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

                                    FORM 10-Q


             [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                  For the quarterly period ended June 30, 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 August 9, 2007, a total of 8,438,615 shares of Common Stock, $.75
par value, were outstanding.

                                       1
<PAGE>


                     COMPUDYNE CORPORATION AND SUBSIDIARIES
                                      INDEX




                                                                        Page No.
                                                                        --------
Part I.  Financial Information

     Item 1. Financial Statements - Unaudited

          Consolidated Balance Sheets - June 30, 2007
          and December 31, 2006                                              3

          Consolidated Statements of Operations -
          Three Months and Six Months Ended June 30, 2007 and 2006           4

          Consolidated Statement of Changes in Shareholders' Equity -
          Six Months Ended June 30, 2007                                     5

          Consolidated Statements of Cash Flows -
          Six Months Ended June 30, 2007 and 2006                            6

          Notes to Consolidated Financial Statements                      7-18

     Item 2. Management's Discussion and Analysis of
             Financial Condition and Results of Operations               19-33

     Item 3. Quantitative and Qualitative Disclosures
             About Market Risk                                              34

     Item 4. Controls and Procedures                                        35

Part II. Other Information                                               36-37

     Signature                                                              38

                                       2
<PAGE>

                          ITEM 1. FINANCIAL STATEMENTS

                     COMPUDYNE CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                   (unaudited)
                                 (in thousands)

                                                  June 30,        December 31,
                            ASSETS                  2007              2006
                                                 ----------       ------------
Current Assets
     Cash and cash equivalents                   $   8,179        $     7,740
     Marketable securities                           4,882              8,687
     Accounts receivable, net                       31,774             25,534
     Contract costs in excess of billings            9,152             12,031
     Inventories                                     5,348              5,577
     Prepaid expenses and other                      3,066              4,595
                                                 ----------       ------------
        Total Current Assets                        62,401             64,164

Cash equivalents pledged                             7,500              7,500
Property, plant and equipment, net                   9,243              9,630
Goodwill                                            13,275             13,274
Other intangible assets, net                         7,154              7,428
Other                                                1,818              1,954
                                                 ----------       ------------
        Total Assets                             $ 101,391        $   103,950
                                                 ==========       ============

                      LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities
     Accounts payable and accrued liabilities    $  13,732        $    14,155
     Billings in excess of contract costs
      incurred                                      10,334              9,221
     Deferred revenue                                7,838              9,305
     Current portion of notes payable                  440                440
                                                 ----------       ------------
        Total Current Liabilities                   32,344             33,121

Notes payable                                        2,385              2,685
Convertible subordinated notes payable, net         39,585             39,492
Deferred tax liabilities                             1,425              1,425
Other                                                  420                388
                                                 ----------       ------------
        Total Liabilities                           76,159             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 June 30,
      2007 and December 31, 2006;
      9,301,537 and 9,293,637 shares issued at
      June 30, 2007 and December 31, 2006,
      respectively                                   6,976              6,970
     Additional paid-in-capital                     50,617             50,034
     Accumulated deficit                           (26,086)           (23,956)
     Accumulated other comprehensive (loss)           (397)              (331)
     Treasury stock, at cost; 862,922 shares at
      June 30, 2007 and December 31, 2006           (5,878)            (5,878)
                                                 ----------       ------------
        Total Shareholders' Equity                  25,232             26,839
                                                 ----------       ------------
        Total Liabilities and Shareholders'
         Equity                                  $ 101,391        $   103,950
                                                 ==========       ============

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

                                       3
<PAGE>

<TABLE>
<CAPTION>
<S>     <C>                                <C>         <C>             <C>             <C>
                             COMPUDYNE CORPORATION AND SUBSIDIARIES
                              CONSOLIDATED STATEMENTS OF OPERATIONS
                                           (unaudited)
                              (in thousands, except per share data)

                                            Three Months Ended              Six Months Ended
                                                  June 30,                       June 30,
                                             2007        2006             2007           2006
                                           ---------   ---------        ---------      ---------
Revenues:
 Contract revenues earned                  $ 19,972    $ 19,256         $ 37,696       $ 41,458
 Maintenance revenue                          6,639       7,312           13,193         13,291
 Other revenues                               8,985      11,826           15,839         24,115
                                           ---------   ---------        ---------      ---------
   Total revenues                            35,596      38,394           66,728         78,864

Cost of sales                                23,246      26,258           44,600         54,219
                                           ---------   ---------        ---------      ---------

Gross profit                                 12,350      12,136           22,128         24,645

Selling, general and administrative
 expenses                                     9,132       9,342           18,383         19,078
Research and development                      2,452       1,934            4,823          3,701
                                           ---------   ---------        ---------      ---------
Income (loss) from operations                   766         860           (1,078)         1,866
                                           ---------   ---------        ---------      ---------

Other expense (income)
 Interest expense                               795         842            1,587          1,657
 Interest income                               (300)       (290)            (647)          (568)
 Other expense (income)                          67          (4)             112           (158)
                                           ---------   ---------        ---------      ---------
   Total other expense                          562         548            1,052            931
                                           ---------   ---------        ---------      ---------

Income (loss) before taxes on income            204         312           (2,130)           935
Income tax expense (benefit)                      -           7                -           (177)
                                           ---------   ---------        ---------      ---------
Net income (loss)                          $    204    $    305         $ (2,130)      $  1,112
                                           =========   =========        =========      =========

Earnings (loss) per share:
--------------------------
Basic income (loss) per common share       $    .02    $    .04         $   (.25)      $    .14
                                           =========   =========        =========      =========

Weighted average number of common
 shares outstanding                           8,438       8,119            8,437          8,119
                                           =========   =========        =========      =========

Diluted income (loss) per common share     $    .02    $    .04         $   (.25)      $    .14
                                           =========   =========        =========      =========

Weighted average number of common
 shares and equivalents                       8,455       8,164            8,437          8,161
                                           =========   =========        =========      =========

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

                                       4
<PAGE>

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

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

Balance at January 1, 2007                    9,294 $6,970    $50,034   $(23,956)        $(331)    863 $(5,878) $26,839
Stock options exercised                           8      6         37                                                43
Stock-based compensation                                          546                                               546
                                             ---------------------------------------------------------------------------
 Subtotal                                     9,302  6,976     50,617    (23,956)         (331)    863  (5,878)  27,428
Comprehensive income:
 Net loss                                                                 (2,130)                                (2,130)
Other comprehensive loss, net of tax:
Change in unrealized loss on available for
 sale of marketable securities                                                             (71)                     (71)
Foreign currency translation adjustments                                                     5                        5
                                                                                                                --------
Comprehensive loss                                                                                               (2,196)
                                             ---------------------------------------------------------------------------
Balance at June 30, 2007                      9,302 $6,976    $50,617   $(26,086)        $(397)    863 $(5,878) $25,232
                                             ====== ====== ========== =========== ============= ====== ======== ========
</TABLE>

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

                                       5
<PAGE>

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

                                                           Six Months Ended
                                                                June 30,
                                                           2007       2006
                                                         ---------  ---------
Cash flows from operating activities:
  Net (loss) income                                      $ (2,130)  $  1,112

