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, 2007

                                       OR

         [ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
            For the transition period from ___________to ___________


                         Commission File Number 0-29798


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

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

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

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


     Indicate by check mark whether the registrant (1) has filed all reports
   required to be filed by Section 13 or 15(d) of the Securities Exchange Act
   of 1934 during the preceding 12 months (or for such shorter period that the
   registrant was required to file such reports), and (2) has been subject to
                 such filing requirements for the past 90 days.
                          Yes [X]            No [ ]

   Indicate by check mark whether the registrant is a large accelerated filer,
        an accelerated filer, or a non-accelerated filer. See definition
        of accelerated filer and large accelerated filer in Rule 12b-2 of
                         the Exchange Act. (Check one):
Large accelerated filer [ ]   Accelerated filer [ ]   Non-accelerated filer [X]

   Indicate by checkmark whether the registrant is a shell company (as defined
                       in Rule 12b-2 of the Exchange Act)
                          Yes [ ]            No [X]

            As of May 4, 2007, a total of 8,438,615 shares of Common
                    Stock, $.75 par value, were outstanding.


<PAGE>


                     COMPUDYNE CORPORATION AND SUBSIDIARIES
                                      INDEX




                                                                        Page No.

Part I.  Financial Information

  Item 1.  Financial Statements - Unaudited

     Consolidated Balance Sheets - March 31, 2007
      and December 31, 2006                                                 3

     Consolidated Statements of Operations -
      Three Months Ended March 31, 2007 and 2006                            4

     Consolidated Statement of Changes in Shareholders' Equity -
      Three Months Ended March 31, 2007                                     5

     Consolidated Statements of Cash Flows -
      Three Months Ended March 31, 2007 and 2006                            6

     Notes to Consolidated Financial Statements                            7-17

  Item 2.  Management's Discussion and Analysis of
     Financial Condition and Results of Operations                        18-29

  Item 3.  Quantitative and Qualitative Disclosures
     About Market Risk                                                     30

  Item 4.  Controls and Procedures                                         31

Part II.  Other Information                                                32

  Signature                                                                33


                                       2
<PAGE>


                          ITEM 1. FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                     COMPUDYNE CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                   (unaudited)


                                                                                March 31,       December 31,
                                              ASSETS                              2007             2006
                                                                              -------------    -------------
                                                                                  (dollars in thousands)
Current Assets
<S>                                                                           <C>              <C>
       Cash and cash equivalents                                              $     10,694     $      7,740
       Marketable securities                                                         6,001            8,687
       Accounts receivable, net                                                     25,584           25,534
       Contract costs in excess of billings                                         12,231           12,031
       Inventories                                                                   6,152            5,577
       Prepaid expenses and other                                                    2,031            4,595
                                                                              -------------    -------------
           Total Current Assets                                                     62,693           64,164

Cash equivalents pledged                                                             7,500            7,500
Property, plant and equipment, net                                                   9,281            9,630
Goodwill                                                                            13,275           13,274
Other intangible assets, net                                                         7,282            7,428
Other                                                                                1,841            1,954
                                                                              -------------    -------------
           Total Assets                                                       $    101,872     $    103,950
                                                                              =============    =============

                             LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities
       Accounts payable and accrued liabilities                               $     12,933     $     14,155
       Billings in excess of contract costs incurred                                 9,444            9,221
       Deferred revenue                                                             10,145            9,305
       Current portion of notes payable                                                440              440
                                                                              -------------    -------------
           Total Current Liabilities                                                32,962           33,121

Notes payable                                                                        2,685            2,685
Convertible subordinated notes payable, net                                         39,539           39,492
Deferred tax liabilities                                                             1,425            1,425
Other                                                                                  392              388
                                                                              -------------    -------------
           Total Liabilities                                                        77,003           77,111
                                                                              -------------    -------------

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, 2007 and December 31, 2006;
        9,300,837 and 9,293,637 shares issued at March 31,
        2007 and December 31, 2006, respectively                                     6,975            6,970
       Additional paid-in-capital                                                   50,333           50,034
       Accumulated deficit                                                         (26,290)         (23,956)
       Accumulated other comprehensive (loss)                                         (271)            (331)
       Treasury stock, at cost; 862,922 shares at March 31, 2007
        and December 31, 2006                                                       (5,878)          (5,878)
                                                                              -------------    -------------
           Total Shareholders' Equity                                               24,869           26,839
                                                                              -------------    -------------
           Total Liabilities and Shareholders' Equity                         $    101,872     $    103,950
                                                                              =============    =============

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


                                       3
<PAGE>


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


                                                                               Three Months Ended March 31,
                                                                                  2007             2006
                                                                              -------------    -------------
                                                                           (in thousands, except per share data)
Revenues:
<S>                                                                           <C>              <C>
  Contract revenues earned                                                    $     17,722     $     22,202
  Maintenance revenue                                                                6,555            5,979
  Other revenues                                                                     6,855           12,289
                                                                              -------------    -------------
     Total revenues                                                                 31,132           40,470

Cost of sales                                                                       21,354           27,961
                                                                              -------------    -------------

Gross profit                                                                         9,778           12,509

Selling, general and administrative expenses                                         9,299            9,736
Research and development                                                             2,371            1,767
                                                                              -------------    -------------
(Loss) income from operations                                                       (1,892)           1,006
                                                                              -------------    -------------

Other expense (income)
  Interest expense                                                                     792              815
  Interest income                                                                     (347)            (278)
  Other income                                                                          (3)            (154)
                                                                              -------------    -------------
     Total other expense                                                               442              383
                                                                              -------------    -------------

(Loss) income before taxes on income                                                (2,334)             623
Income tax expense (benefit)                                                             -             (184)
                                                                              -------------    -------------
Net (loss) income                                                             $     (2,334)    $        807
                                                                              =============    =============

Earnings (loss) per share:
Basic (loss) income per common share                                          $       (.28)    $        .10
                                                                              =============    =============

Weighted average number of common
 shares outstanding                                                                  8,436            8,119
                                                                              =============    =============

Diluted (loss) income per common share                                        $       (.28)    $        .10
                                                                              =============    =============

Weighted average number of common
 shares and equivalents                                                              8,436            8,159
                                                                              =============    =============

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


                                       4
<PAGE>


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


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

<S>                             <C>    <C>           <C>            <C>            <C>            <C>  <C>            <C>
Balance at January 1, 2007      9,294  $  6,970      $ 50,034       $(23,956)      $   (331)      863  $ (5,878)      $ 26,839
Stock options exercised             7         5            36                                                               41
Stock-based compensation                                  263                                                              263
                              -------------------------------------------------------------------------------------------------
  Subtotal                      9,301     6,975        50,333        (23,956)          (331)      863    (5,878)        27,143
Comprehensive income:
  Net loss                                                            (2,334)                                           (2,334)
Other comprehensive
 loss, net of tax:
Change in unrealized loss on
 available for sale of
 marketable securities                                                                   54                                 54
Foreign currency translation
 adjustments                                                                              6                                  6
                                                                                                                      ---------
Comprehensive income                                                                                                    (2,274)
                              -------------------------------------------------------------------------------------------------
Balance at March 31, 2007       9,301  $  6,975      $ 50,333       $(26,290)      $   (271)      863  $ (5,878)      $ 24,869
                                =====  ========      ========       =========      =========      ===  =========      ========



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


                                       5
<PAGE>


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


                                                                               Three Months Ended March 31,
                                                                                  2007             2006
                                                                              -------------    -------------
                                                                                      (in thousands)
Cash flows from operating activities:
<S>                                                                           <C>              <C>
   Net income (loss)                                                          $     (2,334)    $        807

Adjustments to reconcile net income (loss) to
 net cash provided by operations:
   Depreciation and amortization                                                       841              795
   Amortization of debt discount and financing fees                                     82               82
   Accretion of premium on marketable securities, net                                   (1)              (6)
   Stock-based compensation expense                                                    263              255

Changes in assets and liabilities:
   Accounts receivable                                                                 (50)           6,884
   Contract costs in excess of billings                                               (200)           1,770
   Inventories                                                                        (575)            (361)
   Prepaid expenses and other current assets                                         2,556              465
   Other assets                                                                         79               61
   Accounts payable and accrued liabilities                                         (1,222)          (3,991)
   Billings in excess of contract costs incurred                                       223           (2,532)
   Deferred revenue                                                                    840              594
   Other liabilities                                                                     4              (41)
                                                                              -------------    -------------
Net cash flows provided by operating activities                                        506            4,782
                                                                              -------------    -------------

Cash flows from investing activities:
   Purchase of marketable securities                                                     -           (2,983)
   Redemption of marketable securities                                               2,748            1,624
   Additions to property, plant and equipment                                         (347)            (317)
                                                                              -------------    -------------
Net cash flows provided by (used in) investing activities                            2,401           (1,676)
                                                                              -------------    -------------

Cash flows from financing activities:
   Stock options exercised                                                              41                3
   Restricted cash                                                                       -             (400)
                                                                              -------------    -------------
Net cash provided by (used in) financing activities                                     41             (397)
                                                                              -------------    -------------

Effect of exchange rate changes on cash                                                  6                -

Net change in cash and cash equivalents                                              2,954            2,709
Cash and cash equivalents at beginning of period                                     7,740            6,938
                                                                              -------------    -------------
Cash and cash equivalents at end of period                                    $     10,694     $      9,647
                                                                              =============    =============

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


                                       6
<PAGE>


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


1.   SUMMARY OF SIGNIFICANT 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, 2006 has been  derived from the
Company's December 31, 2006 audited financial  statements.  Certain  information
and note disclosures  included in the annual financial  statements,  prepared in
accordance with accounting principles generally accepted in the United States of
America, have been condensed or omitted pursuant to those rules and regulations,
although the Company  believes that the  disclosures  made in this Form 10-Q are
adequate to make the information presented not misleading.

In the opinion of the Company, the accompanying unaudited consolidated financial
statements reflect all necessary adjustments and reclassifications (all of which
are  of a  normal,  recurring  nature,  unless  otherwise  disclosed)  that  are
necessary for the fair  presentation of the periods  presented.  It is suggested
that these consolidated  unaudited  financial  statements be read in conjunction
with the consolidated financial statements and the notes thereto included in the
Company's  annual report filed with the  Securities  and Exchange  Commission on
Form 10-K for the year ended December 31, 2006.  Operating results for the three
month  periods ended March 31, 2007 and 2006 are not  necessarily  indicative of
operating results for the entire fiscal year.

Income Taxes
The Company follows  Statement of Financial  Accounting  Standards  ("SFAS") No.
109,  "Accounting  for Income Taxes." Under SFAS 109,  deferred income taxes are
recognized for the future tax  consequences of differences  between tax bases of
assets and liabilities and financial  reporting amounts,  based upon enacted tax
laws and statutory tax rates  applicable to the periods in which the differences
are  expected  to affect  taxable  income.  The Company has decided to provide a
valuation  allowance  against its deferred tax assets, as it has determined that
due to the Company's  accumulated  deficit  resulting  from recent years' losses
there is  uncertainty as to whether it is more likely than not that these assets
will be realized.

Foreign Currency Translation
The  financial  statements of the Company's  foreign  subsidiaries  are measured
using the local  currency as the  functional  currency.  Net  exchange  gains or
losses  resulting  from the  translation  of  financial  statements  of  foreign
operations are recorded as a separate component of shareholders' equity.

