   =========
</TABLE>

6.     INTANGIBLE ASSETS

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

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

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

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


                                       10
<PAGE>


Intangible assets consist of the following, in thousands:

<TABLE>
<CAPTION>
                                                March 31,   December 31,  Amortizable
                                                  2005          2004         Lives
                                                ----------  -----------  -------------
                                                                          (in years)
<S>                                               <C>       <C>
         Trade names                              $  5,673  $     5,673   Indefinite
         Customer relationships                      2,500        2,500        14
         Backlog                                       300          300  Fully amortized
         Other                                       1,305        1,305       1-20
                                                ----------  -----------
                                                     9,778        9,778
         Less:  accumulated amortization            (1,426)      (1,318)
                                                ----------  -----------
                                                  $  8,352  $     8,460
                                                ==========  ===========
</TABLE>

Amortization  expense for the Company's  intangible  assets for the three months
ended  March  31,  2005 was $108  thousand.  The  following  schedule  lists the
expected  amortization  expense for each of the next five years ending  December
31, in thousands:

                            YEAR
                            2005 (remaining)          $      203
                            2006                             265
                            2007                             257
                            2008                             225
                            2009                             225
                                                      ----------
                            Total                     $    1,175
                                                      ==========

7.     NOTES PAYABLE AND LINE OF CREDIT

<TABLE>
<CAPTION>

                                                                                   March 31,       December 31,
                                                                                     2005              2004
                                                                                  ----------        -----------
                                                                                         (in thousands)
<S>                                                                                <C>                  <C>
Industrial revenue bond,  interest payable quarterly at a variable rate of 1.65%
to 2.53% (2.53% at March 31, 2005) principal  payable in quarterly  installments
of $35,000. The bond is fully collateralized by a $1.4 million letter
of credit and a bond guarantee agreement.                                          $  1,400         $  1,400

Industrial revenue bond, interest payable quarterly at a variable rate
of 1.62% to 2.43% (2.43% at March 31, 2005)  principal payable
in yearly installments of $300,000 until 2013 when the installments become
$100,000.  The bond is fully collateralized by a $2.6 million letter of
credit and a bond guarantee agreement.                                                2,605            2,605

6.25%  Convertible  Subordinated  Notes due  January  15,  2011.  The notes bear
interest  at  a  rate  of  6.25%  per  annum,  payable  semi-annually,  and  are
convertible  into  shares of common  stock at a  conversion  price of $13.89 per
share. These notes are subordinated to all other liabilities of the Company.         40,250           40,250
                                                                                  ---------         ---------
         Total notes payable                                                         44,255           44,255
         Less convertible subordinated notes discount                                 1,085            1,132
                                                                                  ---------         ---------
           Subtotal                                                                  43,170           43,123
         Less amount due within one year                                                440              440
                                                                                  ---------         ---------
                                                                                   $ 42,730         $ 42,683
                                                                                  =========         =========
</TABLE>


                                       11
<PAGE>



Maturities of notes payable are as follows, in thousands:

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

On January 22,  2004,  the  Company  completed  an  offering  of $40.25  million
principal  amount of the 2011 Notes.  The 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
March 31, 2005 carrying value is listed below, in thousands.



                           Face value                           $   40,250
                           Underwriters discounts, net               1,085
                                                              ------------
                                                                $   39,165

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 debt issuance  costs for the 2011 Notes are recorded as  non-current  assets
and are amortized on a straight-line  basis to interest expense over the term of
the 2011 Notes. In addition,  underwriters'  discounts  totaled $1.3 million and
are amortized on a straight-line  basis to interest expense over the term of the
2011  Notes.  Interest  expense  recorded  for the  total of the  deferred  debt
issuance  costs  and  underwriters'  discounts  on the 2011  Notes  totaled  $63
thousand  and $49  thousand  for the three months ended March 31, 2005 and 2004,
respectively.

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

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

                                       12
<PAGE>


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

In January  2004,  the interest rate swap ceased to be a  highly-effective  cash
flow  hedge  when  the  related  debt  was  repaid.  Consequently,  the  amounts
previously  recorded in other  comprehensive  income as changes in fair value of
the interest rate swap were  recognized in earnings for the year ended  December
31, 2004. Upon determination of the hedge ineffectiveness the cumulative loss on
the fair value of the interest rate swap was $155 thousand, which was recognized
in other  income.  The  change in fair value of the  interest  rate swap for the
three  months  ended March 31, 2005 was a gain of $13  thousand,  resulting in a
remaining  liability for the  investment of $8 thousand.  Future  changes in the
value of the interest rate swap will be recognized in earnings.

8.     PRODUCT WARRANTIES

Included in accounts  payable and accrued  liabilities  are  estimated  expenses
related  to  warranties  made at the  time  products  are sold or  services  are
rendered.  These accruals are established  using  historical  information on the
nature,  frequency,  and average cost of warranty  claims.  The Company warrants
numerous  products,  the terms of which vary  widely.  In  general,  the Company
warrants its products against defect and specific  non-performance.  As of March
31,  2005 the  Company  had a product  warranty  accrual  in the  amount of $333
thousand.  The changes in the product  warranty  liability  are displayed in the
following table, in thousands:

     Beginning balance at January 1, 2005                        $ 359
     Plus:  accruals for product warranties                         54
     Less:  warranty charges/claims                                (80)
                                                                 -----
     Ending balance at March 31, 2005                            $ 333
                                                                 =====