Adjustments to reconcile net (loss) income to
net cash (used in) provided by operations:
  Depreciation and amortization                             1,554      1,545
  Amortization of debt discount and financing fees            163        164
  Accretion of premium on marketable securities, net           (3)         -
  Stock-based compensation expense                            546        578

Changes in assets and liabilities:
  Accounts receivable                                      (6,240)     9,129
  Contract costs in excess of billings                      2,879      2,711
  Inventories                                                 229        364
  Prepaid expenses and other current assets                 1,521        141
  Other assets                                                 67         54
  Accounts payable and accrued liabilities                   (423)    (7,496)
  Billings in excess of contract costs incurred             1,113     (1,538)
  Deferred revenue                                         (1,467)    (1,430)
  Other liabilities                                            32        (80)
                                                         ---------  ---------
Net cash flows (used in) provided by operating
 activities                                                (2,159)     5,254
                                                         ---------  ---------

Cash flows from investing activities:
  Purchase of marketable securities                             -     (6,957)
  Redemption of marketable securities                       3,744      4,310
  Additions to property, plant and equipment                 (894)    (1,148)
                                                         ---------  ---------
Net cash flows provided by (used in) investing
 activities                                                 2,850     (3,795)
                                                         ---------  ---------

Cash flows from financing activities:
  Stock options exercised                                      43          3
  Restricted cash                                               -       (571)
  Repayment of notes payable                                 (300)      (300)
                                                         ---------  ---------
Net cash used in financing activities                        (257)      (868)
                                                         ---------  ---------

Effect of exchange rate changes on cash                         5          -
                                                         ---------  ---------

Net change in cash and cash equivalents                       439        591
Cash and cash equivalents at beginning of period            7,740      6,938
                                                         ---------  ---------
Cash and cash equivalents at end of period               $  8,179   $  7,529
                                                         =========  =========


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

                                       6
<PAGE>

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


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation:
The  accompanying  unaudited  consolidated  financial  statements  of  CompuDyne
Corporation and its subsidiaries  (the "Company") have been prepared pursuant to
the rules  and  regulations  of the  Securities  and  Exchange  Commission.  The
consolidated  balance  sheet as of December  31, 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
and six  month  periods  ended  June  30,  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 six months ended June 30, 2007 and 2006, in thousands:

                                                  For the Six Months
                                                    Ended June 30,
                                                   2007         2006
                                                 ---------    --------

  Net (loss) income                              $ (2,130)    $ 1,112
  Unrealized gain (loss) on available-for-sale
   securities                                         (71)       (318)
  Foreign currency translation adjustment               5           -
                                                 ---------    --------
  Comprehensive (loss) income                    $ (2,196)    $   794
                                                 =========    ========

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 did
not have an impact on our  financial  position or results of  operations  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 operations.

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 state and foreign jurisdictions.

At the adoption  date on January 1, 2007 and as of June 30, 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  recognizes  interest  and  penalties as a component of tax expense.
During the years ended December 31, 2006, and 2005 and the six months ended June
30, 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  1,245,000  shares for the three months ended June 30,
2007 and stock options and warrants to purchase  1,424,297  shares for the three
months ended June 30, 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 June 30, 2007,and 2006 as the effect is antidilutive.

Stock  options to purchase  1,165,000  shares for the six months  ended June 30,
2007 and stock  options and  warrants to purchase  1,464,733  shares for the six
months ended June 30, 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 six months
ended June 30, 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   Six Months Ended
                                                June 30,            June 30,
                                            2007      2006      2007      2006
                                          --------  --------  --------  --------
                                          (in thousands, except per share data)
 Net income (loss)                        $   204   $   305   $(2,130)  $ 1,112
                                          ========  ========  ========  ========

 Weighted average common shares
  outstanding                               8,438     8,119     8,437     8,119
 Effect of dilutive stock options and
  warrants                                     17        45         -        42
                                          --------  --------  --------  --------
 Diluted weighted average number of
  common shares outstanding                 8,455     8,164     8,437     8,161
                                          ========  ========  ========  ========

 Net income (loss) per common share
 Basic                                    $   .02   $   .04   $  (.25)  $   .14
 Diluted                                  $   .02   $   .04   $  (.25)  $   .14

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 six months ended June 30, 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
did 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 June 30,  Six Months Ended June 30,
                          ---------------------------  -------------------------
                           2007                 2006    2007               2006
                          ------               ------  ------             ------
Cost of sales             $  15                $  21   $  28              $  39
Selling, general and
 administrative             258                  279     492                493
Research and development     10                   23      26                 46
                          ------               ------  ------             ------
   Effect on income       $ 283                $ 323   $ 546              $ 578
                          ======               ======  ======             ======

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 each the three and six months ended June 30,
2007 and June 30, 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            Six Months Ended
                                June 30,                     June 30,
                           -------------------        --------------------
                           2007           2006        2007            2006
                           ----           ----        ----            ----
Risk-free interest rate     4.7%           5.0%        4.7%            4.9%
Dividend yield                -              -           -               -
Expected volatility        74.3%          77.7%       74.3%           78.0%
Expected lives              6.2 years      6.5 years   6.2 years       6.5 years
Annual forfeiture rate      4.4%           4.4%        4.4%            4.4%


The  Company  has  various  stock  option  plans.  Under all  plans,  there were
3,924,000  shares of common  stock  reserved  for future  grants  and  1,329,900
options outstanding for a total of 5,253,900 options to purchase common stock as
of June 30, 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:

                                                                       Aggregate
                                                                       Intrinsic
                                                 Number     Weighted   Value at
                                                   of        Average    June 30,
                                                 Shares       Price       2007
                                               -----------  --------- ----------
    Outstanding, at December 31, 2006           1,513,100   $ 8.2478
           Granted                                 50,000   $ 5.1300
           Forfeited                              131,400   $ 7.0476
           Exercised                                7,900   $ 5.5243
           Expired or Cancelled                    93,900   $ 9.8981
                                               -----------
    Outstanding, at June 30, 2007               1,329,900   $ 8.1489  $ 102,426
                                               ===========            ==========

    Exercisable, at June 30, 2007                 800,900   $ 9.0929  $  85,926
                                               ===========            ==========

A summary of our stock options outstanding at June 30, 2007 follows:
<TABLE>
<CAPTION>
<S>     <C>          <C>            <C>          <C>        <C>             <C>
                               Options outstanding              Options exercisable
                     --------------------------------------  ------------------------
                                      Weighted-
                          Number       Average    Weighted-     Number      Weighted-
                       Outstanding    Remaining    Average    Exercisable    Average
      Range of            as of      Contractual   Exercise      as of      Exercise
   Exercise Price     June 30, 2007     Term        Price    June 30, 2007    Price
 ------------------- --------------  -----------  ---------  -------------  ---------
 $  2.5000 -  6.0350      154,900       7.03      $  5.0050      63,900     $  4.3503
 $  6.1800 -  6.6950      140,500       8.88      $  6.3392      12,400     $  6.4166
 $  6.7000 -  6.9000      115,800       8.37      $  6.8398      18,600     $  6.8177
 $  6.9500 -  6.9500      150,000       8.84      $  6.9500      30,000     $  6.9500
 $  7.0000 -  7.9850      137,000       6.11      $  7.4975      87,500     $  7.5107
 $  8.0150 -  8.0750      133,500       4.19      $  8.0712     131,500     $  8.0720
 $  8.1050 -  8.9600      152,900       5.44      $  8.6190     111,700     $  8.5663
 $  9.1900 - 10.4200      148,800       5.96      $ 10.0018     148,800     $ 10.0018
 $ 11.1650 - 13.4450      193,000       5.78      $ 12.2915     193,000     $ 12.2915
 $ 13.7500 - 16.6300        3,500       4.36      $ 15.3300       3,500     $ 15.3300
 ------------------------------------------------------------------------------------