Comprehensive Income (Loss)
The following table shows the components of comprehensive  income (loss), net of
income taxes, for the three months ended March 31, 2007 and 2006, in thousands:

                                                          For the Three Months
                                                            Ended March 31,
                                                           2007          2006
                                                        ----------    ----------

     Net (loss) income                                  $  (2,334)    $     807
     Unrealized gain (loss) on available-for-sale
      securities                                               54          (255)
     Foreign currency translation adjustment                    6             -
                                                        ----------    ----------
     Comprehensive (loss) income                        $  (2,274)    $     552
                                                        ==========    ==========

Recently Issued Accounting Pronouncements
In February  2007, the Financial  Accounting  Standards  Board  ("FASB")  issued
Statement of Financial  Accounting  Standard  ("SFAS") No. 159,  "The Fair Value
Option for Financial  Assets and Financial  Liabilities - Including an amendment
of FASB Statement No. 115" ("SFAS 159").  SFAS 159 permits  entities to elect to
measure  many  financial  instruments  and  certain  other  items at fair value.
Unrealized  gains and losses on items for which the fair  value  option has been
elected will be recognized in earnings at each  subsequent  reporting date. SFAS
159 is effective for fiscal years beginning after November 15, 2007. The Company
is  currently  assessing  the impact of SFAS 159 on its  consolidated  financial
statements.

In September  2006,  the FASB issued SFAS No. 158,  "Employers'  Accounting  for
Defined Benefit Pension and Other  Postretirement  Plans -- an amendment of FASB
Statements No. 87, 88, 106 and 132(R)." This  statement  would require a company
to (a)  recognize in its  statement of financial  position an asset for a plan's
overfunded status or a liability for a plan's underfunded  status, (b) measure a
plan's assets and its obligations that determine its funded status as of the end
of the employer's fiscal year, and (c) recognize changes in the funded status of
a defined  postretirement  plan in the year in which the changes occur (reported
in comprehensive income). The adoption of this new accounting  pronouncement has
not had an impact on our  financial  position  or  results of  operation  as the
Company does not have any such plans.


                                       7
<PAGE>

In September 2006, the FASB issued SFAS No 157 "Fair Value  Measurements".  This
Statement  defines fair value,  establishes a framework for measuring fair value
in generally accepted  accounting  principles  (GAAP),  and expands  disclosures
about fair value measurements. The adoption of this new accounting pronouncement
has not had an impact on our financial position or results of operation.

In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes, an  interpretation of FASB Statement No. 109" ("FIN 48"), which
clarifies  the  accounting  for  uncertainty  in income  taxes  recognized  in a
company's  financial  statements.  The  interpretation  prescribes a recognition
threshold  and  measurement  attribute  criteria  for  the  financial  statement
recognition and measurement of an uncertain tax position taken or expected to be
taken  in  a  tax  return.   The   interpretation   also  provides  guidance  on
derecognition,  classification,  interest and  penalties,  accounting in interim
periods, disclosure and transition.

The  Company  adopted  the  provisions  of  FIN  48  on  January  1,  2007.  The
implementation   of  FIN  48  did  not  have  a  material  impact  on  CompuDyne
Corporation's  financial  statements.  The Company files tax returns in the U.S.
federal jurisdiction, and in various states and foreign jurisdictions.

At the adoption date on January 1, 2007 and as of March 31, 2007 the company did
not have any  unrecognized  tax  benefits  and  recorded  no  cumulative  effect
adjustments  related to the adoption of Fin 48. The Company does not  anticipate
any material  increase to its  unrecognized  tax benefits within the next twelve
months.

All federal and state tax filings for CompuDyne Corporation and its subsidiaries
as of December 31, 2005 have been timely  filed.  There are currently no federal
or state  examinations  in process.  The Company's last federal income tax audit
closed all tax years  through  December 31, 2003.  The Company  files income tax
returns  in  numerous  states and  generally  the years  subject to  examination
include December 31, 2003 through the current year.

The Company has decided to recognize  interest  and  penalties as a component of
tax expense.  During the years ended December 31, 2006, and 2005 and the quarter
ended March 31, 2007, the Company did not recognize any interest or penalties in
its results of operations related to unrecognized tax benefits.

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

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 to purchase  1,313,600 shares for the three months ended March 31,
2007 and stock options and warrants to purchase  1,325,633  shares for the three
months ended March 31, 2006 were not dilutive and, therefore,  were not included
in the  computation  of diluted  earnings per common  share.  Additionally,  the
2,897,768 shares issuable upon conversion of the 6.25% Convertible  Subordinated
Notes due January 15, 2011 (the "2011  Notes") are excluded for the three months
ended March 31, 2007,and 2006 as the effect is antidilutive.


                                       8
<PAGE>

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

                                                    Three Months Ended March 31,
                                                    ----------------------------
                                                         2007          2006
                                                      ----------    ----------

   Net (loss) income                                  $  (2,334)    $     807
                                                      ==========    ==========

   Weighted average number of common shares
    outstanding                                           8,436         8,119
   Effect of dilutive stock options and warrants              -            40
                                                      ----------    ----------
   Diluted weighted average number of common
    shares outstanding                                    8,436         8,159
                                                      ==========    ==========

   Net (loss) income per common share
   Basic                                              $    (.28)    $     .10
   Diluted                                            $    (.28)    $     .10

In March 2004, the Emerging Issues Task Force ("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 years ended December 31, 2006, 2005 and 2004 or
the quarter ended March 31, 2007.  Accordingly,  no undistributed  earnings have
been allocated to the 2011 Notes. The 2011 Notes provide that "if the portion of
the cash so  distributed  applicable to one share of Common Stock is equal to or
greater  than the  Current  Market  Price on the  Record  Date [of the  dividend
declared],  in lieu of the  foregoing  adjustment  [to  the  conversion  price],
adequate provision shall be made so that each Noteholder shall have the right to
receive upon  conversion  the amount of cash such holder would have received had
such holder  converted  each Note on the Record  Date."  Under EITF  03-06,  the
assessment  as to whether the  contingency  criteria  have been met must be made
each  reporting  period.  This  determination  is  made  without  regard  to the
participation  rights of the convertible  notes. Under the consensus reached for
Issue 3 of EITF 03-06,  the criteria  could be met even if the dividend were not
declared. The consensus also permits consideration of avoiding allocation to the
participating  securities  in certain  events.  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.   STOCK-BASED COMPENSATION

Effective  January 1, 2006, we adopted SFAS No. 123(R),  "Share-Based  Payment."
This  statement  requires  us to  expense  the fair  value of grants of  various
stock-based  compensation  programs  over the vesting  period of the awards.  We
elected to adopt the "Modified Prospective  Application" transition method which
does not require the restatement of previously issued financial statements,  and
therefore  previously issued financial statements are not directly comparable to
periods after adoption. Compensation expense is measured using the Black-Scholes
option  pricing  model  which  we have  determined  to be the  most  appropriate
fair-value method for determining the value of our awards and we have recognized
compensation  costs on a straight-line  basis over the awards vesting periods in
accordance  with the  provisions  of FAS 123R.  We have  recognized  stock based
compensation beginning in 2006 as follows:

Awards granted after December 31, 2005 - Awards are measured at their fair value
at date of grant.  The  resulting  compensation  expense  is  recognized  in the
consolidated  statement of  operations  ratably  over the vesting  period of the
award.

Awards  granted  prior to December 31, 2005 - Awards were measured at their fair
value at the date of original grant.  Compensation  expense  associated with the
unvested  portion  of these  options at  January  1, 2006 is  recognized  in the
consolidated statement of operations ratably over the remaining vesting period.

For all  grants  issued  after  December  31,  2005  the  amount  of  recognized
compensation  expense is adjusted based upon an estimated  forfeiture rate which
is derived from historical data.


                                       9
<PAGE>

The following table shows total stock-based compensation expense included in the
Consolidated Statement of Operations, in thousands:

                                                  Three Months Ended March 31,
                                                  ----------------------------
                                                     2007              2006
                                                     ----              ----
       Cost of sales                               $   12            $   18
       Selling, general and administrative            235               214
       Research and development                        16                23
                                                   ------            ------
           Total                                   $  263            $  255
                                                   ======            ======

SFAS No.  123(R)  also  requires  that the tax  deduction  from the  exercise of
options  be  reflected  in the  statement  of cash flows as a cash  inflow  from
financing  activities.  Prior to the  adoption  of SFAS No.  123(R),  these  tax
benefits were reflected as a cash inflow from  operations.  The tax benefit from
the  exercise of options was $0 for both the three  months  ended March 31, 2007
and March 31,  2006.  Additionally,  the Company  used the  long-form  method to
calculate the additional  paid-in capital  ("APIC") pool, the tax benefit of any
resulting  excess tax deduction should increase the APIC pool; any resulting tax
deficiency is deducted from the APIC pool.

Stock Option Plans
------------------

2005 Stock Incentive Compensation Plan for Employees.  Stock options are granted
with an  exercise  price  equal to the market  price of the stock at the date of
grant.  Substantially  all of the options granted are exercisable  pursuant to a
five-year vesting  schedule.  The fair value of these options is estimated using
the Black-Scholes  option pricing model which incorporates the assumptions noted
in  the  table  below.   Expected  volatilities  are  based  on  the  historical
performance of our stock. We also use historical data to estimate the timing and
amount of option  exercises  and  forfeitures  within the valuation  model.  The
expected  term of the options is derived  from the output of the option  pricing
model and  represents  the period of time that  options  are  expected to remain
unexercised. The risk-free interest rate for periods within the contractual life
of the option is based on the U.S.  Treasury  bond rate in effect at the time of
grant.

2005 Stock Option Plan for  Non-Employee  Directors.  Stock  options are granted
with an  exercise  price  equal to the market  price of the stock at the date of
grant.  Substantially  all of the options granted are exercisable  pursuant to a
three-year vesting schedule.  The fair value of these options is estimated using
the Black-Scholes  option pricing model which incorporates the assumptions noted
in  the  table  below.   Expected  volatilities  are  based  on  the  historical
performance of our stock. We also use historical data to estimate the timing and
amount of option  exercises  and  forfeitures  within the valuation  model.  The
expected  term of the options is derived  from the output of the option  pricing
model and  represents  the period of time that  options  are  expected to remain
unexercised. The risk-free interest rate for periods within the contractual life
of the option is based on the U.S.  Treasury  bond rate in effect at the time of
grant.

The 1996 Stock  Incentive  Plan for Employees and the 1996 Stock Option Plan for
Non-Employee  Directors,  collectively referred to as the "Prior Plans," expired
in accordance with their terms and no further stock options may be granted under
these plans.

The fair values of grants in the stated period were computed using the following
range of assumptions for our various stock option plans:

                                               Three Months Ended March 31,
                                               ----------------------------
                                                 2007 *            2006
                                                 ------            ----
         Risk-free interest rate                    -              4.6%
         Dividend yield                             -              none
         Expected volatility                        -             78.5%
         Expected lives                             -            6.2 years
         Annual forfeiture rate                     -              4.4%

* In the three months ended March 31, 2007 no stock options were granted.

The  Company  has  various  stock  option  plans.  Under all  plans,  there were
3,970,000  shares of common  stock  reserved  for future  grants  and  1,313,600
options outstanding for a total of 5,283,000 options to purchase common stock as
of March 31,  2007.  Options  generally  are granted at fair market value at the
date of  grant,  typically  vest over 1 to 5 years  from the date of grant,  and
expire 10 years after the date of grant. The plans permit the issuance of either
incentive stock options or non-qualified stock options.