9.     OPERATING SEGMENT INFORMATION

The following is the operating  segment  information  for the three months ended
March 31, 2005 and 2004, in thousands:

<TABLE>
<CAPTION>
                                              Revenues                     Pre-tax Income (Loss)
                                              --------                     ---------------------
                                         2005          2004                  2005          2004
                                         ----          ----                  ----          ----
<S>                                    <C>           <C>                   <C>            <C>
Institutional Security Systems         $ 15,732      $ 16,057              $ 1,230        $  207
Attack Protection                         6,898         6,953                  499          (679)
Integrated Electronic Systems             2,019         3,575                   (8)          200
Public Safety and Justice                11,657        12,442                 (482)          435
CompuDyne Corporate                          --            --               (1,558)         (674)
                                       --------      --------              --------       -------
                                       $ 36,306      $ 39,027              $  (319)       $ (511)
                                       ========      ========              ========       =======
</TABLE>


10.      CONTINGENCIES

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

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

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

                                       13
<PAGE>

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

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

On May 4, 2005,  the Company  received a notice from the Listing  Qualifications
Department of The Nasdaq Stock Market stating that due to the Company's  failure
to timely file the 404 Report,  the Company was no longer in compliance with the
requirements of Marketplace Rule 4350(c)(14) (the "Rule"). The Rule requires the
Company to file with Nasdaq copies of all reports  required to be filed with the
Securities  and Exchange  Commission  (the "SEC") on or before the date they are
required to be filed with the SEC.

The Nasdaq Stock Market notified the Company that the Company's  securities will
be delisted  from The Nasdaq  Stock Market at the opening of business on May 13,
2005,  unless the Company  requests a hearing  appealing the delisting  with The
Nasdaq Stock Market's Listings  Qualifications Panel (the "Panel") in accordance
with the  Marketplace  Rules 4800  Series.  Such a request  for an appeal to the
Panel will stay the  delisting of the Company's  securities  pending the Panel's
decision.

The  Company  intends  to appeal  the  delisting  to the  Panel  and is  working
diligently  to file the 404  Report  as  described  in the Form 8-K dated May 2,
2005.  There can be no assurance the Panel will grant the Company's  request for
continued listing.


                                       14
<PAGE>



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

INTRODUCTION

OVERVIEW OF COMPUDYNE CORPORATION

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

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

Included in the  Institutional  Security  Systems  segment is the TrenTech  line
which designs, manufactures and integrates electronic security systems. TrenTech
integrates  generally  available  products and software as well as designing its
own  proprietary  systems.  TrenTech has developed a  sophisticated  proprietary
video badging system,  with  approximately 240 systems installed at more than 65
facilities, most of which are military installations.

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

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

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

The Integrated  Electronic  Systems (formerly known as Federal Security Systems)
segment is known as CompuDyne-Integrated Electronics Division, LLC. Its customer
base  includes  the  military,   governmental  agencies,  and  state  and  local
governmental  units.  Integrated  Electronic  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.  Integrated  Electronic  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 also
designs and  manufactures  advanced digital signal  processing  products used in
reconnaissance  of foreign  telecommunications  signals  designed for the United
States Government and its foreign allies.

                                       15
<PAGE>

The Public Safety and Justice segment  consists of  CompuDyne-Public  Safety and
Justice,  Inc.  (formerly  Tiburon,  Inc.),  CorrLogic,  LLC,  and the  recently
acquired assets of 90 Degrees and Copperfire.  PS&J's software  systems are used
in a wide range of  applications  within the public safety and criminal  justice
sectors of governmental  units,  including  police,  fire and emergency  medical
services  computer-aided  dispatch systems, and police, fire, jail, prosecution,
probation and court records management  systems. We are also a leading developer
of inmate management and institutional  medical software systems.  We specialize
in the development,  implementation  and support of complex,  integrated  inmate
management  software systems,  including inmate medical  management systems that
improve the efficiency and accuracy of correctional facility operations.

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

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

Certain  statements  made  in  this  Form  10-Q  with  regard  to the  Company's
expectations as to future revenues,  expenses,  financial  position and industry
conditions,  the Company's ability to secure new contracts, its goals for future
operations,   implementation  of  business  strategy  and  other  future  events
constitute  "forward-looking  statements"  within  the  meaning  of the  federal
securities  laws.  When  used in this Form  10-Q,  words  such as  "anticipate,"
"believe,"  "estimate,"  "expect,"  "intend"  and similar  expressions,  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,  capital  spending  patterns of the security  market and the
demand for the Company's  products,  competitive  factors and pricing pressures,
changes in legal and regulatory  requirements,  government budget problems,  the
ability to successfully grow the Company by completing acquisitions, the ability
to  remain  in  compliance  with  its  bank  covenants,   delays  in  government
procurement  processes,  ability to obtain bid, payment and performance bonds on
various of the Company's  projects,  technological  change or difficulties,  the
ability  to  refinance  debt when it becomes  due,  product  development  risks,
commercialization  difficulties,  adverse  results in  litigation,  the level of
product  returns,  the amount of remedial work needed to be performed,  costs of
compliance  with  Sarbanes-Oxley  requirements  and the impact of the failure to
comply with such requirements, risks associated with internal control weaknesses
identified in complying with Section 404 of Sarbanes-Oxley, and general economic
conditions.  Risks inherent in the Company's business and with respect to future
uncertainties  are further  described in our other  filings with the  Securities
Exchange Commission.