 $  2.5000 - 16.6300      1,329,900      6.67     $  8.1489     800,900     $  9.0929
                          =========                             =======
</TABLE>

In the six months ended June 30, 2007 and 2006 the  weighted-average  grant-date
fair value of an option  granted was $3.57 and $4.83 per  option,  respectively.
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 six
months ended June 30, 2007 and 2006 was  approximately  $21 thousand and $1,600,
respectively.   Total  unrecognized  compensation  expense  from  stock  options
outstanding at June 30, 2007 was approximately $1.6 million excluding  estimated
forfeitures,  which is expected to be recognized over a weighted-average  period
of 2.46 years as follows, in thousands:

                                                     Compensation
                                                  Expense Excluding
                            Year                Estimated Forfeitures
                            ----                ---------------------
                            2007 (remaining)           $   382
                            2008                           530
                            2009                           401
                            2010                           273
                            2011                            62
                                                       --------
                                Total                  $ 1,648
                                                       ========

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 June 30, 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>
<S>     <C>               <C>      <C>   <C>        <C>     <C>     <C>    <C>        <C>
                                      June 30, 2007                   December 31, 2006
                           --------------------------------  --------------------------------
                                   Gross Unrealized                  Gross Unrealized
                                   ----------------  Fair            ----------------  Fair
                            Cost   Gains   Losses    Value    Cost   Gains   Losses    Value
                           ------  -----  ---------  ------  ------  -----  ---------  ------
Collateralized mortgage
 obligations (CMO's)
 consisting of securities
 issued by Fannie Mae and
 Freddie Mac               $5,284     $5       $407  $4,882  $9,026     $2       $341  $8,687
</TABLE>

The cost and estimated fair value of current  marketable  securities at June 30,
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                    $     -          $         -
        Due after one year and beyond            5,284                4,882
                                               --------         ------------
        Total debt securities                  $ 5,284          $     4,882
                                               ========         ============

The  following  table  shows the net  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 June 30, 2007, in thousands:
<TABLE>
<CAPTION>
<S>     <C>                   <C>    <C>         <C>     <C>         <C>     <C>
                                    Less Than          12 Months
                                    12 Months         or Greater            Total
                               -----------------  ------------------  ------------------
                                Fair  Unrealized   Fair   Unrealized   Fair   Unrealized
                               Value   (Gains)    Value     Losses    Value     Losses
                               -----  ----------  ------  ----------  ------  ----------
Federal agency mortgage-backed
 securities                    $   -  $        -  $4,882     $402     $4,882     $402
                               =====  ==========  ======  ==========  ======  ==========
</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 June 30, 2007.

5.   INVENTORIES

Inventories consist of the following, in thousands:

                                                         June 30,   December 31,
                                                           2007         2006
                                                        ----------  ------------
 Raw materials                                          $   3,794   $     3,645
 Work in progress                                           2,140         2,575
 Finished goods                                               457           274
                                                        ----------  ------------
 Total inventories                                          6,391         6,494
       Less: Reserve for excess and obsolete inventory     (1,043)         (917)
                                                        ----------  ------------
 Inventories, net                                       $   5,348   $     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 June 30, 2007.

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

                                            Integrated   Public
                                  Attack    Electronic  Safety &
                                Protection    Systems   Justice    Total
                                ----------  ----------  --------  --------

December 31, 2006                    $ 728       $ 829  $ 11,717  $ 13,274
Addition from 2006 acquisition           -           1         -         1
                                ----------  ----------  --------  --------
June 30, 2007                        $ 728       $ 830  $ 11,717  $ 13,275
                                ==========  ==========  ========  ========

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 $7.2 million
at June 30, 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:

                                   June 30,    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             (1,072)          (883)
  Other                                (724)          (636)
                                   ---------   ------------
                                     (1,796)        (1,519)
                                   ---------   ------------

Other intangible assets, net       $  7,154     $    7,428
                                   =========   ============

Amortization  expense for the Company's  intangible  assets for the three months
ended June 30, 2007 and 2006 was $128  thousand and $66  thousand  respectively.
Amortization  expenses for the  Company's  intangible  assets for the six months
ended  June 30,  2007 and 2006  was  $276 and $130  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)     $   248
                                    2008                     491
                                    2009                     491
                                    2010                     477
                                    2011                     364
                                    Thereafter             1,128
                                                         --------
                                    Total                $ 3,199
                                                         ========

                                       13
<PAGE>

8.   NOTES PAYABLE AND LINE OF CREDIT

                                                          June 30,  December 31,
                                                            2007        2006
                                                          --------- ------------
                                                               (in thousands)
Industrial revenue bond, interest payable monthly at a
variable rate of 3.65 % to 4.16 % (3.94 % at June 30,
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 % (3.84 % at June 30,
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 $1.7 million letter of credit and
a bond guarantee agreement.                                  1,705        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                                         43,075       43,375
Less convertible subordinated notes discount                   665          758
                                                          --------- ------------
Subtotal                                                    42,410       42,617
Less amount due within one year                                440          440
                                                          --------- ------------
                                                          $ 41,970  $    42,177
                                                          ========= ============

Maturities of notes payable are as follows, in thousands:

                          Year Ending December 31,     Amount
                          ------------------------    ---------
                          2007 (remaining)            $    140
                          2008                             440
                          2009                             440
                          2010                             440
                          2011                          40,690
                          Thereafter                       925
                                                      ---------
                                                      $ 43,075
                                                      =========

On January 22,  2004,  the  Company  completed  an  offering  of $40.25  million
principal  amount of the 2011 Notes.  The 2011 Notes bear  interest at a rate of
6.25% per annum,  payable  semi-annually,  and are  convertible  into  shares of
common stock at a conversion price of $13.89 per share,  subject to adjustments.
The 2011 Notes are  subordinated  to all other  liabilities of the Company.  The
June 30, 2007 carrying value is listed below, in thousands.

                        Face value                    $ 40,250
                        Underwriters discounts, net        665
                                                      ---------
                                                      $ 39,585
                                                      =========

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.  The
consummation  of the  tender  offer for  shares of the  Company's  common  stock
classified  below under  "Subsequent  Event" will constitute a change of control
under the indenture.

                                       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  for both the
three months  ended June 30, 2007 and 2006.  Interest  expense  recorded for the
total of the deferred debt  issuance  costs and  underwriter's  discounts on the
2011 Notes totaled $126 thousand for both the six months ended June 30, 2007 and
2006.

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.