                                       10
<PAGE>

Transactions for stock options and warrants are summarized as follows:

<TABLE>
<CAPTION>
                                                                                        Aggregate
                                                    Number            Weighted          Intrinsic
                                                      of              Average            Value at
                                                    Shares             Price          March 31, 2007
                                                --------------     --------------     --------------
   <S>                                               <C>           <C>                <C>
   Outstanding, at December 31, 2006                 1,513,100     $       8.2478
           Granted                                           -     $            -
           Forfeited                                   129,000     $       7.0538
           Exercised                                     7,200     $       5.8426
           Expired or Cancelled                         63,300     $      11.0231
                                                --------------
   Outstanding, at March 31, 2007                    1,313,600     $       8.2445     $       95,057
                                                ==============                        ==============

   Exercisable, at March 31, 2007                      742,300     $       9.2059     $       95,057
                                                ==============                        ==============
</TABLE>

A summary of our stock options outstanding at March 31, 2007 follows:

<TABLE>
<CAPTION>
                                             Options outstanding                      Options exercisable
                                  --------------------------------------------   -------------------------------
                                                  Weighted-
                                                   Average         Weighted-                         Weighted-
                                  Number          Remaining         Average          Number           Average
                              Outstanding As     Contractual       Exercise      Exercisable As      Exercise
 Range of Exercise Price        of 03/31/07         Term             Price        of 03/31/07          Price
 -----------------------      --------------   --------------   --------------   --------------   --------------
   <S>                             <C>              <C>            <C>               <C>             <C>
   $ 1.690  -  6.235               150,600          6.90           $ 5.3146          39,600          $ 3.2496
   $ 6.250  -  6.825               162,500          8.73           $ 6.5513          29,800          $ 6.6164
   $ 6.875  -  6.900                56,800          8.34           $ 6.8970           6,800          $ 6.8750
   $ 6.950  -  6.950               150,000          9.09           $ 6.9500               0          $ 0.0000
   $ 7.000  -  7.985               157,000          5.55           $ 7.4500          99,600          $ 7.4406
   $ 8.015  -  8.075               133,500          4.44           $ 8.0712         129,500          $ 8.0729
   $ 8.105  -  8.960               152,900          5.69           $ 8.6190         106,700          $ 8.5764
   $ 9.190  - 10.420               153,800          6.01           $10.0123         133,800          $ 9.9656
   $11.165  - 13.445               193,000          6.03           $12.2915         193,000          $12.2915
   $13.750  - 16.630                 3,500          4.60           $15.3300           3,500          $15.3300
----------------------------------------------------------------------------------------------------------------

   $ 1.690  - 16.630            1,313,600          6.65           $ 8.2445         742,300          $ 9.2059
                                =========                                          =======
</TABLE>


In the three months ended March 31, 2007 no stock options were  granted.  In the
three months ended March 31, 2006 the weighted-average  grant-date fair value of
an  option  granted  was $4.85  per  option.  The  total  intrinsic  value,  the
difference  between  the  exercise  price  and the  market  price on the date of
exercise,  of all options exercised during the three months ended March 31, 2007
and  2006  was  approximately  $19  thousand  and  $1,600,  respectively.  Total
unrecognized  compensation  expense from stock options  outstanding at March 31,
2007 was approximately $1.8 million excluding  estimated  forfeitures,  which is
expected  to be  recognized  over a  weighted-average  period  of 2.3  years  as
follows, in thousands:


                                                     Compensation
                                                   Expense Excluding
                   Year                          Estimated Forfeitures
                   ----                          ---------------------
                   2007 (remaining)                     $   544
                   2008                                     507
                   2009                                     392
                   2010                                     272
                   2011                                      62
                                                        -------
                      Total                             $ 1,777
                                                        =======

Share - Based Compensation Fair Value Assumption
------------------------------------------------

The fair value of each option  award is  estimated  on the date of grant using a
Black-Scholes  option pricing model that uses the weighted average  assumptions.
For 2007 and 2006  volatility is based on historical  volatility of  CompuDyne's
stock.  The risk-free  interest rate is based on the zero-coupon  U.S.  Treasury
bond. We use historical data to estimate stock option  exercises and forfeitures
within the valuation  model. The expected term of stock option awards granted is
derived from  historical  exercise  experience  under the  share-based  employee
compensation  arrangements  and  represents the period of time option awards are
expected to be outstanding.


                                       11
<PAGE>


4.   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, 2007 and December 31, 2006 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/(loss) in shareholders'  equity.  The cost for marketable  securities was
determined using the specific  identification  method and adjusted for accretion
of discounts or  amortization of premiums from the date of purchase to maturity.
The accretion and amortization is included in interest  income.  The fair values
of  marketable  securities  are  estimated  based on the quoted market price for
these securities.

Marketable securities are summarized, in thousands, as follows:

<TABLE>
<CAPTION>
                                                   March 31,                             December 31,
                                                     2007                                   2006
                                      ----------------------------------     ----------------------------------
                                               Gross Unrealized                       Gross Unrealized
                                               ----------------   Fair                ----------------   Fair
                                        Cost    Gains    Losses   Value        Cost    Gains    Losses   Value
                                      -------  -------  -------  -------     -------  -------  -------  -------
<S>                                   <C>      <C>      <C>      <C>         <C>      <C>      <C>      <C>
Collateralized mortgage
 obligations (CMO's) consisting
 of securities issued by
 Fannie Mae and Freddie Mac           $ 6,278  $     5  $   282  $ 6,001     $ 9,026  $     2  $   341  $ 8,687
</TABLE>

The cost and estimated fair value of current marketable  securities at March 31,
2007, by contractual maturity,  are shown below. Expected maturities will differ
from contractual maturities because the issuers of the securities have the right
to repay obligations without prepayment penalties. It is the Company's policy to
classify  available-for-sale  securities  that are  available for use in current
operations as a current asset.


                                                             Estimated
                                                 Cost        Fair Value
                                              ----------     ----------
                                                    (in thousands)
       Due within one year                    $       87     $       86
       Due after one year and beyond               6,191          5,915
                                              ----------     ----------
       Total debt securities                  $    6,278     $    6,001
                                              ==========     ==========

The  following  table  shows the gross  unrealized  losses and fair value of the
Company's  investments  with  unrealized  losses  that  are  not  deemed  to  be
other-than-temporarily impaired, aggregated by investment category and length of
time that  individual  securities  have  been in a  continuous  unrealized  loss
position, at March 31, 2007, in thousands:

<TABLE>
<CAPTION>
                                       Less Than 12 Months     12 Months or Greater              Total
                                       -------------------     --------------------       --------------------
                                      Fair       Unrealized     Fair      Unrealized      Fair      Unrealized
                                      Value       (Gains)       Value       Losses        Value       Losses
                                     -------      -------      -------      -------      -------      -------
<S>                                  <C>          <C>          <C>          <C>          <C>          <C>
Federal agency mortgage-backed
 securities                          $   920      $   (5)      $ 5,081      $   282      $ 6,001      $   277
                                     =======      =======      =======      =======      =======      =======
</TABLE>

The   unrealized   losses  on  the  Company's   investments  in  federal  agency
mortgage-backed  securities were caused by interest rate increases.  The Company
purchased  these  investments at a discount of or at their face amount,  and the
contractual  cash flows of these  investments are guaranteed by an agency of the
U.S.  government.  Accordingly,  it is expected that the securities would not be
settled at a price less than the  amortized  cost of the  Company's  investment.
Because the decline in market value is attributable to changes in interest rates
and not credit  quality  and  because  the Company has the ability and intent to
hold these investments until their expected  redemption at full principal value,
the Company does not consider  these  investments  to be  other-than-temporarily
impaired at March 31, 2007.

5.   INVENTORIES

Inventories consist of the following, in thousands:

                                                     March 31,      December 31,
                                                     ---------      ------------
                                                       2007            2006
                                                   -------------   -------------
   Raw materials                                   $      4,185    $      3,645
   Work in progress                                       2,230           2,575
   Finished goods                                           679             274
                                                   -------------   -------------
   Total inventories                                      7,094           6,494
       Less: Reserve for excess and obsolete
        inventory                                          (942)           (917)
                                                   -------------   -------------
   Inventories, net                                $      6,152    $      5,577
                                                   -------------   -------------


                                       12
<PAGE>

6.   GOODWILL

The Company  reviews the carrying value of goodwill  annually  during the fourth
quarter of the year or whenever events or changes in circumstances indicate that
the carrying value may not be  recoverable.  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.  This  valuation  is  performed  by  the  Company  with  the
assistance of an  independent  national  valuation firm which  considers  market
valuations,   discounted  cash  flows  and  other  factors  when  preparing  the
valuations.  The  Company  cannot  predict the  occurrence  of events that might
adversely  affect the reported value of the remaining  goodwill of approximately
$13.3 million at March 31, 2007.

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

<TABLE>
<CAPTION>
                                                       Integrated       Public
                                          Attack       Electronic      Safety &
                                        Protection      Systems        Justice         Total
                                        ----------     ----------     ----------     ---------

   <S>                                  <C>            <C>            <C>            <C>
   December 31, 2006                    $      728     $      829     $   11,717     $   13,274
   Addition from 2006 acquisition                -              1              -              1
                                        ----------     ----------     ----------     ----------
   March 31, 2007                       $      728     $      830     $   11,717     $   13,275
                                        ==========     ==========     ==========     ==========
</TABLE>

7.   OTHER INTANGIBLE ASSETS

The Company reviews the carrying value of intangible  assets when  circumstances
indicate  that the  carrying  value may not be  recoverable.  This  valuation is
performed  by  the  Company  with  the  assistance  of an  independent  national
valuation  firm which  considers  the excess  earnings  method,  the relief from
royalty method and discounted earnings method when preparing the valuations. The
Company cannot predict the occurrence of events that might adversely  affect the
reported value of the remaining  intangible assets of approximately $7.3 million
at March 31, 2007.

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

                                         March 31,    December 31,  Amortizable
                                           2007          2006          Lives
                                        -----------   -----------   -----------
     Cost                                                            (in years)
       Trade names                      $    3,955    $    3,952     Indefinite
       Customer relationships                3,280         3,280        7-14
       Other                                 1,715         1,715        2-20
                                        -----------   -----------
                                             8,950         8,947
                                        -----------   -----------
     Accumulated amortization
       Customer relationships                 (988)         (883)
       Other                                  (680)         (636)
                                        -----------   -----------
                                            (1,668)       (1,519)
                                        -----------   -----------

     Other intangible assets, net       $    7,282    $    7,428
                                        ===========   ===========

Amortization  expense for the Company's  intangible  assets for the three months
ended March 31, 2007 and 2006 was $148  thousand and $64 thousand  respectively.
The following schedule lists the expected  amortization  expense for each of the
next five years ending December 31, in thousands:

                   Year
                   ----
                   2007 (remaining)            $   376
                   2008                            491
                   2009                            491
                   2010                            477
                   2011                            364
                   Thereafter                    1,128
                                               -------
                   Total                       $ 3,327
                                               =======


                                       13
<PAGE>

8.   NOTES PAYABLE AND LINE OF CREDIT

<TABLE>
<CAPTION>
                                                                                  March 31,       December 31,
                                                                                    2007             2006
                                                                                -------------    -------------
                                                                                        (in thousands)
<S>                                                                             <C>              <C>
Industrial revenue bond, interest payable monthly at a variable rate
 of 3.65 % to 4.16 % (3.86 % at March 31, 2007) principal payable
 in quarterly installments of $35,000. The bond is fully collateralized
 by a $1.1 million letter of credit and a bond guarantee agreement.             $      1,120     $      1,120

Industrial revenue bond, interest payable monthly at a variable rate
 of 3.58 % to 4.05 % (3.77 % at March 31, 2007) principal payable
 in annual installments on April 1, of $300,000 until 2013 when the annual
 installments become $100,000. The bond is fully collateralized by
 a $2.0 million letter of credit and a bond guarantee agreement.                       2,005            2,005

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

Total notes payable                                                                   43,375           43,375
Less convertible subordinated notes discount                                             711              758
                                                                                -------------    -------------
Subtotal                                                                              42,664           42,617
Less amount due within one year                                                          440              440
                                                                                -------------    -------------
                                                                                $     42,224     $     42,177
                                                                                =============    =============
</TABLE>


Maturities of notes payable are as follows, in thousands:

                   Year Ending December 31,           Amount
                   ------------------------        ------------
                   2007 (remaining)                  $    440
                   2008                                   440
                   2009                                   440
                   2010                                   440
                   2011                                40,690
                   Thereafter                             925
                                                     --------
                                                     $ 43,375
                                                     ========

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, 2007 carrying value is listed below, in thousands.