MANAGEMENT OUTLOOK

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

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

We are continuing to experience a decline in our overall backlog. Our backlog is
a key indicator of what our future  revenues will look like.  Our backlog peaked
at December 31, 2002, at which time it exceeded $204 million.  Since then it has
continued to decline and,  although it saw a slight  increase at the ends of the
second and third quarters in 2004, it slipped to approximately $115.7 million at
March 31, 2005 as shown in the following table:


                                       16
<PAGE>



<TABLE>
<CAPTION>

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

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

Our second area of focus is the  reengineering  of our business model so that it
contains  a  greater  percentage  of  recurring  revenue.  As  indicated  in the
following table,  approximately  13.4% of our first three months of 2005 revenue
was generated from recurring revenue sources (primarily  maintenance  revenues),
and the  majority of these  revenues  occurred in our Public  Safety and Justice
segment.  We define one-time revenue as revenue derived from discrete  projects,
from which we do not expect to generate  incremental revenue upon the completion
of the project.  We define recurring revenue as sources of revenue from which we
anticipate  receiving  revenue in the current,  as well as future  periods,  for
example annual renewable maintenance contracts.


<TABLE>
<CAPTION>
                                                                  Three Months Ended March 31, 2005
                                                                  ----------------------------------
          (In Thousands)                     One-time Revenue         %     Recurring Revenue    %       Total
                                             -----------------    -------   ----------------- ------  ----------
<S>                                                <C>              <C>        <C>              <C>    <C>
Institutional Security Systems                     $ 14,565         40.1       $   1,167        3.2    $  15,732
Attack Protection                                     6,898         19.0               -          -        6,898
Integrated Electronic Systems                         2,019          5.6               -          -        2,019
Public Safety and Justice                             7,949         21.9           3,708       10.2       11,657
                                                -----------       -------      ---------      -----    ---------
     Total                                         $ 31,431         86.6       $   4,875       13.4    $  36,306
                                                ===========       =======      =========      =====    =========
</TABLE>


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

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

                                       17
<PAGE>

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

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

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

On May 4, 2005, we received a notice from the Listing Qualifications  Department
of The Nasdaq  Stock  Market  stating that due to our failure to timely file the
404 Report, we were no longer in compliance with the requirements of Marketplace
Rule 4350(c)(14). The Rule requires us to file with Nasdaq copies of all reports
required to be filed with the  Securities  and Exchange  Commission on or before
the date they are required to be filed with the SEC.

The Nasdaq Stock  Market  notified us that our  securities  will be delisted
from The Nasdaq Stock Market at the opening of business on May 13, 2005,  unless
we request a hearing  appealing  the  delisting  with The Nasdaq Stock  Market's
Listings  Qualifications  Panel in accordance with the Marketplace
Rules  4800  Series.  Such a request  for an  appeal to the Panel  will stay the
delisting of our securities pending the Panel's decision.

We intend to appeal our  delisting  to the Panel and are working  diligently  to
file our 404 Report as described in our Form 8-K dated May 2, 2005. There can be
no assurance the Panel will grant our request for continued listing.

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2005 AND 2004

Revenues.  The Company had revenues of $36.3  million and $39.0  million for the
three months ended March 31, 2005 and March 31, 2004, respectively, representing
a decrease of $2.7  million or 7.0%.  As discussed  below,  much of this decline
occurred in our IES segment.

Revenues from the  Institutional  Security Systems segment were $15.7 million in
the three months ended March 31,  2005,  a decrease  from $16.1  million for the
same  period of 2004  representing  a  decrease  of $0.4  million  or 2.0%.  The
Institutional   Security  Systems  segment  is  largely  a  construction  driven
business.  Much of its  revenue  is  obtained  by  working  on new and  retrofit
construction  projects  in the  corrections  industry,  as opposed to sources of
recurring revenue.  As such, the decrease in revenue experienced by this segment
is  largely  attributable  to our  working on less  projects  than we did in the
previous  year.  The  principal  reason for the  decline  was that  backlog  had
decreased  from $99.5  million at December 31, 2002 to $57.3 million at December
31, 2003  resulting  in less work  available  to be  performed in the year ended
December 31, 2004 compared to the year ended December 31, 2003. Backlog declined
further to $49.3  million and $42.7  million at December  31, 2004 and March 31,
2005,  respectively.  The years 2003 and 2004 have been slow bidding periods for
the  Company.  Although  the  gross  amount  of  construction  spending  in  the
corrections  area remained  relatively  flat between 2003 and 2004, the types of
projects  that the  Company  solicits,  namely  large-scale  medium  to  maximum
security installations,  declined significantly in 2003 and 2004. This situation
was  further  compounded  by the  general  state and local  governmental  budget
deficits which are causing these governmental units to rethink and delay many of
their pending corrections projects.