The Company may terminate the Agreement at any time upon ninety (90) days' prior
written notice of payment in full. In the event this occurs and refinancing does
not occur with the current bank an early termination fee will be assessed on the
$20 million  maximum  revolving  advances  amount.  This fee will be two percent
(2.00%) if terminated  within the first year, one percent  (1.00%) if terminated
within the second year and one-half of one percent  (.5%) if  terminated  within
the third year. At June 30, 2007 we are in year two of the Agreement.

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.

                                       15
<PAGE>

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 minimum EBITDA requirement was met at June 30, 2007.

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              176
     Less: warranty charges/claims                      201
                                                      ------
     Ending balance at June 30, 2007                  $ 385
                                                      ======

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 June 30, 2007 and 2006.
<TABLE>
<CAPTION>
<S>     <C>                  <C>        <C>           <C>        <C>        <C>      <C>
                                                                                 Pre-tax
                                   Revenues               Gross Profit         Income (loss)
                             --------------------     --------------------  -----------------
                               2007       2006          2007       2006       2007     2006
                             ---------  ---------     ---------  ---------  -------  --------
Institutional Security
 Systems                     $ 14,545   $ 13,220      $  2,007   $  1,853   $ (206)  $  (386)
Attack Protection               6,613     11,333         2,709      3,859      914     1,548
Integrated Electronic
 Systems                        4,755      2,983         1,158        494      285       161
Public Safety and Justice       9,683     10,858         6,476      5,930      (91)     (529)
CompuDyne Corporate                 -          -             -          -     (698)     (482)
                             ---------  ---------     ---------  ---------  -------  --------
                             $ 35,596   $ 38,394      $ 12,350   $ 12,136   $  204   $   312
                             =========  =========     =========  =========  =======  ========
</TABLE>

The following is the segment information for each of the six months ended June
30, 2007 and 2006.
<TABLE>
<CAPTION>
<S>     <C>                  <C>        <C>           <C>        <C>        <C>       <C>
                                                                                  Pre-tax
                                   Revenues               Gross Profit          Income (loss)
                             --------------------     --------------------  --------------------
                               2007       2006          2007       2006        2007       2006
                             ---------  ---------     ---------  ---------  ---------  ---------
Institutional Security
 Systems                     $ 25,700   $ 26,575      $  2,993   $  4,026   $ (1,481)  $   (250)
Attack Protection              11,050     23,017         3,676      7,151        (12)     2,753
Integrated Electronic
 Systems                        9,712      6,570         2,466      1,000        698        345
Public Safety and Justice      20,266     22,702        12,993     12,468       (291)      (522)
CompuDyne Corporate                 -          -             -          -     (1,044)    (1,391)
                             ---------  ---------     ---------  ---------  ---------  ---------
                             $ 66,728   $ 78,864      $ 22,128   $ 24,645   $ (2,130)  $    935
                             =========  =========     =========  =========  =========  =========
</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.

                                       16
<PAGE>

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 June 30, 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.

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

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 June 30, 2007 and December
31, 2006 is approximately  $201 thousand and $86 thousand  representing the fair
value of this liability, respectively.

12.  SUBSEQUENT EVENT

On August 6, 2007, the Company entered into an Agreement and Plan of Merger (the
"Merger  Agreement") with Gores Patriot Holdings,  Inc., a Delaware  corporation
("Purchaser")  and Patriot  Acquisition  Corp.,  a Nevada  corporation  ("Merger
Sub").  Purchaser is controlled by an investor group consisting of affiliates of
The Gores Group, LLC ("Gores") and industry executive Stuart Mackiernan.

                                       17
<PAGE>

Pursuant  to the Merger  Agreement,  and  subject  to its terms and  conditions,
Merger Sub will  commence a tender  offer (the  "Offer") to purchase and acquire
all of the outstanding shares of common stock of the Company. In the Offer, each
stockholder  of the Company will receive for each share of the Company's  common
stock  validly  tendered  and  not  withdrawn  $7.00  in  cash,  subject  to any
applicable  withholding for taxes, without interest. The obligation of Purchaser
to accept for payment and pay for the shares tendered in the Offer is subject to
the  satisfaction  or waiver of a number of  conditions  set forth in the Merger
Agreement,  including  that  at  least  53% of  the  outstanding  shares  of the
Company's common stock on a fully diluted basis shall have been validly tendered
in  accordance  with the terms of the Offer and not  properly  withdrawn  and no
event having a material adverse effect on the Company or its business shall have
occurred.  Subject  to  certain  terms and  conditions  set forth in the  Merger
Agreement, the Company also gave Purchaser the option to purchase, following its
acceptance for payment of shares  tendered in the Offer, up to the lesser of (i)
15% of the  Company's  common  stock  outstanding  (assuming  issuance of shares
subject  to the  option)  and (ii) the lowest  number of shares of common  stock
that,  when added to the number of shares of common stock owned by Purchaser and
Merger Sub, shall  constitute at least 90% of the Company's  outstanding  common
stock.

Pursuant to the Merger Agreement,  as soon as practicable after the consummation
of the Offer and subject to the satisfaction or waiver of certain conditions set
forth in the  Merger  Agreement,  Merger  Sub shall be merged  with and into the
Company  (the   "Merger")  and  the  Company  will  continue  as  the  surviving
corporation  and a  wholly-owned  subsidiary  of Purchaser.  In the Merger,  the
remaining  stockholders  of  the  Company  will  also  receive  $7.00  for  each
outstanding share of the Company's common stock.

                                       18
<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 Quanta Systems,  LLC and
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  going to market under the name
Signami DCS.

                                       19
<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, the  occurrence of any event,  change or
other  circumstance  that  could  give  rise to the  termination  of the  Merger
Agreement with the investor group, the risk that the conditions  relating to the
required minimum tender of CompuDyne shares or any required regulatory clearance
might not be  satisfied  in a timely  manner or at all,  the  failure to satisfy
other  conditions  to  completion  of  the  merger,   risks  that  the  proposed
transaction disrupts current plans and operations and the potential difficulties
in key  employee  retention  as a result of the  transaction,  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"), 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  $134.1  million at June 30,  2007,  as shown in the
following table:
<TABLE>
<CAPTION>
<S>     <C>          <C>            <C>          <C>          <C>        <C>
                      Institutional               Integrated    Public
                         Security      Attack     Electronic  Safety and   Backlog
     (in thousands)      Systems     Protection     Systems     Justice     Total
                      --------------------------------------------------------------
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
June 30, 2007            $ 74,330     $  8,761     $  5,260   $  45,786  $  134,137
</TABLE>

                                       20
<PAGE>

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 was  completed  by 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 have 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.

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 adapted 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  19.8% of our revenue in the first six 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>
<S>     <C>                         <C>               <C>   <C>                <C>   <C>
                                              For the Six Months Ended June 30, 2007
                                     ---------------------------------------------------------
        (in thousands)               One-time Revenue   %    Recurring Revenue   %     Total
                                     ---------------- ------ ----------------- ----- ---------
Institutional Security Systems           $ 23,421      35.1      $  2,279       3.4  $ 25,700
Attack Protection                          11,050      16.6             -         -    11,050
Integrated Electronic Systems               7,829      11.7         1,883       2.8     9,712
Public Safety and Justice                  11,235      16.8         9,031      13.6    20,266
                                         ---------               ---------           ---------
     Total                               $ 53,535      80.2      $ 13,193      19.8  $ 66,728
                                         =========               =========           =========
</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.  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.