                       Face value                        $ 40,250
                       Underwriters discounts, net            711
                                                         --------
                                                         $ 39,539
                                                         ========

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 U.S. Bank,  relating to the 2011 Notes,  occurs. If
such an event does occur, the Company may redeem the 2011 Notes at a premium, in
whole but not in part,  to face.  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.


                                       14
<PAGE>

The debt issuance  costs for the 2011 Notes are recorded as a non-current  asset
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. There is no material difference between the straight-line  method of
amortization and the effective  interest method with respect to the amortization
of the  underwriter's  discounts  and debt  issuance  costs  on the 2011  Notes.
Interest  expense recorded for the total of the deferred debt issuance costs and
underwriters'  discounts on the 2011 Notes totaled $63 thousand and $63 thousand
for the three months ended March 31, 2007 and 2006, respectively.

On December 19, 2005, the Company and its bank entered into a Second Amended and
Restated  Revolving  Credit and Security  Agreement (the "Second Restated Credit
Agreement").  The Second  Restated  Credit  Agreement  amended and  restated the
Company's Amended and Restated Credit Agreement dated March 31, 2004.

In connection with the execution of the Second Restated  Credit  Agreement,  the
Company  provided  the bank  with  collateral  that  includes  all  receivables,
equipment, general intangibles,  inventories, investment property, real property
and a  security  interest  in  subsidiary  stock.  The  Second  Restated  Credit
Agreement allows the Company to obtain revolving  advances in a principal amount
of up to $20 million. Revolving advances are limited by a borrowing base formula
based upon the value of the Company's  receivables,  inventories,  fixed assets,
real  property  and  issued and  outstanding  letters  of  credit.  The  maximum
aggregate  face  amount of letters of credit  that may be drawn under the Second
Restated Credit  Agreement is $18 million.  The Second Restated Credit Agreement
matures on December 18, 2008.

Revolving advances under the Second Restated Credit Agreement bear interest,  at
the  election of the Company,  at a variable  rate equal to the  alternate  base
rate, a prime interest based rate, or the Eurodollar rate plus two percent.  For
letters of credit,  the Company pays an amount  equal to the average  daily face
amount of each outstanding letter of credit multiplied by two percent per annum,
and a fronting fee of one quarter of one percent per annum,  together with other
administrative fees and charges.  The Company paid its bank a closing fee of $50
thousand  in  connection  with  the  execution  of the  Second  Restated  Credit
Agreement.  The Company is also  required to pay the bank an unused fee equal to
three-eighths  of one  percent  per annum of the  amount  by which  $20  million
exceeds the average daily unpaid  balance of the revolving  advances and undrawn
amount of any  outstanding  letters  of  credit.  In  addition,  the  Company is
required to pay a collateral monitoring fee equal to $1 thousand per month and a
collateral evaluation fee as required.

The Second Restated Credit Agreement  contains various  affirmative and negative
covenants including financial covenants.  The Company is required to maintain an
unrestricted  undrawn  borrowing  base  availability  of at  least  $5  million.
Commencing  with the fiscal quarter ended June 30, 2006, the Company is required
to maintain a fixed  charge  coverage  ratio of at least 1.1 to 1.0. The Company
was not in  compliance  with  this  ratio at March  31,  2007 and was  granted a
compliance  waiver  for this item from its bank for the period  ended  March 31,
2007.

On July 14, 2006,  the Company and its banks  entered into a First  Amendment to
Second  Amended and Restated  Revolving  Credit  Security  Agreement (the "First
Amendment").  The First Amendment amended the Credit Agreement to (i) modify the
borrowing base, (ii) permit any Borrower to guaranty certain indebtedness of any
other  Borrower,  (iii)  increase  the  maximum  limit of  rental  payments  for
non-capitalized  leases  from $3  million to $4 million  per fiscal  year,  (iv)
permit the  Company to  repurchase  or redeem  certain  of the  Company's  6.25%
Convertible  Subordinated  Notes due January 15, 2011 and (v) consent to make an
acquisition by a newly formed indirect  subsidiary of the Company pursuant to an
asset purchase transaction.

On December 5, 2006,  the Company and its banks entered into a Second  Amendment
to Second Amended and Restated  Revolving Credit Security Agreement (the "Second
Amendment").  The Second Amendment  amended the Credit Agreement to supply a new
definition for the loan agreement  which reduced the interest rate being charged
by 0.5%.

On March 28, 2007,  the Company and its banks entered into a Third  Amendment to
Second Amended and Restated  Revolving Credit and Security Agreement (the "Third
Amendment").  The Third Amendment  amended the Credit  Agreement by (i) amending
the definition of EBITDA to exclude from the  calculation of EBITDA any non-cash
impairment  charges against goodwill and other intangible assets incurred by the
Company's subsidiary,  Tiburon,  Inc., during the fiscal year ended December 31,
2006,  (ii)  increasing  the  aggregate  maximum  permissible  amount of capital
expenditures in any fiscal year to $2.5 million;  (iii)  permitting the Company,
subject to certain  conditions,  to  purchase  or redeem up to $8 million of the
Company's  6.25%  Convertible  Subordinated  Notes due  January 15,  2011,  (iv)
permitting  the Company to deliver its  audited  financials  for the fiscal year
ended  December 31, 2006 by no later than April 30, 2007 and (v)  permitting the
Company's annual projected  operating budget and cash flow projections be broken
down on a quarterly basis versus a monthly basis.

On May 11, 2007,  the Company and its banks  entered into a Fourth  Amendment to
Second Amended and Restated Revolving Credit and Security Agreement (the "Fourth
Amendment"). The Fourth Amendment amended the Credit Agreement by a) waiving the
event of default by reason of the  Company's  failure to maintain a fixed charge
coverage  ratio  of 1.1 to  1.0,  for the  quarter  ended  March  31,  2007,  b)
establishing  minimum  EBITDA  figures  for  the  next  two  quarters,   and  c)
establishing  that the Company will not be required to comply with the quarterly
fixed charge  coverage ratio of 1.1 to 1.0 until the quarter ending December 31,
2007.


                                       15
<PAGE>

9.   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.  The changes
in the product  warranty  liability  are displayed in the  following  table,  in
thousands:

                 Beginning balance at January 1, 2007            $  410
                 Plus:  accruals for product warranties              75
                 Less:  warranty charges/claims                    (124)
                                                                 -------
                 Ending balance at March 31, 2007                $  361
                                                                 =======

10.  OPERATING SEGMENT INFORMATION

The following segment information includes operating information for CompuDyne's
four operating  segments,  Institutional  Security Systems,  Attack  Protection,
Integrated  Electronic  Systems  and Public  Safety and  Justice in  addition to
Corporate activities for each of the three months ended March 31, 2007 and 2006.

<TABLE>
<CAPTION>

                                          Revenues                 Gross Profit         Pre-tax Income (loss)
                                          --------                 ------------         ---------------------
                                      2007        2006          2007        2006          2007        2006
                                   ----------  ----------    ----------  ----------    ----------  ----------
<S>                                <C>         <C>           <C>         <C>           <C>         <C>
Institutional Security Systems     $  11,155   $  13,355     $     986   $   2,173     $  (1,275)  $     136
Attack Protection                      4,437      11,684           967       3,292          (926)      1,205
Integrated Electronic Systems          4,957       3,587         1,308         506           413         184
Public Safety and Justice             10,583      11,844         6,517       6,538          (200)          7
CompuDyne Corporate                        -           -             -           -          (346)       (909)
                                   ----------  ----------    ----------  ----------    ----------  ----------
                                   $  31,132   $  40,470     $   9,778   $  12,509     $  (2,334)  $     623
                                   ==========  ==========    ==========  ==========    ==========  ==========
</TABLE>

11.  CONTINGENCIES

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

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

During 2006 we received a letter from a client of our Public  Safety and Justice
segment  indicating  their intent to terminate their contract with us for cause.
The letter alleges that we failed to complete the project under the terms of the
agreement  and the  applications  implemented  failed to meet the  functionality
requirements of the agreement. The customer is seeking a refund of approximately
$400  thousand  previously  paid  by  them.  Costs  in  excess  of  billings  of
approximately  $450 thousand  related to this project  remain as an asset on our
books and records as of March 31, 2007. The segment  disagrees with the client's
views.  While the ultimate  outcome cannot be predicted,  the Company intends to
vigorously  pursue this matter.  The Company has established an accrual for this
matter  which is  included in accounts  payable and accrued  liabilities  on the
balance sheet.

On November 21, 2006,  CompuDyne  Corporation  ("CompuDyne")  and William  Blair
Mezzanine Capital Fund II, L.P.  ("Blair") entered into a Release and Settlement
Agreement with Friedman,  Billings,  Ramsey Group,  Inc.  ("FBR"),  by which FBR
agreed to pay $4.5 million to CompuDyne and Blair, CompuDyne and Blair agreed to
release FBR, and FBR has agreed to release CompuDyne and Blair, from any and all
causes of action arising out of or relating to, among other things,  an offering
of CompuDyne  common stock in 2001 for which FBR acted as lead  underwriter  and
financial  advisor.  Blair is a former  shareholder of CompuDyne which also sold
shares in the 2001  offering.  After  legal and other  expenses  and  payment of
Blair's  share of the  settlement,  the net amount  recorded  by  CompuDyne  was
approximately $2.8 million which was recorded in additional paid-in capital.  At
December  31,  2006,  $1.3  million in cash was received and the balance of $1.5
million was received in January, 2007.


                                       16
<PAGE>

The Company has learned  that the National  Association  of  Securities  Dealers
("NASD")  and other  regulatory  bodies are seeking  sanctions  against  certain
purchasers  of the  Company's  common  stock in its 2001 PIPE  transaction.  The
Company is investigating  these matters,  and has filed lawsuits against certain
purchasers. The Company is currently attempting to resolve these matters.

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

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

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

In connection  with the  acquisition  of the assets of Signami,  LLC made by the
Company in July 2006,  the Company issued 93,334 shares to the sellers for which
it  guaranteed  for a 2 year  period  that  upon sale of these  securities,  the
Company would guarantee a price of $7.50 per share for these shares. This period
is extended for members  precluded  from  selling  their shares due to statutory
reasons.  Included in other long term liabilities at March 31, 2007 and December
31, 2006 is approximately  $133 thousand and $86 thousand  representing the fair
value of this liability, respectively.



                                       17
<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  television,  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 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  manufactures  and  integrates   electronic  security  systems.   TrenTech
integrates  generally  available products and software as well as developing its
own  proprietary  systems.  TrenTech has developed a  sophisticated  proprietary
video badging system,  with  approximately 250 systems installed at more than 70
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   locking  devices  used  in  the
corrections industry.