Revenues  from the  Attack  Protection  segment  were $6.9  million in the three
months ended March 31, 2005, a decrease from $7.0 million for the same period of
2004  representing  a  decrease  of $0.1  million or 0.8%.  In 2002 the  Company
purchased  an  existing  75,000  square foot  factory for the Attack  Protection
segment  on 20 acres of land in  close  proximity  to its  existing  factory  in
Montgomery,  Alabama. This capacity increase was largely driven by the Company's
expectation that the demands for its products,  principally its bullet and blast
resistant windows and doors would accelerate significantly in the post September
11, 2001 world.  Throughout  2002,  2003 and 2004 this  anticipated  increase in
demand did not materialize leaving the segment with significant excess capacity.
This segment is composed of two chief product offerings, namely Norshield, which
encompasses bullet and blast resistant windows and doors and ancillary products,
and Fiber SenSys, which encompasses fiber optic intrusion detection systems. For
the three months ended March 31, 2005 the  Norshield  line  experienced  a 22.9%
decline in  revenues  as compared  to the three  months  ended  March 31,  2004,
whereas the Fiber SenSys line  experienced a 55.8%  increase in revenues for the
comparable period, bolstered by its largest order ever. The Company continues to
see  heightened  interest  for its Fiber SenSys  products and expects  sales for
these items to continue to experience  sustainable  growth. The slow-down in the
government  building  process  experienced  during  2002 and 2003 has  reversed.
Projects are now being released for construction, and thus the Attack Protection
segment is experiencing increased bidding activity for its products. During 2003
the  Company  furnished  bids to supply  its  products  for  eight  new  embassy
projects.  At the time, this was the largest number of embassy projects bid in a
single  calendar  year for this  segment.  The Company was awarded four of these
embassy projects, for a total CompuDyne contract value of $7.0 million, and lost
the remaining four embassy projects.  During 2004, we bid on fifteen new embassy
projects.  Through  March 2005 the  Company  was  awarded  six of these  embassy
projects for a total  contract  value of $8.6  million,  and lost seven  embassy
projects to  competitors,  with two  projects  still  awaiting  award.  In 2005,
preliminary  indications  show eighteen  embassy  projects will be available for
bid.  We believe  that this  increased  level of new embassy  construction  will
continue for the next several years.

                                       18
<PAGE>


Revenues  from  Integrated  Electronic  Systems  were $2.0  million in the three
months ended March 31, 2005, a decrease from $3.6 million for the same period of
2004 representing a decrease of $1.6 million or 43.5%. A significant  portion of
this segment's revenue is backlog driven.  Backlog at both December 31, 2003 and
December  31, 2004 was $8.3  million.  IES'  revenue  decline was largely due to
certain  government  clients,  for which the segment  receives repeat  business,
having had their budgets significantly  reduced. In addition, IES had planned to
work on one  significant  project  in the first  quarter of 2005  which,  due to
customer   imposed   delays  due  to  its  falling   behind  on   infrastructure
construction, was not available to be worked on.

Revenues  from the Public  Safety and Justice  segment were $11.7 million in the
three months ended March 31,  2005, a decrease  from $12.4  million for the same
period of 2004  representing a decrease of $0.8 million or 6.3%. The decline was
primarily the result of lower backlogs, the deferral of an expected change order
into the second quarter,  and this segment  delaying a CAD version upgrade until
the second quarter  instead of the first quarter when it was originally  planned
to be released.  It should be noted that  although we made two  acquisitions  in
this segment in 2004 (90 Degrees and Copperfire),  these acquisitions had little
impact on Public Safety and  Justice's  revenues due to their  relatively  small
size.

Expenses.  Cost of sales of $23.9  million in the three  months  ended March 31,
2005 were down $4.9 million or 17.0% from $28.8  million  during the same period
of 2004. The smaller percentage  decrease in sales as compared to the percentage
decrease in cost of goods sold resulted in an increased gross profit  percentage
of 34.1% for the three months ended March 31, 2005 as compared to 26.1% in 2004.

Cost of  goods  sold in the  Institutional  Security  Systems  segment  of $12.2
million for the three  months  ended  March 31,  2005 were down $1.4  million or
10.2% from $13.6  million  during the same  period of 2004.  This  decrease  was
greater than the related sales decrease of this segment of 2.0%,  resulting in a
7.1%  increase in the gross profit  percentage  to 22.7% from 15.6% in the three
months  ended March 31, 2005.  This  increase in gross  profit  percentage  also
resulted  from certain of this  segment's  customers  terminating  contracts for
convenience, resulting in the recognition of $1.3 million in gross margin due to
contract  closeout  activities.  Starting in 2002 and  continuing  through 2004,
Institutional Security Systems' senior management identified managerial problems
at its West Coast operations and determined that numerous problems existed there
including that the costs to complete its projects were going to be significantly
higher than was  previously  projected.  This was a result of  significant  cost
overruns on many of these projects. As the work on the projects progressed,  the
Institutional Security Systems segment identified additional cost overruns which
would cause the costs to complete  these projects to increase as a result of the
changes in the estimates to complete.  Although the problem projects  identified
in 2002 are  substantially  all  complete,  the  problems  in the ISS West Coast
operations  continued into 2003,  2004 and 2005. We realized that the management
changes made in 2002 did not  adequately  address the root problems  identified,
and as a result,  projects  started  after 2002  continued  to  experience  cost
overruns due to a lack of appropriate oversight. Staff and management changes in
ISS are ongoing.  We have revised our estimates to complete  these  projects and
believe that all future costs on these projects have been adequately  considered
through  March 31,  2005.  It should be noted that as the West  Coast  office is
being  downsized to a sales and support  office,  new profitable  projects which
previously  would have been  executed by this office have been and will continue
to be transferred  to the ISS  Montgomery  office  division  headquarters  where
execution  will occur.  This has left the West Coast office to run the remaining
projects  which have little or no gross  margin in them.  Therefore,  since this
office  will be  performing  work on which no  profit is  available  to be made,
combined with the fact that the office has fixed overhead costs, will cause this
office to lose money through 2005.