                                       21
<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  2005
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, 2007, 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, 2007.

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.

Subsequent Event

On August 6, 2007, the Company entered into an Agreement and Plan of Merger (the
"Merger  Agreement") with Gores Patriot Holdings,  Inc., a Delaware  corporation
("Purchaser")  and Patriot  Acquisition  Corp.,  a Nevada  corporation  ("Merger
Sub").  Purchaser is controlled by an investor group consisting of affiliates of
The Gores Group, LLC ("Gores") and industry executive Stuart Mackiernan.

Pursuant  to the Merger  Agreement,  and  subject  to its terms and  conditions,
Merger Sub will  commence a tender  offer (the  "Offer") to purchase and acquire
all of the outstanding shares of common stock of the Company. In the Offer, each
stockholder  of the Company will receive for each share of the Company's  common
stock  validly  tendered  and  not  withdrawn  $7.00  in  cash,  subject  to any
applicable  withholding for taxes, without interest. The obligation of Purchaser
to accept for payment and pay for the shares tendered in the Offer is subject to
the  satisfaction  or waiver of a number of  conditions  set forth in the Merger
Agreement,  including  that  at  least  53% of  the  outstanding  shares  of the
Company's common stock on a fully diluted basis shall have been validly tendered
in  accordance  with the terms of the Offer and not  properly  withdrawn  and no
event having a material adverse effect on the Company or its business shall have
occurred.  Subject  to  certain  terms and  conditions  set forth in the  Merger
Agreement, the Company also gave Purchaser the option to purchase, following its
acceptance for payment of shares  tendered in the Offer, up to the lesser of (i)
15% of the  Company's  common  stock  outstanding  (assuming  issuance of shares
subject  to the  option)  and (ii) the lowest  number of shares of common  stock
that,  when added to the number of shares of common stock owned by Purchaser and
Merger Sub, shall  constitute at least 90% of the Company's  outstanding  common
stock.

Pursuant to the Merger Agreement, as soon as practicable after the consummation
of the Offer and subject to the satisfaction or waiver of certain conditions set
forth in the Merger Agreement, Merger Sub shall be merged with and into the
Company (the "Merger") and the Company will continue as the surviving
corporation and a wholly-owned subsidiary of Purchaser. In the Merger, the
remaining stockholders of the Company will also receive $7.00 for each
outstanding share of the Company's common stock.

Results of Operations

THREE MONTHS ENDED JUNE 30, 2007 and 2006

Revenues.  The Company had revenues of $35.6  million and $38.4  million for the
three months ended June 30, 2007 and June 30, 2006, respectively, representing a
decrease of $2.8 million or 7.3%.  As  discussed  below,  the decrease  occurred
primarily due to lower revenues in our AP and PS&J  segments,  offset in part by
an increase in revenues from our IES and ISS segments.

Revenues from the Institutional  Security Systems segment were $14.5 million for
the three  months ended June 30, 2007,  an increase  from $13.2  million for the
three months ended June 30,  2006,  representing  an increase of $1.3 million or
10.0%.  The  Institutional  Security  Systems  segment is largely a construction
driven business.  Much of its revenue is obtained by working on new and retrofit
construction  projects  in the  corrections  industry,  as opposed to sources of
recurring revenue.  As such, the increase in revenue experienced by this segment
is  largely  attributable  to our  working on more  projects  than we did in the
previous year.  Backlog was $74.3 million and $51.2 million at June 30, 2007 and
June 30, 2006,  respectively.  This  increase in backlog  levels  should lead to
increasing  revenues in the coming  quarters  assuming  ISS  continues  to win a
significant  amount of new awards.  Since 2005, ISS has seen heightened  bidding
activity,  in the market space it serves,  namely  large-scale medium to maximum
security  prisons.  Backlog  started to increase  significantly  starting in the
second half of 2006.

                                       22
<PAGE>

Revenues  from the Attack  Protection  segment  were $6.6  million for the three
months ended June 30, 2007, a decrease from $11.3 million for the same period of
2006, representing a decrease of $4.7 million or 41.6%. 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 June 30, 2007 the Norshield line  experienced a 70.5% decrease in revenues
as compared to the three months ended June 30, 2006.  The decrease in revenue of
$7.1 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,  which was completed in
the third quarter of 2006. To date,  this contract has not been replaced via the
winning of sufficient new awards to replace the volume from this large completed
contract.  Execution on this contract began  immediately  upon award.  The Fiber
SenSys line experienced a 197.9% increase in revenues for the comparable  period
from  $1.2  million  in 2006 to $3.6  million  in 2007.  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 $4.8 million for
the three months ended June 30, 2007, an increase from $3.0 million for the same
period of 2006, representing an increase of $1.8 million or 59.4%. This increase
was largely a result of the acquisition of the assets and certain liabilities of
Signami  during the third  quarter of 2006 and an increase in legacy DCS product
sales.  Since 2005, IES has been successfully  performing work for the Bureau of
Engraving & printing  (BEP)  under a one-year  contract  with four option  years
valued at approximately $5M/year. As part of an internal reorganization, BEP has
decided not to exercise the next option year;  instead,  BEP has chosen to break
this contract effort into two separate efforts  (Operations and Maintenance) and
redefine  the  contractual  requirements  for  each of  these  efforts.  BEP has
solicited   bids  for  these  two  new   efforts  and   anticipates   awards  in
August/September  2007. IES has submitted bids on both efforts. In the event IES
is unsuccessful in winning the two new contracts,  this segment's  revenues will
be significantly adversely impacted.

Revenues  from the Public  Safety and Justice  segment were $9.7 million for the
three months ended June 30,  2007,  a decrease  from $10.9  million for the same
period of 2006,  representing  a decrease of $1.2 million or 10.8%.  The decline
was primarily the result of lower backlogs from lower contract  signings in 2006
and an increased  focus on developing our next generation  products.  Backlog of
June 30, 2007 increased significantly over March 31, 2007 backlogs.

Expenses.  Cost of sales of $23.2  million for the three  months  ended June 30,
2007 was down $3.0 million or 11.5% from $26.3 million during the same period of
2006.  The  greater  percentage  decrease  in cost of sales as  compared  to the
percentage decrease in sales resulted in an increased gross profit percentage to
34.7% for the three  months  ended June 30,  2007,  as compared to 31.6% for the
three months ended June 30, 2006.

Cost of sales in the Institutional Security Systems segment of $12.5 million for
the three months  ended June 30, 2007 were up $1.2 million or 10.3%,  from $11.4
million during the same period of 2006. This increase,  coupled with the related
sales  increase of this  segment of 10.0%,  resulted in an 8.3%  decrease in the
gross profit  percentage to 13.8% from 14.0% for the three months ended June 30,
2006. The decrease in the gross profit percentage is largely a result of the mix
of projects worked on by the ISS's segment.