The Attack Protection  segment is one of the country's largest  manufacturers of
bullet,  blast and attack resistant windows and doors designed for high security
applications such as embassies, courthouses, Federal buildings, banks, corporate
headquarters  and other  facilities  that insist on having the highest  level of
protection  currently  available.  We believe that we are a premier  provider of
Underwriters  Laboratory  ballistic standard UL-752 Level 8 security windows and
doors,  the highest rating level of commercial  ballistic  security  windows and
doors.  Our attack  resistant  windows and doors are integrated and structurally
secure  products with  specifically  designed  frames and  encasements  that are
integral  parts of the structure in which they are installed.  Existing  product
installations  number in the  thousands  and range from the  Middle  East to the
White House. AP is a significant  supplier of bullet and blast resistant windows
and doors to United  States  embassies  throughout  the world.  AP usually works
under contracts from prime contractors who have direct contracts with the United
States  Department of State,  the segment's  largest  client.  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 private  estates  and other
similar properties.

The  Integrated  Electronic  Systems  segment  consists of  CompuDyne-Integrated
Electronics  Division,  LLC and the newly-formed  Signami DCS, LLC. Its customer
base  includes  the  military,   governmental  agencies,  and  state  and  local
governmental  units. IES provides turnkey system  integration of public security
and safety  systems.  This  segment  specializes  in a wide range of  customized
access control and badging,  intrusion  detection,  surveillance and assessment,
communications,  command and control,  fire and life safety,  and asset tracking
systems.  IES provides  central  station  oversight  and control of multiple and
separate  facilities  as well as security  and public  life  safety  systems and
equipment.  This segment also designs and  manufactures  advanced digital signal
processing products used in reconnaissance of foreign telecommunications signals
designed for the United States  Government and its foreign allies. In July 2006,
the Company  acquired  the assets and  certain  liabilities  of Signami,  LLC, a
producer of software and hardware  systems for signals  intelligence  gathering.
Together with the Data Control Systems  ("DCS")  division of IES, a new business
was established and is going to market under the name Signami DCS.


                                       18
<PAGE>

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

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, the ability to secure
bid  payment  and   performance   bonds,   its  goals  for  future   operations,
implementation   of  business   strategy  and  other  future  events  constitute
"forward-looking  statements" within the meaning of the federal securities laws.
When used in this Form 10-Q, words such as "anticipate,"  "believe," "estimate,"
"expect," "intend" and similar expressions identify forward-looking  statements.
Although the Company  makes such  statements  based on current  information  and
assumptions it believes to be reasonable,  there can be no assurance that actual
results  will not  differ  materially  from those  expressed  or implied by such
forward-looking  statements.  Actual results could differ  materially from those
contemplated by the forward-looking  statements as a result of certain important
factors, including but not limited to, capital spending patterns of the security
market  and the demand  for the  Company's  products,  competitive  factors  and
pricing   pressures,   changes  in  legislation  and  regulatory   requirements,
government budget problems,  the Company's ability to secure new contracts,  the
ability to remain in compliance  with its bank  covenants,  delays in government
procurement processes, inability 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  ("SOX"),  the
Company's ability to realize anticipated cost savings,  the Company's ability to
simplify its structure and modify its strategic objectives, 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 and
Exchange Commission.

Management Outlook

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

     o    The first is increasing the amount of our backlog.
     o    The second is  migrating to a business  model with a more  predictable
          revenue stream.
     o    The third is to improve our cost structure  (including  evaluating our
          strategy  to  determine  if we would  benefit  from  focusing on fewer
          segments), quality, and customer and employee satisfaction.

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.
Backlog was  approximately  $117.1  million at March 31,  2007,  as shown in the
following table:

<TABLE>
<CAPTION>
                            Institutional                    Integrated       Public
                              Security          Attack       Electronic     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
  December 31, 2003           $ 57,258         $ 10,043       $  8,326       $ 63,727       $139,354
  December 31, 2004           $ 49,324         $ 20,803       $  8,299       $ 48,434       $126,860
  December 31, 2005           $ 58,128         $ 28,802       $  7,503       $ 53,705       $148,138
  March 31, 2006              $ 57,030         $ 20,961       $  6,590       $ 43,874       $128,455
  June 30, 2006               $ 51,173         $ 13,593       $  7,393       $ 39,351       $111,510
  September 30, 2006          $ 65,489         $  7,991       $  8,137       $ 40,088       $121,705
  December 31, 2006           $ 64,687         $  5,686       $  7,902       $ 39,067       $117,342
  March 31, 2007              $ 63,868         $  9,299       $  6,208       $ 37,707       $117,082
</TABLE>

During the fourth  quarter of 2005 the Attack  Protection  segment was awarded a
significant  contract to provide its products to a large  embassy  project.  The
execution of this contract is complete as of December 31, 2006.  Since the award
of this contract,  the Norshield  component of the Attack Protection segment has
had limited  success in winning new contracts due to  competitive  factors which
has resulted in a  significant  decline in the backlog of this  segment.  We are
actively pursuing  non-embassy work in an effort to generate awards  incremental
to our embassy  work.  The overall  decline in backlog could lead to a potential
decline in future quarterly revenues.


                                       19
<PAGE>

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,  state and local  budgets,  which we are  dependent  on for
approximately 60% of our revenue sources, have come under intense pressure. Most
states were running in a deficit situation, as were many local governments. This
caused  many of them to delay and in some cases  cancel  certain  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 21.1% of our revenue in the first three months of
2007  was  generated  from  recurring  revenue  sources  (primarily  maintenance
revenues),  and the majority of these revenues occurred in our Public Safety and
Justice  segment.  We define  one-time  revenue as revenue derived from discrete
projects,  from which we do not expect to generate  incremental revenue upon the
completion  of the project.  We define  recurring  revenue as sources of revenue
from which we  anticipate  receiving  revenue in the current,  as well as future
periods, for example annual renewable maintenance contracts.

<TABLE>
<CAPTION>
                                                           Year Ended December 31, 2006
                                     --------------------------------------------------------------------
      (in thousands)                 One-time Revenue     %     Recurring Revenue     %           Total
                                     ----------------   -----   -----------------   -----       ---------
<S>                                       <C>            <C>           <C>           <C>         <C>
Institutional Security Systems            $  9,969       32.0          1,186         3.8         $ 11,155
Attack Protection                            4,437       14.2              -           -            4,437
Integrated Electronic Systems                4,020       12.9            937         3.0            4,957
Public Safety and Justice                    6,151       19.8          4,432        14.3           10,583
                                          --------                  --------                     --------
     Total                                $ 24,577       78.9       $  6,555        21.1         $ 31,132
                                          ========                  ========                     ========
</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 hope to modify  our  business  model to rely less upon
one-time sources of revenue and more on recurring sources of revenue.

Our third focus area is to improve our cost structure,  quality,  and client and
employee satisfaction.  Our Institutional Security Systems and Attack Protection
business  segments  are  undergoing   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. In addition,
our Public Safety and Justice  segment has and is continuing to undergo  expense
restructuring including right sizing its organization in light of its relatively
low level of backlog.  The Attack Protection segment also has a very low backlog
level which will necessitate us to reevaluate and reduce our expense  structure.
In addition,  in light of the  escalating  selling,  general and  administrative
costs  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 and we are evaluating our strategy to determine if we would
benefit from focusing on fewer segments.

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

On December 21, 2005 the Securities and Exchange  Commission  issued Release No.
33-8644 "Revisions to Accelerated Filer Definition and Accelerated Deadlines For
Filing Periodic Reports" (the "Release").  The Release revised the definition of
"accelerated filer" to make it simpler for accelerated filers whose public float
falls below the $50 million threshold on the measurement date of June 30 to exit
accelerated  filer status.  Under the new rules,  an accelerated  filer that has
voting and non-voting  equity held by non-affiliates of less than $50 million at
the end of its second  fiscal  quarter is  permitted to exit  accelerated  filer
status at the end of that year and to file its  annual  report for that year and
subsequent periodic reports on a non-accelerated basis. Accelerated filer status
affects an issuer's  deadlines for filing its periodic  reports with the SEC and
complying  with the  requirements  of Section 404 of the  Sarbanes-Oxley  Act of
2002. A  non-accelerated  filer must begin to comply with the  internal  control
over  financial  reporting  requirements  for its first fiscal year ending on or
after December 15, 2007.


                                       20
<PAGE>

The aggregate worldwide market value of CompuDyne  Corporation's  equity held by
non-affiliates as of June 30, 2005, the last business day of CompuDyne's  second
fiscal quarter, was less than $50 million. As a result, as of December 31, 2005,
CompuDyne  exited  accelerated  filer status.  CompuDyne's  aggregate  worldwide
market value as of June 30, 2006,  the last business day of  CompuDyne's  second
fiscal quarter,  was also less than $50 million;  as such CompuDyne continued to
be classified as a non-accelerated filer for the year ended December 31, 2006.

Prior  to  the  issuance  of  the  Release,   CompuDyne  was  classified  as  an
"accelerated  filer" and was required to comply with the requirements of Section
404 of the Sarbanes-Oxley Act of 2002. In light of the Release,  CompuDyne, as a
non-accelerated  filer as of December 31, 2005,  was not required to comply with
Section 404 for the years ended December 31, 2005 and 2006.

Results of Operations

THREE MONTHS ENDED MARCH 31, 2007 and 2006

Revenues.  The Company had revenues of $31.1  million and $40.5  million for the
three months ended March 31, 2007 and March 31, 2006, respectively, representing
a decrease of $9.3 million or 23.1%. As discussed below,  the decrease  occurred
primarily due to lower revenues in our ISS, AP and PS&J segments, offset in part
by an increase in revenues from our IES segment.

Revenues from the Institutional  Security Systems segment were $11.2 million for
the three months ended March 31,  2007,  a decrease  from $13.4  million for the
three months ended March 31,  2006,  representing  a decrease of $2.2 million or
16.5%.  The  Institutional  Security  Systems  segment is largely a construction
driven business.  Much of its revenue is obtained by working on new and retrofit
construction  projects  in the  corrections  industry,  as opposed to sources of
recurring revenue.  As such, the decrease in revenue experienced by this segment
is largely  attributable  to our  working on fewer  projects  than we did in the
previous  year and the delay in the  start of some  projects.  Although  backlog
increased  significantly  during  the  second  half  of  2006,  it was  not at a
significantly  high enough level prior  thereto to maintain its revenue  levels.
Backlog  was $63.9  million  and $57.0  million at March 31,  2007 and March 31,
2006, respectively.  Several of ISS' recently won awards were delayed and/or not
yet  available  to be worked on by us. The years 2003 and 2004 were slow bidding
periods for the Company.  Although the gross amount of construction  spending in
the corrections  area remained  relatively flat between 2003 and 2004, the types
of projects  that the Company  solicits,  namely  large-scale  medium to maximum
security installations,  declined significantly in 2003 and 2004. This situation
was  further  compounded  by the  general  state and local  governmental  budget
deficits  which  caused  these  governmental  units to rethink and delay many of
their pending corrections projects.  Since 2005, ISS has seen heightened bidding
activity,  particularly in the market space it serves, namely large-scale medium
to maximum security prisons.

Revenues  from the Attack  Protection  segment  were $4.4  million for the three
months ended March 31, 2007, a decrease  from $11.7  million for the same period
of 2006,  representing  a decrease  of $7.2  million or 62.0%.  This  segment is
composed of two primary 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, 2007 the Norshield  line  experienced a 73.2% decrease in
revenues as compared to the three months  ended March 31, 2006.  The decrease in
revenue of $8.0 million in the Norshield line is a direct result of execution on
an award of a major  contract won in the fourth  quarter of 2005. To date,  this
contract has not been  replaced via the winning of a sufficient  new award(s) to
replace  the  volume  from this  large  completed  contract.  Execution  on this
contract began immediately upon award. The Fiber SenSys line experienced a 89.3%
increase in revenues for the comparable  period.  Fiber SenSys' revenue increase
is a result of the  rollout  of its next  generation  product,  which  until its
testing was  completed  and  accepted at the end of the second  quarter of 2006,
negatively impacted 2006 revenues.