                                       19
<PAGE>

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

                Second Half of 2002                       $ 2,698
                First Quarter of 2003                         595
                Second Quarter of 2003                      1,079
                Third Quarter of 2003                         541
                Fourth Quarter of 2003                      1,872
                First Quarter of 2004                       1,271
                Second Quarter of 2004                      1,139
                Third Quarter of 2004                       1,516
                Fourth Quarter of 2004                      2,166
                First Quarter of 2005                         740
                                                          -------
                        Total West Coast Losses           $13,617
                                                          =======

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

Cost of goods sold in the Attack  Protection  segment  of $4.5  million  for the
three  months  ended March 31, 2005  decreased  $1.5  million or 24.9% from $6.0
million  during the same period of 2004.  This decrease was far greater than the
related sales decrease of this segment of 0.8%, resulting in a 21.1% increase in
the gross  profit  percentage  to 34.3% from 13.2% during the three months ended
March 31,  2004.  Significant  factors  contributing  to this  increase in gross
profit  included  significant  growth in the Fiber SenSys  business line.  Fiber
SenSys  sales have a higher  margin than does the windows and door  component of
the Attack  Protection  segment.  In addition,  one of this segment's  customers
terminated its contracts for  convenience  resulting in the  recognition of $0.2
million in gross margin due to contract closeout activities.

Cost of goods sold in the Integrated  Electronic Systems segment of $1.7 million
in the three  months ended March 31, 2005  decreased  $1.3 million or 43.7% from
$3.1 million during the same period of 2004.  This decrease was consistent  with
the  related  sales  decrease  of this  segment  of 43.5%,  resulting  in a 0.3%
increase in the gross profit  percentage to 14.0% from 13.7% in the three months
ended March 31, 2004.  Substantially all of the projects awarded in this segment
are discrete projects.

Cost of goods sold in the Public Safety and Justice  segment of $5.5 million for
the three  months  ended March 31, 2005 was down $0.7 million or 10.8% from $6.2
million  during 2004.  This decrease was more than the related sales decrease of
this  segment  of  6.3%,  resulting  in a  2.4%  increase  in the  gross  profit
percentage  to 52.9%  from  50.5% in the three  months  ended  March  31,  2004.
Substantially all of the projects awarded in this segment are discrete projects.

Selling,  general and  administrative  expenses were $10.0 million for the three
months  ended March 31,  2005,  an  increase of $1.9  million or 22.8% from $8.2
million  for the same  period  of 2004.  Much of this  increase  is  related  to
additional  costs  incurred  by the  Company  related  to  compliance  with  new
requirements  mandated  by the  Sarbanes-Oxley  Act and  the  SEC.  The  Company
expended  approximately  $0.4  million to perform its 2003 audit,  which did not
require a SOX 404 report.  This was paid to our  independent  registered  public
accounting firm for audit and audit related  services.  For the 2004 audit,  the
Company has expended or accrued  $2.2 million for external  third party costs to
complete  its 2004 audit and its SOX 404 report  which is not yet  complete.  Of
this amount,  approximately $1.6 million was paid to our independent  registered
public  accounting  firm for audit and audit  related  services with the balance
paid to various  consultants and others who have assisted the Company in the 404
process. Expenses related thereto of $1.1 million and $0.2 million were recorded
during the periods ended March 31, 2005 and 2004, respectively.

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


                                       20
<PAGE>



                                              Amount
                                           (In Thousands)    Life (In Years)
                                           --------------    ---------------
Software                                       $2,800              5
Employment Contracts                              120             1-3
                                               -------
                                               $2,920
                                               =======

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

Research and  development  expenses were $2.1 million for the three months ended
March 31,  2005,  an increase of $0.4 million or 20.3% from $1.8 million for the
same period of 2004. Being a technology-driven  enterprise, the Company's Public
Safety and  Justice  segment  continually  updates  and  enhances  its  software
offerings, thus incurring significant research and development costs.

Interest expense  increased to $0.8 million for the three months ended March 31,
2005 from $0.7  million  for the three  months  ended  March 31,  2004 due to an
increase  in average  borrowings  outstanding  and higher  interest  rates.  The
following  table  compares the weighted  average of the  Company's  three months
ended March 31, 2005 and 2004 interest bearing borrowings, in thousands, and the
related rates charged thereon:

<TABLE>
<CAPTION>
                                       Monthly Weighted      Monthly Weighted
                                        Average - 2005        Average - 2004
                                        Amount     Rate       Amount    Rate
                                     ------------  -----    --------   -----
<S>                                     <C>                  <C>         <C>
Bank borrowings                         $      -      -%     $ 2,467     4.2%
Industrial revenue bonds                $  4,005    3.0%     $ 4,445     3.4%
Subordinated borrowings                 $ 40,250    6.3%     $33,989     6.3%
Swap hedge agreement                    $  2,029    2.4%     $ 4,735     3.8%
</TABLE>

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

Amortization and write-off
  of deferred financing charges       $67                     $128


Taxes on Income.  The  effective  tax rate was zero for the three  months  ended
March 31, 2005 and the effective tax rate was approximately  39.9% for the three
months  ended March 31, 2004.  The Company has decided to fully  reserve its net
deferred tax assets,  as it has  determined  it is not more likely than not that
the asset will be realized due to the Company's recent operating losses.