Cost of sales in the Attack  Protection  segment of $3.9  million  for the three
months  ended June 30, 2007  decreased  $3.6  million or 47.8% from $7.5 million
during the same period of 2006. This decrease was greater than the related sales
decrease of 41.6%,  resulting in a 6.9% increase in the gross profit  percentage
to 41.0% from 34.1% during the three months ended June 30, 2006.  The  principal
reason for the increase in the gross profit  percentage  during the three months
ended June 30, 2007, as compared to the three months ended June 30, 2006,  was a
shift in product mix whereby a greater  percentage  of this  segment's  revenues
were comprised of its higher margin Fiber Sensys products.

Cost of sales in the Integrated  Electronic  Systems segment of $3.6 million for
the three months ended June 30, 2007  increased  $1.1 million or 44.5% from $2.5
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 59.4%,  resulting  in a 7.8%  increase in the
gross profit  percentage to 24.4% as compared to 16.6% in the three months ended
June 30, 2006.

Cost of sales in the Public  Safety and Justice  segment of $3.2 million for the
three  months  ended  June 30,  2007 was down $1.7  million  or 34.9%  from $4.9
million  during 2006.  This decrease was greater than the related sales decrease
of this  segment of 10.8%,  resulting  in a 12.3%  increase in the gross  profit
percentage  to 66.9%  from  54.6%  in the  three  months  ended  June 30,  2006.
Substantially all of the projects awarded in this segment are discrete projects.

Selling,  general and  administrative  expenses (SG&A) were $9.1 million for the
three  months  ended June 30, 2007, a decrease of $0.2 million or 2.2% from $9.3
million for the same period of 2006.  Much of the  Company's  SG&A  expenses are
fixed.


                                       23
<PAGE>

As a  percentage  of  revenues  SG&A grew to 25.7% from 24.3%  during the second
quarter of 2007 as  compared  to the second  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.

                                         June 30,
                                           2007                   Life
                                      (in thousands)           (in years)
                                      --------------          ------------
     Software                             $   630                  5
     Non Compete Agreements                   460                  5
     Customer Relationships                   780                  5
     Trademark, tradename                      60              indefinite
                                          --------
                                          $ 1,930

The  amortization  of  the  above  assets  resulted  in  the  Company  recording
amortization expense related to these assets of $94 thousand and $0 thousand for
the three months ended June 30, 2007 and 2006,  respectively,  which is included
in operating expenses.

Research and  development  expenses were $2.5 million for the three months ended
June 30,  2007,  an increase of $0.5  million or 26.8% from $1.9 million for the
three months  ended June 30, 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.
"Due to the  higher  contracted  backlog  in  2006,  the  mix of  time  software
engineers   concentrated   on  project   implementations   versus  research  and
development  activities  was  greater  in 2006  than  2007.  This was a  primary
contributor to higher research and development cost in 2007 than in 2006."

Pre-Tax  Income.  The Company had a pre-tax income of $0.2 million for the three
months  ended June 30, 2007  compared to pre-tax  income of $0.3 million for the
three months ended June 30, 2006.  As discussed  below,  the  decreased  pre-tax
income occurred primarily in the AP segment,  partially offset by a smaller loss
in the PS&J segment.

Pre-tax loss from the  Institutional  Security  Systems segment was $0.2 million
for the three  months ended June 30,  2007,  an increase  from a pre-tax loss of
$0.4 million for the three months ended June 30, 2006. This increase was largely
a result of this segment's sales increase.

Pre-tax income from the Attack Protection segment was $0.9 million for the three
months ended June 30, 2007, a decrease from the $1.5 million  pre-tax income for
the three months ended June 30, 2006.  This decrease in pre-tax  income for this
segment is attributable to the significant decrease in this segment's revenues.

Pre-tax income from the Integrated  Electronic  Systems segment was $0.3 million
for the three  months  ended June 30,  2007,  an  increase  from a $0.2  million
pre-tax  income for the three  months  ended June 30,  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 $0.1 million for the
three months ended June 30,  2007.  This  compares to a loss of $0.5 million for
the three months ended June 30, 2006. This decrease was largely a result of cost
containment and management by this segment.

Pre-tax loss at the Corporate  level was $0.7 million for the three months ended
June 30, 2007 as compared to a pre-tax loss of $0.5 million for the three months
ended June 30, 2006. Increased professional fees account for the majority of the
increased loss.

Interest  expense was $0.8  million for the three months ended June 30, 2007 and
June 30,  2006.  The  following  table  compares  the  weighted  average  of the
Company's  three months ended June 30, 2007 and June 30, 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               $  2,825     6.2%     $  3,265     6.8%
Subordinated borrowings                $ 40,250     6.3%     $ 40,250     6.3%

                                       24
<PAGE>

The Company also incurred letter of credit fees, in addition to those related to
the  industrial  revenue  bonds,  of $0 thousand  and $60 thousand for the three
months ended June 30, 2007 and 2006, respectively.

In addition the Company recorded the following  non-cash interest  expense,  for
the periods ended June 30, in thousands:
                                                 2007          2006
                                                ------        ------
      Amortization and write-off
       of deferred financing charges            $  82         $  82

Taxes on Income.  The  effective tax rate was 0% for the three months ended June
30, 2007 and the effective tax rate was 2.5% for the three months ended June 30,
2006.  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 net income of $0.2 million for the three
months  ended June 30, 2007 and net income of $0.3  million for the three months
ended June 30,  2006.  Diluted  earnings per share was $.02 for the three months
ended June 30, 2007  compared to earnings per share of $.04 for the three months
ended June 30, 2006. The weighted  average  number of common shares  outstanding
and  equivalents  used in  computing  earnings per share was 8.5 million and 8.2
million for the three months ended June 30, 2007 and 2006, respectively.

SIX MONTHS ENDED JUNE 30, 2007 and 2006

Revenues.  The Company had revenues of $66.7  million and $78.9  million for the
six months ended June 30, 2007 and June 30, 2006,  respectively,  representing a
decrease of $12.1 million or 15.4%. As discussed  below,  the decrease  occurred
primarily due to lower revenues in our 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 $25.7 million for
the six months ended June 30, 2007,  a decrease  from $26.6  million for the six
months ended June 30, 2006, representing a decrease of $0.9 million or 3.3%. The
Institutional   Security  Systems  segment  is  largely  a  construction  driven
business.  Much of its  revenue  is  obtained  by  working  on new and  retrofit
construction  projects  in the  corrections  industry,  as opposed to sources of
recurring revenue.  As such, the decrease in revenue experienced by this segment
is largely  attributable  to our  working on fewer  projects  than we did in the
previous  year and the delay in the  start of some  projects.  Although  backlog
started increasing  significantly since the second half of 2006, it was not at a
significantly  high enough level prior  thereto to maintain its revenue  levels.
Backlog  was  $74.3  and  $51.2  million  at June 30,  2007  and June 30,  2006,
respectively. The years 2003 and 2004 were slow bidding periods for the Company.
Although  the gross  amount of  construction  spending in the  corrections  area
remained  relatively  flat between 2003 and 2004, the types of projects that the
Company solicits,  namely large-scale medium to maximum security  installations,
declined  significantly in 2003 and 2004. This situation was further  compounded
by the general state and local  governmental  budget deficits which caused these
governmental  units to  rethink  and  delay  many of their  pending  corrections
projects. 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 $11.1  million  for the six
months ended June 30, 2007, a decrease from $23.0 million for the same period of
2006,  representing  a  decrease  of $12.0  million  or 52.0%.  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 six
months ended June 30, 2007 the Norshield  line  experienced a 71.9%  decrease in
revenues as  compared to the six months  ended June 30,  2006.  The  decrease in
revenue of $15.1 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,  which was
completed  in the third  quarter of 2006.  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 154.8% increase in revenues for the
comparable  period  from $2.0  million  for the first six months of 2006 to $5.1
million for the first six months of 2007.  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 $9.7 million for
the six months ended June 30, 2007,  an increase  from $6.6 million for the same
period of 2006, representing an increase of $3.1 million or 47.8%. This increase
was largely a result of the acquisition of the assets and certain liabilities of
Signami  during the third  quarter of 2006 and  increase  in Signami DCS product
sales.