Revenues from the Integrated  Electronic  Systems  segment were $5.0 million for
the three  months ended March 31,  2007,  an increase  from $3.6 million for the
same period of 2006,  representing  an increase of $1.4  million or 38.2%.  This
increase  was  largely a result of the  acquisition  of the assets  and  certain
liabilities  of Signami  during  the third  quarter  of 2006.  IES is  currently
performing  work  under a long term  contract  with the  Bureau of  Engraving  &
Printing (BEP). Due to multiple  protests by the incumbent  contractor,  BEP has
decided to put the  contract  out for re-bid in May/June  2007.  This  contract,
originally won in 2005, is a 5 year, $25 million security contract. In the event
IES is  unsuccessful  in winning  the re-bid of this  contract,  this  segment's
revenues will be significantly adversely impacted.

Revenues from the Public  Safety and Justice  segment were $10.6 million for the
three months ended March 31,  2007, a decrease  from $11.8  million for the same
period of 2006,  representing  a decrease of $1.3 million or 10.6%.  The decline
was primarily the result of lower backlogs and an increased  focus on developing
our next  generation  products.  Revenues  were also  impacted  by low  contract
signings in 2006, which resulted in the segment's low backlog level.


                                       21
<PAGE>

Expenses.  Cost of sales of $21.3  million for the three  months ended March 31,
2007 was down $6.6 million or 23.6% from $28.0 million during the same period of
2006.  The  larger  percentage  decrease  in cost of  sales as  compared  to the
percentage decrease in sales resulted in an increased gross profit percentage of
31.4% for the three months  ended March 31,  2007,  as compared to 30.9% for the
three months ended March 31, 2006.

Cost of sales in the Institutional Security Systems segment of $10.2 million for
the three months ended March 31, 2007 were down $1.0 million or 9.1%, from $11.2
million during the same period of 2006. This decrease,  coupled with the related
sales  decrease of this  segment of 16.5%,  resulted  in a 7.4%  decrease in the
gross profit  percentage to 8.8% from 16.3% for the three months ended March 31,
2006.  The decrease in the gross profit  percentage  is largely a result of ISS'
fixed  costs now being  absorbed  by a smaller  revenue  base  during  the first
quarter of 2007.

Cost of sales in the Attack  Protection  segment of $3.5  million  for the three
months  ended March 31, 2007  decreased  $4.9 million or 58.7% from $8.4 million
during the same period of 2006.  This  decrease was less than the related  sales
decrease of 62.0%,  resulting in a 6.4% decrease in the gross profit  percentage
to 21.8% from 28.2% during the three months ended March 31, 2006.  The principal
reason for the decrease in the gross profit  percentage  during the three months
ended March 31, 2007, as compared to the three months ended March 31, 2006,  was
a shift in product mix and a decrease in facility utilization as a result of the
significant decrease in sales of this segment.

Cost of sales in the Integrated  Electronic  Systems segment of $3.6 million for
the three months ended March 31, 2007  increased $0.6 million or 18.4% from $3.1
million during the same period of 2006.  This increase was largely the result of
the  acquisition of Signami in July 2006,  whose gross margins tend to be higher
than this segment's historical margins.  This increase was less than the related
sales  increase of this segment of 38.2%,  resulting in a 12.3%  increase in the
gross profit  percentage to 26.4% as compared to 14.1% in the three months ended
March 31, 2006.  Substantially  all of the projects  awarded in this segment are
discrete projects.

Cost of sales in the Public  Safety and Justice  segment of $4.1 million for the
three  months  ended  March 31,  2007 was down $1.2  million  or 23.4% from $5.3
million  during 2006.  This decrease was greater than the related sales decrease
of this  segment of 10.6%,  resulting  in a 6.4%  increase  in the gross  profit
percentage  to 61.6%  from  55.2% in the three  months  ended  March  31,  2006.
Substantially all of the projects awarded in this segment are discrete projects.

Selling,  general and  administrative  expenses (SG&A) were $9.3 million for the
three  months ended March 31, 2007, a decrease of $0.4 million or 4.5% from $9.7
million for the same period of 2006.  Much of the  Company's  SG&A  expenses are
fixed.  As a  percentage  of revenues  SG&A grew to 29.9% from 24.1%  during the
first quarter of 2007 as compared to the first quarter of 2006.  The Company was
unable to reduce its SG&A expenses in line with the reduction in its revenue.

In conjunction with the acquisition of the assets of Signami in July 2006 and in
compliance with Statement of Financial  Accounting  Standards No. 141 (SFAS 141)
Business  Combinations,  the Company  determined the fair value of the following
identifiable  assets  and  assigned  the  indicated  lives for the  purposes  of
amortization and depreciation.

                                                  March 31,
                                                    2007             Life
                                               (in thousands)     (in years)
                                               --------------     ----------
           Software                               $    630             5
           Non Compete Agreements                      460             5
           Customer Relationships                      780             5
           Trademark, tradename                         60        indefinite
                                                  --------
                                                  $  4,494
                                                  ========

The  amortization  of  the  above  assets  resulted  in  the  Company  recording
amortization  expense  related to these  assets of $114  thousand  for the three
months ended March 31, 2007, which is included in operating expenses.

Research and  development  expenses were $2.4 million for the three months ended
March 31,  2007,  an increase of $0.6 million or 34.2% from $1.8 million for the
three months ended March 31, 2006.  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.
During  the first  quarter  of 2006 R&D  employees  were  reassigned  to revenue
producing  activities  to  enhance  2006  revenues.  This did not occur in 2007,
resulting  in more R&D effort in the first  quarter of 2007 as compared to first
quarter of 2006.

Pre-Tax  Income.  The Company had a pre-tax  loss of $2.3  million for the three
months ended March 31, 2007  compared to pre-tax  income of $0.6 million for the
three months ended March 31, 2006. As discussed  below,  the  decreased  pre-tax
income  occurred  primarily  in the ISS and AP segments,  partially  offset by a
smaller loss in the corporate segment.


                                       22
<PAGE>

Pre-tax loss from the  Institutional  Security  Systems segment was $1.3 million
for the three months ended March 31, 2007, a decrease  from a pre-tax  income of
$136  thousand  for the three months  ended March 31,  2006.  This  decrease was
largely a result of this segment's sales decline.

Pre-tax loss from the Attack  Protection  segment was $0.9 million for the three
months ended March 31, 2007, a decrease from the $1.2 million pre-tax income for
the three months ended March 31, 2006.  This decrease in pre-tax income for this
segment is attributable to the significant  decrease in this segment's revenues,
amplified by the fact that products with higher margins were sold during 2006 as
compared to 2007.

Pre-tax income from the Integrated  Electronic Systems segment was $413 thousand
for the three  months  ended March 31, 2007,  an increase  from a $184  thousand
pre-tax  income for the three  months  ended March 31,  2006.  This  increase in
pre-tax income is a result of the increased revenue generated by this segment in
2007 as compared to 2006, which includes revenues from the new signals intercept
business of Signami acquired by Integrated  Electronic  Systems during the third
quarter of 2006, which contributed revenues with higher margins to this segment.

Pre-tax loss from the Public Safety and Justice segment was $0.2 million for the
three  months ended March 31,  2007.  This  compares to break even for the three
months  ended  March  31,  2006.  This  decrease  was  largely  a result of this
segment's sales decline.

Pre-tax loss at the Corporate  level was $0.3 million for the three months ended
March 31,  2007 as  compared  to a pre-tax  loss of $0.9  million  for the three
months ended March 31, 2006.  Decreased  audit and related  costs in addition to
increased interest income account for the majority of the decreased loss.

Interest  expense was $0.8 million for the three months ended March 31, 2007 and
March 31,  2006.  The  following  table  compares  the  weighted  average of the
Company's  three  months  ended  March  31,  2007  and  2006  interest   bearing
borrowings,  which  includes  bank  letters  of credit  fees for the  industrial
revenue bonds, and the related rates charged thereon:

                                      Monthly Weighted          Monthly Weighted
                                       Average - 2007            Average - 2006
                                     Amount                    Amount
                                 (in thousands)   Rate     (in thousands)   Rate
                                 --------------   ----     --------------   ----
     Industrial revenue bonds      $    3,125     6.0%       $    3,565     5.5%
     Subordinated borrowings       $   40,250     6.3%       $   40,250     6.3%

The Company also incurred letter of credit fees, in addition to those related to
the  industrial  revenue  bonds,  of $0 thousand  and $42 thousand for the three
months ended March 31, 2007 and 2006, respectively.

In addition the Company recorded the following  non-cash interest  expense,  for
the periods ended March 31, in thousands:

         Amortization and write-off               2007              2006
                                                --------          --------
          of deferred financing charges         $    82           $    82

Taxes on Income.  The effective tax rate was 0% for the three months ended March
31, 2007 and the  effective  tax rate was a benefit of 2.5% for the three months
ended March 31, 2006.  The tax benefit for the three months ended March 31, 2006
is  primarily  a result of $200  thousand  previously  recorded as a reserve for
uncertain tax positions  which was no longer needed,  partially  offset by state
tax expenses.  The Company has decided to provide a valuation  allowance against
its  deferred  tax  assets,  as it has  determined  that  due  to the  Company's
accumulated deficit resulting from recent prior year losses there is uncertainty
as to whether it is more likely than not the assets will be realized.

Net Income (Loss). The Company reported a net loss of $2.3 million for the three
months  ended March 31, 2007 and net income of $0.8 million for the three months
ended March 31, 2006. Diluted loss per share was $.28 for the three months ended
March 31, 2007 compared to earnings per share of $.10 for the three months ended
March 31, 2006.  The weighted  average number of common shares  outstanding  and
equivalents used in computing earnings per share was 8.4 million and 8.2 million
for the three months ended March 31, 2007 and 2006, respectively.

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 to retire
its 2011 Notes. 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.


                                       23
<PAGE>

As of March 31, 2007, the Company had working capital of $29.7 million  compared
with $31.0 million as of December 31, 2006.

Net cash  provided by operating  activities  was $0.5  million  during the three
months ended March 31, 2007 versus $4.8 million provided by operating activities
during the three  months  ended March 31,  2006.  The largest  component of cash
provided by operating  activities  was a decrease in prepaid  expenses and other
current  assets of $2.6  million,  which was  partially  offset by a decrease in
accounts payable and accrued liabilities of $1.2 million.

Net cash provided by investing  activities was $2.4 million for the three months
ended March 31, 2007  compared to net cash used in investing  activities of $1.7
million in the three  months  ended March 31,  2006.  In the three  months ended
March 31,  2007,  the net of  marketable  securities  bought and redeemed was an
increase of cash of $2.7  million.  In the three months ended March 31, 2006 the
net purchase of marketable securities was $1.4 million.

Net cash provided by financing activities amounted to $41 thousand for the three
months ended March 31, 2007 compared with net cash used in financing  activities
of $0.4 million in the three months ended March 31, 2006.

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 bank borrowings.

On November 21, 2006, the Company and William Blair  Mezzanine  Capital Fund II,
L.P.  ("Blair")  entered into a Release and Settlement  Agreement with Friedman,
Billings, Ramsey Group, Inc. ("FBR"), by which FBR agreed to pay $4.5 million to
the Company and Blair,  the Company  and Blair  agreed to release  FBR,  and FBR
agreed to  release  the  Company  and  Blair,  from any and all causes of action
arising out of or relating  to, among other  things,  an offering of the Company
common  stock in 2001 for  which  FBR acted as lead  underwriter  and  financial
advisor.  Blair is a former  shareholder  of the Company who also sold shares in
the 2001  offering.  After legal and other expenses and payment of Blair's share
of the settlement, the net amount recorded by the Company was approximately $2.7
million which is recorded in additional paid-in capital.