Net Loss.  The Company  reported a net loss of $0.3  million in the three months
ended March 31, 2005 and 2004.  The net loss in the three months ended March 31,
2005  is due  primarily  to  lower  revenue  and  higher  selling,  general  and
administrative  expenses.  Diluted  earnings per share was a loss of $.04 in the
three  months  ended March 31, 2005 and 2004.  The  weighted  average  number of
common shares  outstanding and equivalents used in computing EPS was 8.2 million
in 2005 and 8.0 million in 2004.

Liquidity and Capital Resources

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

As of March 31, 2005, the Company had working capital of $37.7 million  compared
with $44.0 million as of December 31, 2004.

Net cash used in operating activities was $2.6 million in the three months ended
March 31, 2005 versus $1.7  million used in  operating  activities  in the three
months  ended March 31,  2004.  The largest  component of cash used in operating
activities  was a decrease in accounts  payable and accrued  liabilities of $5.2
million. This decrease was largely caused by the decline in revenues experienced
by the Company during 2004 and the first quarter of 2005.

                                       21
<PAGE>

Net cash provided by investing  activities  was $2.5 million in the three months
ended  March 31, 2005  compared  to net cash used of $22.4  million in the three
months ended March 31, 2004.  In the three months ended March 31, 2005,  the net
of  marketable  securities  bought and  redeemed was an increase of cash of $2.9
million. In the three months ended March 31, 2004 the net purchase of marketable
securities was $22.2 million.

Net cash used by  financing  activities  amounted  to $0.9  million in the three
months ended March 31, 2005  compared  with a net provided cash of $26.0 million
in the three  months  ended  March 31,  2004.  The amount in 2004 was  primarily
provided through the issuance of the 2011 Notes offset by the repayment of $13.2
million of our bank borrowings.

The following  table  summarizes the long term debt and related  interest of the
Company as of March 31, 2005 and the payments due by period, in thousands.


                           Long-term Debt  Interest On Contractual Obligations
                           --------------  -----------------------------------
       December 31:
           2005 (remaining)      $  440                    $1,963
           2006                     440                     2,596
           2007                     440                     2,585
           2008                     440                     2,575
           2009                     440                     2,564
       Thereafter                42,055                     3,311
                                -------                   -------
       Totals                   $44,255                   $15,594
                                =======                   =======

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

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

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

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

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

The  Company's  total  outstanding  borrowings  at March 31,  2005  amounted  to
approximately $43.2 million, net of broker's discounts. The 2011 Notes accounted
for $39.2 million, net of broker's discounts, of these borrowings. The remaining
amount of $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 March 31, 2005 for its
industrial  revenue  bonds  was  2.5%.  The  variable  interest  rate for  these
borrowings  fluctuated between 1.6% and 2.5% during the three months ended March
31, 2005 based on weekly market conditions. These bonds are fully collateralized
by bank  letters  of credit  issued  under the  Company's  bank  agreement.  The
Company's  banks  consider  letters  of credit as  outstanding  borrowings  when
considering the amount of availability  the Company has remaining under its line
of credit and in determining  the amount of marketable  securities  needed to be
pledged as collateral.

                                       22
<PAGE>

Other than the Company's  letters of credit,  which  amounted to $5.3 million at
March 31, 2005, the Company has no other material off balance sheet liabilities.

At March 31, 2005 the Company had $4.7 million of unused  availability,  subject
to the pledge of collateral under its line of credit.

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

The Company anticipates that cash generated from operations and borrowings under
the working capital line of credit and its currently  available cash will enable
the Company to meet its  liquidity,  working  capital  and  capital  expenditure
requirements  during the next 12 months and beyond.  The Company,  however,  may
require additional financing to pursue  acquisitions,  and to meet its long-term
liquidity,  working  capital  and  capital  expenditure  requirements.  If  such
financing is required,  there are no assurances that it will be available, or if
available,  that it can be obtained on terms favorable to the Company. From time
to time, the Company may be party to one or more  non-binding  letters of intent
regarding  material  acquisitions,  which, if consummated,  may be paid for with
cash or through the issuance of a significant  number of shares of the Company's
common stock.

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

On May 4, 2005, we received a notice from the Listing Qualifications  Department
of The Nasdaq  Stock  Market  stating that due to our failure to timely file the
404 Report, we were no longer in compliance with the requirements of Marketplace
Rule 4350(c)(14). The Rule requires us to file with Nasdaq copies of all reports
required to be filed with the  Securities  and Exchange  Commission on or before
the date they are required to be filed with the SEC.

The Nasdaq Stock Market  notified us that our  securities  will be delisted from
The Nasdaq Stock  Market at the opening of business on May 13,  2005,  unless we
request a  hearing  appealing  the  delisting  with The  Nasdaq  Stock  Market's
Listings  Qualifications  Panel in accordance  with the  Marketplace  Rules 4800
Series. Such a request for an appeal to the Panel will stay the delisting of our
securities pending the Panel's decision.

We intend to appeal our  delisting  to the Panel and are working  diligently  to
file our 404 Report as described in our Form 8-K dated May 2, 2005. There can be
no assurance the Panel will grant the Company's request for continued listing.