                                       25
<PAGE>

Since  2005,  IES has  been  successfully  performing  work  for the  Bureau  of
Engraving & printing  (BEP)  under a one-year  contract  with four option  years
valued at approximately $5M/year. As part of an internal reorganization, BEP has
decided not to exercise the next option year;  instead,  BEP has chosen to break
this contract effort into two separate efforts  (Operations and Maintenance) and
redefine  the  contractual  requirements  for  each of  these  efforts.  BEP has
solicited   bids  for  these  two  new   efforts  and   anticipates   awards  in
August/September  2007. IES has submitted bids on both efforts. In the event IES
is unsuccessful in winning the two new contracts,  this segment's  revenues will
be significantly adversely impacted.

Revenues from the Public  Safety and Justice  segment were $20.3 million for the
six months  ended June 30,  2007,  a decrease  from $22.7  million  for the same
period of 2006,  representing  a decrease of $2.4 million or 10.7%.  The decline
was primarily the result of lower backlogs from lower contract  signings in 2006
and an increased  focus on developing our next generation  products.  Backlog of
June 30, 2007 increased significantly over the March 31, 2007 backlog.

Expenses.  Cost of sales of $44.6 million for the six months ended June 30, 2007
was down $9.6  million  or 17.7% from $54.2  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 to
33.2% for the six months ended June 30,  2007,  as compared to 31.3% for the six
months ended June 30, 2006.

Cost of sales in the Institutional Security Systems segment of $22.7 million for
the six months ended June 30, 2007  increased  $0.2 million or 0.7%,  from $22.5
million during the same period of 2006. This increase,  coupled with the related
sales decrease of this segment of 3.3%, resulted in a 3.5% decrease in the gross
profit  percentage  to 11.6% from 15.1% for the six months  ended June 30, 2006.
The  decrease in the gross profit  percentage  is largely a result of ISS' fixed
costs being  absorbed by a smaller  revenue  base during the first six months of
2007.

Cost of sales in the  Attack  Protection  segment  of $7.4  million  for the six
months ended June 30, 2007  decreased  $8.5 million or 53.5% from $15.9  million
during the same period of 2006.  This  decrease was more than the related  sales
decrease of 52.0%,  resulting in a 2.2% increase in the gross profit  percentage
to 33.3% from 31.1%  during the six months ended June 30,  2006.  The  principal
reason for the  increase in the gross  profit  percentage  during the six months
ended June 30, 2007,  as compared to the six months  ended June 30, 2006,  was a
shift in  product  mix,  resulting  in a greater  percentage  of this  segment's
revenues being comprised of its higher margin Fiber Sensys products.

Cost of sales in the Integrated Electronic Systems segment of $7.2 million for
the six months ended June 30, 2007 increased $1.7 million or 30.1% from $5.6
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 47.8%, resulting in a 10.2% increase in the
gross profit percentage to 25.4% as compared to 15.2% in the six months ended
June 30, 2006.

Cost of sales in the Public  Safety and Justice  segment of $7.3 million for the
six months ended June 30, 2007 was down $3.0 million or 28.9% from $10.2 million
during 2006.  This decrease was greater than the related sales  decrease of this
segment of 10.7%, resulting in a 9.2% increase in the gross profit percentage to
64.1% from 54.9% in the six months ended June 30, 2006. Substantially all of the
projects awarded in this segment are discrete projects.

Selling,  general and administrative  expenses (SG&A) were $18.4 million for the
six months  ended June 30,  2007,  a decrease of $0.7 million or 3.6% from $19.1
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 27.5% from 24.2% during the
first six  months of 2007 as  compared  to the  first  six  months 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.

                                      June 30,
                                        2007              Life
                                   (in thousands)      (in years)
                                   --------------     ------------
     Software                          $   630              5
     Non Compete Agreements                460              5
     Customer Relationships                780              5
     Trademark, tradename                   60         indefinite
                                       --------
                                       $ 1,930

The  amortization  of  the  above  assets  resulted  in  the  Company  recording
amortization  expense  related to these assets of $208  thousand and $0 thousand
for the six months ended June 30, 2007 and 2006, respectively, which is included
in operating expenses.

                                       26
<PAGE>

Research  and  development  expenses  were $4.8 million for the six months ended
June 30,  2007,  an increase of $1.1  million or 30.3% from $3.7 million for the
six months  ended  June 30,  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.
"Due to the  higher  contracted  backlog  in  2006,  the  mix of  time  software
engineers   concentrated   on  project   implementations   versus  research  and
development  activities  was  greater  in 2006  than  2007.  This was a  primary
contributor to higher research and development cost in 2007 than in 2006."

Pre-Tax  Income.  The  Company  had a pre-tax  loss of $2.1  million for the six
months  ended June 30, 2007  compared to pre-tax  income of $0.9 million for the
six months ended June 30, 2006. As discussed below, the decreased pre-tax income
occurred  primarily  in the ISS and AP segments,  partially  offset by increased
pre-tax income from IES and a smaller loss in the corporate segment.

Pre-tax loss from the  Institutional  Security  Systems segment was $1.5 million
for the six months ended June 30,  2007, a decrease  from a pre-tax loss of $0.2
million for the six months  ended June 30,  2006.  This  decrease  was largely a
result of this  segment's  sales decline and the lower margin on the projects it
was able to work on during the first six months of 2007.

The Attack Protection segment had a $0.1 million pre-tax loss for the six months
ended June 30, 2007, a decrease from the $2.8 million pre-tax income for the six
months ended June 30, 2006.  This decrease in pre-tax income for this segment is
attributable to the significant decrease in this segment's revenues.

Pre-tax income from the Integrated  Electronic  Systems segment was $0.7 million
for the six months ended June 30, 2007, an increase from a $0.3 million  pre-tax
income for the six months ended June 30, 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 $0.3 million for the
six months ended June 30, 2007.  This compares to a pre-tax loss of $0.5 million
for the six months  ended June 30, 2006.  This  decrease was largely a result of
cost containment and management by this segment.

Pre-tax  loss at the  Corporate  level was $1.0 million for the six months ended
June 30, 2007 as compared to a pre-tax  loss of $1.4  million for the six months
ended June 30, 2006.  Decreased audit and related costs in addition to increased
interest income account for the majority of the decreased loss.