On December 19, 2005, the Company and its bank entered into a Second Amended and
Restated Revolving Credit and Security Agreement (the "Credit  Agreement").  The
Credit Agreement  amended and restated the Company's Amended and Restated Credit
Agreement dated March 31, 2004.

In connection with the execution of the Credit  Agreement,  the Company provided
the bank with  collateral  that  includes all  receivables,  equipment,  general
intangibles,  inventories,  investment  property,  real  property and a security
interest in its subsidiary  stock.  The Credit  Agreement  allows the Company to
obtain revolving advances in a principle amount of up to $20 million.  Revolving
advances  are limited by a borrowing  base  formula  based upon the value of the
Company's receivables,  inventories, fixed assets, real property, and issued and
outstanding  letters of credit.  The maximum aggregate face amount of letters of
credit that may be drawn under the Credit  Agreement  is limited to $18 million.
The Credit Agreement matures on December 18, 2008.

Revolving advances under the Credit Agreement bear interest,  at the election of
the  Company,  at a variable  rate  equal to the  alternate  base rate,  a prime
interest  based rate, or the  Eurodollar  rate plus two percent.  For letters of
credit,  the Company  pays an amount  equal to the average  daily face amount of
each  outstanding  letter of credit  multiplied by two percent per annum,  and a
fronting  fee of one  quarter  of one  percent  per annum,  together  with other
administrative fees and charges.  The Company paid its bank a closing fee of $50
thousand  in  connection  with  the  execution  of the  Second  Restated  Credit
Agreement.  The Company is also  required to pay the bank an unused fee equal to
three-eighths  of one  percent  per annum of the  amount  by which  $20  million
exceeds the average daily unpaid  balance of the revolving  advances and undrawn
amount of any  outstanding  letters  of  credit.  In  addition,  the  Company is
required to pay a collateral monitoring fee equal to $1 thousand per month and a
collateral evaluation fee as required.


                                       24
<PAGE>

The  Credit  Agreement  contains  various  affirmative  and  negative  covenants
including  financial   covenants.   The  Company  is  required  to  maintain  an
unrestricted  undrawn  borrowing  base  availability  of at  least  $5  million.
Commencing  with the fiscal quarter ended June 30, 2006, the Company is required
to maintain a fixed  charge  coverage  ratio of at least 1.1 to 1.0. The Company
was not in  compliance  with  this  ratio at March  31,  2007 and was  granted a
compliance  waiver  for this item from its bank for the period  ended  March 31,
2007.

On July 14, 2006,  the Company and its banks  entered into a First  Amendment to
Second Amended and Restated  Revolving Credit and Security Agreement (the "First
Amendment").  The First Amendment amended the Credit Agreement to (i) modify the
borrowing base, (ii) permit any Borrower to guaranty certain indebtedness of any
other  Borrower,  (iii)  increase  the  maximum  limit of  rental  payments  for
non-capitalized  leases  from $3  million to $4 million  per fiscal  year,  (iv)
permit the Company, subject to certain conditions, to repurchase or redeem up to
$2.0 million of the Company's 6.25% Convertible  Subordinated  Notes due January
15, 2011 and (v) consent to an acquisition by a newly formed indirect subsidiary
of the Company pursuant to an asset purchase transaction.

On December 5, 2006,  the Company and its banks entered into a Second  Amendment
to Second Amended and Restated  Revolving Credit Security Agreement (the "Second
Amendment").  The Second  Amendment  amended the Credit  Agreement to reduce the
interest rate being charged on Eurodollar  loans and the letter of credit fee by
0.5%.

On March 28, 2007,  the Company and its banks entered into a Third  Amendment to
Second Amended and Restated  Revolving Credit and Security Agreement (the "Third
Amendment").  The Third Amendment  amended the Credit  Agreement by (i) amending
the definition of EBITDA to exclude from the  calculation of EBITDA any non-cash
impairment  charges against goodwill and other intangible assets incurred by the
Company's  subsidiary,  Tiburon,  Inc., during the fiscal quarter ended December
31, 2006, (ii) increasing the aggregate  maximum  permissible  amount of capital
expenditures in any fiscal year to $2.5 million;  (iii)  permitting the Company,
subject to certain  conditions,  to  purchase  or redeem up to $8 million of the
Company's  6.25%  Convertible  Subordinated  Notes due  January 15,  2011,  (iv)
permitting  the Company to deliver its  audited  financials  for the fiscal year
ended  December 31, 2006 by no later than April 30, 2007 and (v)  permitting the
Company's  annual  projected  operating  budget and cash flow  projections to be
broken down on a quarterly basis versus a monthly basis.

On May 11, 2007,  the Company and its banks  entered into a Fourth  Amendment to
Second Amended and Restated Revolving Credit and Security Agreement (the "Fourth
Amendment"). The Fourth Amendment amended the Credit Agreement by a) waiving the
event of default by reason of the  Company's  failure to maintain a fixed charge
coverage  ratio  of 1.1 to  1.0,  for  the  quarter  ended  March  31,  2007  b)
establishing  minimum  EBITDA  figures  for  the  next  two  quarters,   and  c)
establishing  that the Company will not be required to comply with the quarterly
fixed charge  coverage ratio of 1.1 to 1.0 until the quarter ending December 31,
2007.

The  Company's  total  outstanding  borrowings  at March 31,  2007  amounted  to
approximately  $43.4  million,  less  broker's  discounts  in the amount of $0.7
million.  The 2011 Notes accounted for $39.5 million, net of broker's discounts,
of  these  borrowings.  The  remaining  amount  of $3.1  million  resulted  from
borrowings  at variable  rates and  consisted of two  industrial  revenue  bonds
outstanding  in the  amounts  of $1.1  million  and $2.0  million.  The  average
interest  rate  charged  to the  Company  at March 31,  2007 for its  industrial
revenue  bonds  was  3.8%.  The  variable  interest  rate for  these  borrowings
fluctuated  between 3.58% and 4.16% during the three months ended March 31, 2007
based on weekly market conditions.  These bonds are fully collateralized by bank
letters  of credit  issued  under  the  Credit  Agreement.  The  Company's  bank
considers  letters of credit as  outstanding  borrowings  when  considering  the
amount of availability the Company has remaining under its line of credit.

At March 31, 2007 the Company had $16.8 million of unused availability under the
Second  Restated  Credit  Agreement,  subject to the  availability of collateral
under its line of credit.

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

The Company recorded significant losses in fiscal 2004, 2005, 2006 and the first
three months of 2007. We recognize that sustaining  profitability  is a critical
objective  which the  Company  must  attain.  The  Company  continued  to have a
significant  amount of cash and  marketable  securities  on its balance sheet at
March 31, 2007, however, the Company must achieve sustained  profitability prior
to depleting its current cash and marketable securities.

Off-Balance Sheet Arrangements

Other than the Company's  letters of credit,  which  amounted to $3.1 million at
March 31, 2007, the Company has no other material off balance sheet liabilities.


                                       25
<PAGE>

Additional Considerations

Bid Bonds and Payment and Performance Bonds
In the conduct of our business we are often  required by our customers to obtain
bid bonds and payment and/or performance bonds. The majority of these bonds have
been needed in the ISS and PS&J segments.  Recently,  approximately  60% of ISS'
revenue has come from jobs where payment and performance  bonds are required and
for PS&J, 19% of its revenue has required  payment and  performance  bonds.  The
Company's  recent losses have made it more challenging for the Company to obtain
the bonding needed to secure certain of its projects.  As of March 31, 2007, the
Company was required to provide  collateral to its primary bonding company which
it did by placing cash, invested in a money market mutual fund, as collateral in
the  amount of $7.5  million.  If we are  unable to  obtain  such  bonds for any
reason, or if the terms, particularly collateral requirements,  of the bonds are
not within our financial means, it would  significantly  diminish our ability to
secure new contracts,  and consequently our financial performance and results of
operations may be materially adversely affected.

Cost Containment
Due to current economic conditions, the Company's losses in 2004, 2005, 2006 and
the  first  three  months  of 2007,  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 significant  selling,
general  and  administrative   costs  associated  with  the  current  heightened
regulatory environment, we are evaluating our strategy to determine if a revised
strategy would result in lower selling,  general and administrative  costs. As a
result, in order to enhance our profitability, the Company will continue to seek
ways to reduce its costs.

Total Backlog
CompuDyne's  backlog  amounted to $117.1  million at March 31, 2007.  This was a
decrease of 0.2% from the Company's December 31, 2006 backlog of $117.3 million.
The break down of the Company's backlog by segment is as follows, in thousands:

                                                      March 31,     December 31,
                                                        2007           2006
                                                     -----------    -----------
           Institutional Security Systems            $    63,868    $    64,687
           Attack Protection                               9,299          5,686
           Integrated Electronic Systems                   6,208          7,902
           Public Safety and Justice                      37,707         39,067
                                                     -----------    -----------
                   Total                             $   117,082    $   117,342
                                                     ===========    ===========

The level of backlog which generally is lower than historical  levels could lead
to a potential decline in future quarterly revenues.

Included in the  backlog of the ISS,  AP and PS&J  segments at March 31, 2007 is
$18.7 million, $3.3 million and $2.6 million, respectively,  representing awards
received by the segment for which the clients  have not yet entered  into signed
contracts. These awards are expected to result in signed contracts over the next
twelve months.

Corporate Reorganization
As part of the Company's  efforts to better  manage its costs,  during the first
quarter of 2005 the Company  implemented a corporate  reorganization  whereby it
converted several corporate entities into LLCs (Limited Liability Corporations).
This activity was designed to improve the Company's tax reporting  structure and
should  help  better  manage the  Company's  state  income tax  obligations.  In
conjunction with this reorganization,  our Integrated Electronics Systems group,
formerly   known   as   Quanta   Systems    Corporation,    was   re-formed   as
CompuDyne-Integrated Electronics Division, LLC. 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 escalating  selling,
general  and  administrative   costs  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,
2006.


                                       26
<PAGE>

Percentage of Completion Accounting and Revenue Recognition.
A majority 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  total  revenue,  cost of
sales, accounts receivable, contract costs in excess of billings and billings in
excess of contract costs incurred.  Revenues from these contracts are classified
as contract revenues earned on the statement of operations.

Change orders are modifications of an original contract that effectively  change
the  provisions  of the  contract  without  adding new  provisions.  They may be
initiated by either us as the contactor, or by the customer, and include changes
in  specifications  or  design,  method or manner  of  performance,  facilities,
equipment, materials, site, and period for completion of the work.

Change orders approved by the customer and us regarding both scope and price are
reflected  as an  adjustment  to the  revenue and costs of the  contract.  Costs
attributable  to  unpriced  change  orders  are  treated  as costs  of  contract
performance  in the period in which the costs are incurred if it is not probable
that the costs will be recovered through a change in the contract price. When it
is probable  that the costs will be  recovered  through a change in the contract
price,  the costs are  deferred  until the parties  have agreed on the change in
contract price. Change orders that are in dispute or are unapproved in regard to
both  scope and  price,  are  evaluated  as claims.  Customer  termination  of a
contract results in the Company's ceasing of any further revenue recognition and
any existing  assets at that date are  evaluated  for  collectibility  under the
contractual terms.

Revenues for support and  maintenance  contracts  are  deferred  and  recognized
ratably over the life of the contract.  Revenues for these items are  classified
as maintenance revenues on the statement of operations.

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.
Revenues for these items are  classified  as other  revenues on the statement of
operations.