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

Additional Considerations

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

                                       23
<PAGE>

TOTAL BACKLOG
CompuDyne's  backlog  amounted to $115.7  million at March 31, 2005.  This was a
decrease of 8.8% from the Company's December 31, 2004 backlog of $126.9 million.
The break down of the Company's backlog by segment is as follows, in thousands:

                                                         March 31, December 31,
                                                            2005       2004
                                                        ---------  -----------

                     Institutional Security Systems       $ 42,700   $ 49,324
                     Attack Protection                      20,139     20,803
                     Integrated Electronic Systems           8,395      8,299
                     Public Safety and Justice              44,488     48,434
                                                          --------   --------
                              Total                       $115,722   $126,860
                                                          ========   ========

Included  in the backlog of the Public  Safety and Justice  segment at March 31,
2005 and  December  31,  2004 is $5.9  million and $5.1  million,  respectively,
representing awards received by the segment,  for which the clients have not yet
entered  into signed  contracts.  These  awards are expected to result in signed
contracts over the next twelve months.  In light of the continued decline of the
Company's  backlog at March 31,  2005 as  compared to  December  31,  2004,  the
Company expects the second quarter results to be weak.

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES
A complete description of the Company's significant  accounting policies appears
in the  Company's  Annual  Report on Form 10-K for the year ended  December  31,
2004.

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

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

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

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

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


                                       24
<PAGE>

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

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

Goodwill and Intangible Assets.
The Company  reviews the carrying  value of goodwill and  intangible  assets not
subject to  amortization  annually during the fourth quarter of the year or when
events or changes in  circumstances  indicate that the carrying value may not be
recoverable,  utilizing a  discounted  cash flow model.  Changes in estimates of
future cash flows caused by items such as unforeseen events or changes in market
conditions could negatively affect the Company's reporting units' fair value and
result in an impairment  charge.  The Company  cannot  predict the occurrence of
events that might adversely affect the reported value of goodwill and intangible
assets not subject to amortization which totaled approximately $25.9 million and
$5.6 million,  respectively, and intangible assets subject to amortization which
totaled approximately $2.7 million, net, at March 31, 2005.

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

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

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

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

MARKET RISK
The Company is exposed to market risk related to changes in interest rates.  The
Company  entered  into an interest  rate swap  agreement on June 26, 2001 in the
initial  notional  amount of $11.5  million.  The  notional  amount of this swap
agreement  declines by $676 thousand on a quarterly basis until it becomes $0 on
September 30, 2005. At March 31, 2005 the notional  amount of the swap agreement
had  declined  to $1.4  million  at a fixed rate of 4.9%.  In  January  2004 the
interest  rate swap  ceased to be a  highly-effective  cash flow  hedge when the
related debt was repaid. Consequently,  the amounts previously recorded in other
comprehensive  income as changes in fair  value of the  interest  rate swap were
recognized in earnings for the year ended December 31, 2004. Upon  determination
of the  hedge  ineffectiveness,  the  cumulative  loss on the fair  value of the
interest rate swap was $155 thousand,  which was recognized in other income. The
change in fair value of the interest  rate swap for the three months ended March
31, 2005 was a gain of $13 thousand,  resulting in a remaining liability for the
investment of $8 thousand. Future changes in the value of the interest rate swap
will be recognized in earnings.

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


                                       25
<PAGE>

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

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

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

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


                                       26
<PAGE>



       ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

The following information  summarizes our sensitivity to market risks associated
with fluctuations in interest rates as of March 31, 2005. To the extent that the
Company's  financial  instruments expose the Company to interest rate risk, they
are presented in the table below.  The table  presents  principal cash flows and
related  interest rates by year of maturity of the Company's  notes payable with
variable rates of interest in effect at March 31, 2005.

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


          Financial Instruments by Expected Maturity Date

<TABLE>
<CAPTION>
               Notes Payable             Variable                             Fixed
                Year Ending              Rate ($)      Average Variable       Rate ($)       Average Fixed
                 December 31          (In Thousands)    Interest Rate       (In Thousands)     Interest Rate
                ------------         ---------------   --------------      --------------     -------------
<S>                                      <C>              <C>                <C>
              2005 (remaining)            $   440           2.46%              $     -              -
              2006                            440           2.46%                    -              -
              2007                            440           2.46%                    -              -
              2008                            440           2.46%                    -              -
              2009                            440           2.46%                    -              -
                                                                                     -              -
              Thereafter                    1,805           2.46%               40,250            6.25%
                                          -------                              ------
              Total                       $ 4,005           2.46%              $40,250            6.25%
              Fair Value                  $ 4,005           2.46%              $33,500           11.00%

            Interest Rate Swaps         Variable
                Year Ending              Rate ($)      Average Variable      Average
                December 31           (In Thousands)         Pay Rate       Receive Rate
                ------------          --------------   -----------------   --------------
              2005 (remaining)            $ 1,353             4.90%             3.09%
              Total                       $ 1,353             4.90%             3.09%
              Fair Value                  $    (8)
</TABLE>


                                       27

<PAGE>



                         ITEM 4. CONTROLS AND PROCEDURES

DISCLOSURE CONTROLS AND PROCEDURES

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

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

STATUS OF MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management  of the  Company is  responsible  for  establishing  and  maintaining
adequate internal control over financial reporting. Management is in the process
of completing  its evaluation of the Company's  internal  control over financial
reporting  as of December 31,  2004.  To date,  management  has  identified  two
material  weaknesses,  which also  existed as of December  31,  2004. A material
weakness is a control deficiency,  or combination of control deficiencies,  that
results in more than a remote  likelihood  that a material  misstatement  of the
annual or interim financial statements will not be prevented or detected.

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

Management further determined that, as of December 31, 2004, the Company did not
maintain  effective  control over the accounting for and review of  significant,
non-routine  transactions.  Specifically,  the  Company  did not have  effective
controls  over the  accounting  for a  non-routine  change  order to a  customer
contract to ensure that the  accounting  for the change order was in  accordance
with generally  accepted  accounting  principles.  This control deficiency could
result in a material misstatement to annual or interim financial statements that
would not be prevented or detected. Accordingly,  management has determined that
this control deficiency constituted a material weakness.

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

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



                                       28
<PAGE>

Securities  and Exchange  Commission  Release No.  34-50754,  subject to certain
conditions, provided up to 45 additional days (until May 2, 2005) beyond the due
date of a company's  Annual  Report on Form 10-K for the filing of  management's
annual  report on internal  control over  financial  reporting  required by Item
308(a) of Regulation S-K and the related  attestation  report of the independent
registered public accounting firm required by Item 308(b) of Regulation S-K. The
Company  originally  qualified  for this  exemption.  On February 23, 2005,  the
Company  issued a press  release  announcing  its intent to avail itself of this
extension. Pursuant to the Release, management's report on internal control over
financial  reporting  and the  associated  report on the  audit of  management's
assessment of the effectiveness of the Company's internal control over financial
reporting  as of  December  31,  2004 were not filed with its Form 10-K but were
expected to be filed via an amendment to its Annual  Report on Form 10-K. On May
2, 2005, the Company filed a Form 8-K whereby the Company  announced that it did
not timely  file an  amendment  to its  Annual  Report on Form 10-K for the year
ended  December  31, 2004 (the "2004  10-K") to provide  management's  report on
internal  control  over  financial  reporting  as of  December  31, 2004 and the
related report of the Company's independent registered public accounting firm on
management's  assessment of the effectiveness of internal control over financial
reporting  (together,   the  "404  Report")  required  by  Section  404  of  the
Sarbanes-Oxley Act of 2002 ("SOX 404").

The  Company is working  diligently  to  complete  its  testing of its  internal
control over  financial  reporting.  The Company is unable to predict,  however,
when the  Company  will be able to issue  its  report.  The  lenders  under  the
Company's  Amended and Restated Credit  Agreement have confirmed that there will
not be any event of  default  thereunder  arising  by  virtue  of the  Company's
failure to file the 404 Report in a timely manner. The Company is evaluating the
impact,  if any, under its various other agreements of not filing the 404 Report
in a timely manner.  Other  consequences of not timely filing the SOX 404 report
include the inability to use a shorter form  registration  document for one year
in the event the Company were to engage in an offering of its securities. On May
4, 2005, we received a notice from the Listing Qualifications  Department of The
Nasdaq  Stock  Market  stating  that due to our  failure to timely  file the 404
Report,  we were no longer in compliance  with the  requirements  of Marketplace
Rule 4350(c)(14). The Rule requires us to file with Nasdaq copies of all reports
required to be filed with the  Securities  and Exchange  Commission on or before
the date they are  required to be filed with the SEC.  The Nasdaq  Stock  Market
notified us that our securities will be delisted from The Nasdaq Stock Market at
the opening of business on May 13, 2005,  unless we request a hearing  appealing
the delisting with The Nasdaq Stock Market's  Listings  Qualifications  Panel in
accordance with the Marketplace Rules 4800 Series.  Such a request for an appeal
to the Panel will stay the  delisting  of our  securities  pending  the  Panel's
decision.  We intend  to  appeal  our  delisting  to the  Panel and are  working
diligently  to file our 404  Report  as  described  in our Form 8-K dated May 2,
2005.  There can be no assurance  the Panel will grant our request for continued
listing. The Company cannot predict at this time what other steps the SEC or the
NASD may pursue.

Upon  completion of our ongoing  evaluation of internal  control over  financial
reporting the Company may discover  additional control  deficiencies,  and those
control  deficiencies,  alone or in  combination  with  others,  may  constitute
material  weaknesses  as of December  31,  2004,  in addition to those  material
weaknesses  described above. As of the current date, the Company is not aware of
any material  weaknesses in its internal control over financial  reporting as of
December 31, 2004, other than those described above.

As a result of the material  weaknesses that existed as of December 31, 2004 and
March 31, 2005, the Company's  management will conclude in its Management Report
on Internal Control Over Financial  Reporting to be filed as an amendment to the
2004 10-K, that the Company's internal control over financial  reporting was not
effective as of December 31, 2004. Also, the Company's  management believes that
the report of its independent  registered  public accounting firm to be filed as
an amendment  to the 2004 10-K will  contain an adverse  opinion with respect to
the effectiveness of the Company's internal control over financial  reporting as
of December 31, 2004.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

Except as otherwise discussed herein,  there has been no change in the Company's
internal control over financial reporting that occurred during the first quarter
of 2005 that has  materially  affected,  or is  reasonably  likely to materially
affect, such internal control over financial reporting.

To address the material weaknesses described above, the Company has: (1) engaged
an outside tax consultant,  who is not from the Company's independent registered
public  accounting  firm,  and has  implemented an ongoing  training  program to
enhance the  capabilities of its internal tax personnel,  and (2) instituted new
procedures   requiring  the   accounting   for  all   significant,   non-routine
transactions to be approved by the Corporate Accounting group.

                                       29

<PAGE>



                           PART II - OTHER INFORMATION


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.

                                       30

<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:  May 10, 2005           /S/ MARTIN ROENIGK
                              ------------------
                              Martin Roenigk
                              Chief Executive Officer


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