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

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

Tax valuation  allowances are  established  when the Company  believes it is not
"more  likely than not" that the Company will be able to receive tax benefits in
the future. The federal income tax benefit recorded in the first quarter of 2006
is primarily the result of the reduction of a liability maintained for uncertain
tax positions which was no longer required.

Goodwill and Intangible Assets.
The  Company  reviews  the  carrying  value of goodwill  and  intangible  assets
annually  during  the fourth  quarter  of the year or when  events or changes in
circumstances indicate that the carrying value may not be recoverable, utilizing
a discounted  cash flow model.  Changes in estimates of future cash flows caused
by items  such as  unforeseen  events  or  changes  in market  conditions  could
negatively  affect the  Company's  reporting  units' fair value and result in an
impairment  charge.  The carrying  value of goodwill and  intangible  assets not
subject to amortization  totaled  approximately  $13.3 million and $4.0 million,
respectively,   and   intangible   assets   subject  to   amortization   totaled
approximately  $3.3 million,  net, at March 31, 2007. The Company cannot predict
the occurrence of events that might adversely affect these values.


                                       27
<PAGE>

Stock Compensation Policy.
Effective  January 1, 2006, we adopted SFAS No. 123(R),  "Share-Based  Payment."
This  statement  requires  us to  expense  the fair  value of grants of  various
stock-based  compensation  programs  over the vesting  period of the awards.  We
elected to adopt the "Modified Prospective  Application" transition method which
does not require the  restatement  of previously  issued  financial  statements.
Compensation expense is measured and recognized beginning in 2006 as follows:

Awards granted after December 31, 2005 - Awards are measured at their fair value
at date of grant.  The  resulting  compensation  expense  is  recognized  in the
consolidated  statement of  operations  ratably  over the vesting  period of the
award.

Awards  granted  prior to December 31, 2005 - Awards were measured at their fair
value at the date of original grant.  Compensation  expense  associated with the
unvested  portion  of these  options at  January  1, 2006 is  recognized  in the
consolidated statement of operations ratably over the remaining vesting period.

For all  grants  issued  after  December  31,  2005  the  amount  of  recognized
compensation  expense is adjusted based upon an estimated  forfeiture rate which
is derived from historical data.

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

Market Risk
On January 22,  2004,  the  Company  completed  an  offering  of $40.25  million
principal  amount of the 2011 Notes. The 2011 Notes bear interest at the rate of
6.25% per annum,  payable  semi-annually,  and are  convertible  into  shares of
common  stock at a  conversion  price of $13.89 per share.  The  Company  used a
portion of the proceeds of this note offering to pay down outstanding borrowings
under its variable rate bank notes. Subsequent to the pay-down of its bank notes
the only  variable rate  borrowing  remaining  outstanding  at March 31, 2007 is
approximately  $3.1 million of industrial  revenue  bonds.  Since this borrowing
bears  interest  at  variable  rates,  in  the  event  interest  rates  increase
dramatically  the increase in interest  expense to the Company could be material
to the results of operations of the Company.

Recent Accounting Pronouncements
In February  2007, the Financial  Accounting  Standards  Board  ("FASB")  issued
Statement of Financial  Accounting  Standard  ("SFAS") No. 159,  "The Fair Value
Option for Financial  Assets and Financial  Liabilities - Including an amendment
of FASB Statement No. 115" ("SFAS 159").  SFAS 159 permits  entities to elect to
measure  many  financial  instruments  and  certain  other  items at fair value.
Unrealized  gains and losses on items for which the fair  value  option has been
elected will be recognized in earnings at each  subsequent  reporting date. SFAS
159 is effective for fiscal years beginning after November 15, 2007. The Company
is  currently  assessing  the impact of SFAS 159 on its  consolidated  financial
statements.

In September  2006,  the FASB issued SFAS No. 158,  "Employers'  Accounting  for
Defined Benefit Pension and Other  Postretirement  Plans -- an amendment of FASB
Statements No. 87, 88, 106 and 132(R)." This  statement  would require a company
to (a)  recognize in its  statement of financial  position an asset for a plan's
overfunded status or a liability for a plan's  underfunded  status (b) measure a
plan's assets and its obligations that determine its funded status as of the end
of the employer's fiscal year, and (c) recognize changes in the funded status of
a defined  postretirement  plan in the year in which the changes occur (reported
in comprehensive income). The adoption of this new accounting  pronouncement has
not had an impact on our financial position or results of operation. The Company
does not have any such plans.

In September 2006, the FASB issued SFAS No 157 "Fair Value  Measurements."  This
Statement  defines fair value,  establishes a framework for measuring fair value
in generally accepted  accounting  principles  (GAAP),  and expands  disclosures
about fair value measurements. The adoption of this new accounting pronouncement
has not had an impact on our financial position or results of operation.

In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes, an  interpretation of FASB Statement No. 109" ("FIN 48"), which
clarifies  the  accounting  for  uncertainty  in income  taxes  recognized  in a
company's  financial  statements.  The  interpretation  prescribes a recognition
threshold  and  measurement  attribute  criteria  for  the  financial  statement
recognition and measurement of an uncertain tax position taken or expected to be
taken  in  a  tax  return.   The   interpretation   also  provides  guidance  on
derecognition,  classification,  interest and  penalties,  accounting in interim
periods, disclosure and transition.


                                       28
<PAGE>

The  Company  adopted  the  provisions  of  FIN  48  on  January  1,  2007.  The
implementation   of  FIN  48  did  not  have  a  material  impact  on  CompuDyne
Corporation's  financial  statements.  The Company files tax returns in the U.S.
federal jurisdiction, and in various states and foreign jurisdictions.

At the adoption date on January 1, 2007 and as of March 31, 2007 the company did
not have any  unrecognized  tax  benefits  and  recorded  no  cumulative  effect
adjustments  related to the adoption of Fin 48. The Company does not  anticipate
any material  increase to its  unrecognized  tax benefits within the next twelve
months.

All federal and state tax filings for CompuDyne Corporation and its subsidiaries
as of December 31, 2005 have been timely  filed.  There are currently no federal
or state  examinations  in process.  The Company's last federal income tax audit
closed all tax years  through  December 31, 2003.  The Company  files income tax
returns  in  numerous  states and  generally  the years  subject to  examination
include December 31, 2003 through the current year.

The Company has decided to recognize  interest  and  penalties as a component of
tax expense.  During the years ended December 31, 2006, and 2005 and the quarter
ended March 31, 2007, the Company did not recognize any interest or penalties in
its results of operations related to unrecognized tax benefits.




                                       29
<PAGE>


       ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

The following information  summarizes our sensitivity to market risks associated
with fluctuations in interest rates as of March 31, 2007. 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, 2007.

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.

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

    Notes Payable           Variable                                   Fixed
     Year Ending            Rate ($)         Average Variable         Rate ($)          Average Fixed
     December 31         (in thousands)       Interest Rate        (in thousands)       Interest Rate
    -------------        -------------        -------------        -------------        -------------
<S>                        <C>                    <C>                <C>                    <C>
    2007 (remaining)       $    440               3.80%              $      -                  -
    2008                        440               3.80%                     -                  -
    2009                        440               3.80%                     -                  -
    2010                        440               3.80%                     -                  -
    2011                        440               3.80%                40,250               6.25%
    Thereafter                  925               3.80%                     -                  -
                           --------                                  --------
    Total                  $  3,125               3.80%              $ 40,250               6.25%
    Fair Value             $  3,125                                  $ 37,936               8.24%
</TABLE>



                                       30
<PAGE>


                         ITEM 4. CONTROLS AND PROCEDURES

Changes in Accelerated Filer Status

On December 21, 2005 the Securities and Exchange  Commission  issued Release No.
33-8644 "Revisions to Accelerated Filer Definition and Accelerated Deadlines For
Filing  Periodic  Reports"  (the  "Release").  Included  in the  Release  was an
amendment to revise the definition of the term "accelerated  filer" to permit an
accelerated  filer that has an  aggregate  worldwide  market value of voting and
non-voting  common equity held by  non-affiliates of less than $50 million as of
the last business day of its second  fiscal  quarter to exit  accelerated  filer
status at the end of the fiscal year in which the  company's  equity falls below
$50 million as of the last business day of its second fiscal quarter and to file
its  annual  report  for  that  year  and  subsequent   periodic  reports  on  a
non-accelerated basis.

The aggregate worldwide market value of CompuDyne  Corporation's  equity held by
non-affiliates as of June 30, 2005, the last business day of CompuDyne's  second
fiscal quarter, was less than $50 million. As a result, as of December 31, 2005,
CompuDyne  exited  accelerated  filer status.  CompuDyne's  aggregate  worldwide
market  value as June 30, 2006,  the last  business  day of  CompuDyne's  second
fiscal quarter,  was also less than $50 million;  as such CompuDyne continued to
be classified as a non-accelerated filer for the year ended December 31, 2006.

Prior to the Release, CompuDyne was classified as an "accelerated filer" and was
required to comply with the  requirements  of Section 404 of the  Sarbanes-Oxley
Act of 2002.

Disclosure Controls and Procedures

As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), the Company  conducted an evaluation under the supervision
and with the  participation  of the  Company's  management,  including the Chief
Executive Officer and the Chief Financial  Officer,  of the effectiveness of the
Company's disclosure controls and procedures as of the end of the period covered
by this report.  Based on that evaluation,  the Chief Executive  Officer and the
Chief Financial  Officer  concluded that the disclosure  controls and procedures
are  effective  in ensuring  that all  information  required to be  disclosed in
reports  that the Company  files or submits  under the Exchange Act is recorded,
processed,  summarized  and reported  within the time  periods  specified in the
Securities  and Exchange  Commission  rules and forms.  There was no significant
change in the Company's internal control over financial  reporting that occurred
during the Company's most recent fiscal quarter that has materially affected, or
is reasonably likely to materially  affect,  the Company's internal control over
financial reporting.



                                       31
<PAGE>


PART II - OTHER INFORMATION

Item 3.  Defaults Upon Senior Securities.

As of the fiscal quarter ended March 31, 2007, the Company was not in compliance
with its Second Amended and Restated Revolving Credit and Security Agreement, as
amended,  by virtue of the Company's failure to maintain a fixed charge coverage
ratio of 1.1 to 1.0. On May 11, 2007 the  Company and its banks  entered  into a
Fourth  Amendment to Second Amended and Restated  Revolving  Credit and Security
Agreement,  which  amendment,  inter  alia,  waived the event of  non-compliance
related to the fixed charge  coverage  ratio for the fiscal  quarter ended March
31, 2007.

Item 6:  Exhibits.

Exhibits -

     10(A) Third Amendment to the Second Amended and Restated  Revolving  Credit
          and  Security  Agreement  dated March 28, 2007 by and among  CompuDyne
          Corporation,  its  subsidiaries  and PNC  Bank  National  Association,
          herein  incorporated by reference to Exhibit 10.1 to Registrant's  8-K
          filed on March 30, 2007.

     10(B) Employment  Agreement  between  CompuDyne  Corporation  and  Geoffrey
          Feidelberg dated April 10, 2007,  herein  incorporated by reference to
          Exhibit 10.1 to Registrants 8-K filed on April 13, 2007.

     10(C) *Fourth Amendment to the Second Amended and Restated Revolving Credit
          and  Security  Agreement  dated May 11,  2007 by and  among  CompuDyne
          Corporation,  its subsidiaries and PNC Bank National Association filed
          herewith.

     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.


         * Filed herewith


                                       32
<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 15, 2007                             /s/ Martin Roenigk
                                               ------------------
                                               Martin Roenigk
                                               Chief Executive Officer


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



                                       33