Interest  expense was $1.6  million  for the six months  ended June 30, 2007 and
June 30,  2006.  The  following  table  compares  the  weighted  average  of the
Company's  six months  ended June 30,  2007 and June 30, 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               $  2,975     6.1%     $  3,415     6.2%
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 $102  thousand for the six
months ended June 30, 2007 and 2006, respectively.

In addition the Company recorded the following  non-cash interest  expense,  for
the periods ended June 30, in thousands:

                                               2007           2006
                                              ------         ------
      Amortization and write-off
       of deferred financing charges          $ 164          $ 164

Taxes on Income. The effective tax rate was 0% for the six months ended June 30,
2007 and the  effective tax rate was a benefit of 18.9% for the six months ended
June 30,  2006.  The tax  benefit  for the six  months  ended  June 30,  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 $2.1 million for the six
months  ended June 30,  2007 and net income of $1.1  million  for the six months
ended June 30,  2006.  Diluted  loss per share was $.25 for the six months ended
June 30, 2007  compared to earnings  per share of $.14 for the six months  ended
June 30, 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 six months ended June 30, 2007 and 2006, respectively.

                                       27
<PAGE>

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,  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.

As of June 30, 2007, the Company had working  capital of $30.1 million  compared
with $31.0 million as of December 31, 2006.

Net cash used in operating  activities  was $2.2  million  during the six months
ended June 30, 2007 versus $5.3 million provided by operating  activities during
the six months  ended  June 30,  2006.  The  largest  component  of cash used in
operating  activities  was an increase in accounts  receivable  of $6.2 million,
partially  offset by a decrease in contract  costs in excess of billings of $2.9
million.

Net cash  provided by investing  activities  was $2.8 million for the six months
ended June 30, 2007  compared to net cash used in investing  activities  of $3.8
million in the six months ended June 30, 2006.  In the six months ended June 30,
2007, the marketable securities redeemed resulted in an increase of cash of $3.7
million.  In the six months ended June 30, 2006 the net  purchase of  marketable
securities was $2.6 million.

Net cash used in  financing  activities  amounted  to $0.3  million  for the six
months ended June 30, 2007 compared  with net cash used in financing  activities
of $0.9 million in the six months ended June 30, 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.

                                       28
<PAGE>

The Company may terminate the Agreement at any time upon ninety (90) days' prior
written notice of payment in full. In the event this occurs and refinancing does
not occur with the current bank an early termination fee will be assessed on the
$20 million  maximum  revolving  advances  amount.  This fee will be two percent
(2.00%) if terminated  within the first year, one percent  (1.00%) if terminated
within the second year and one-half of one percent  (.5%) if  terminated  within
the third year. At June 30, 2007 we are in year two of the Agreement.

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.

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 June  30,  2007  amounted  to
approximately  $43.1  million,  less  broker's  discounts  in the amount of $0.7
million.  The 2011 Notes accounted for $39.6 million, net of broker's discounts,
of  these  borrowings.  The  remaining  amount  of $2.8  million  resulted  from
borrowings  at variable  rates and  consisted of two  industrial  revenue  bonds
outstanding  in the  amounts  of $1.1  million  and $1.7  million.  The  average
interest rate charged to the Company at June 30, 2007 for its industrial revenue
bonds was 3.88%.  The variable  interest  rate for these  borrowings  fluctuated
between  3.58% and 4.16%  during  the six months  ended  June 30,  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.

                                       29
<PAGE>

At June 30, 2007 the Company had $17.1 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
six 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
June 30, 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 $2.9 million at
June 30, 2007, the Company has no other material off balance sheet liabilities.

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  55% of ISS'
revenue has come from jobs where payment and performance  bonds are required and
for PS&J, 25% 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 June 30, 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  additional  bonds when
needed, 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  six  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 $134.1  million at June 30, 2007.  This was an
increase  of 14.7%  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:

                                                 June 30,   December 31,
                                                   2007         2006
                                                ----------  ------------
Institutional Security Systems                  $  74,330    $  64,687
Attack Protection                                   8,761        5,686
Integrated Electronic Systems                       5,260        7,902
Public Safety and Justice                          45,786       39,067
                                                ----------  ------------
       Total                                    $ 134,137    $ 117,342
                                                ==========  ============

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

Included  in the  backlog of the ISS,  AP and PS&J  segments at June 30, 2007 is
$31.4 million, $1.7 million and $15.7 million, respectively, representing awards
received by the segment for which the clients  have not yet entered  into signed
contracts.  "Awards", while evidenced by written confirmation from the customer,
generally  remain subject to negotiation of a definitive  contract with detailed
conditions  and  agreements.  While it is  unusual  not to reach  agreement,  it
remains a  possibility  until the  definitive  agreement  has been signed by all
parties.

                                       30
<PAGE>

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 Quanta Systems,
LLC. In addition,  CorrLogic,  Inc. was  converted to  CorrLogic,  LLC and Fiber
SenSys, Inc. was converted to Fiber SenSys, LLC. On June 30, 2007 CorrLogic, LLC
was merged into Tiburon,  Inc. 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.

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.

                                       31
<PAGE>

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

Tax valuation  allowances are  established  when the Company  believes it is not
"more  likely than not" that the Company will be able to receive tax benefits in
the future. 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  $3.2 million,  net, at June 30, 2007.  The Company cannot predict
the occurrence of events that might adversely affect these values.

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 June 30, 2007 is
approximately  $2.9 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 did
not have an impact on our  financial  position  or  results of  operations.  The
Company does not have any such plans.

                                       32
<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 operations.

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 state and foreign jurisdictions.

At the adoption  date on January 1, 2007 and as of June 30, 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  recognizes  interest  and  penalties as a component of tax expense.
During the years ended December 31, 2006, and 2005 and the six months ended June
30, 2007, the Company did not recognize any interest or penalties in its results
of operations related to unrecognized tax benefits.

                                       33
<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 June 30, 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 June 30, 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.

                    Financial Instruments by Expected Maturity Date

Notes Payable          Variable       Average         Fixed
 Year Ending            Rate ($)      Variable       Rate ($)     Average Fixed
 December 31        (in thousands) Interest Rate  (in thousands)  Interest Rate
-----------------   -------------- -------------  --------------  -------------
2007 (remaining)    $         140          3.88%  $           -               -
2008                          440          3.88%              -               -
2009                          440          3.88%              -               -
2010                          440          3.88%              -               -
2011                          440          3.88%         40,250           6.25%
Thereafter                    925          3.88%              -               -
                    --------------                --------------
Total               $       2,825          3.88%  $      40,250           6.25%
Fair Value          $       2,825                 $      39,646           6.78%

                                   34
<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  2005
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, 2007,  the last business day of  CompuDyne's
2005 second fiscal  quarter,  was also less than $50 million;  as such CompuDyne
continues  to be  classified  as a  non-accelerated  filer  for the  year  ended
December 31, 2007.

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.

                                       35
<PAGE>

PART II - OTHER INFORMATION

Item 1A:  Risk Factors.

See those factors set forth in the  Cautionary  Note  Regarding  Forward-Looking
Statements  in Part I,  Item 2 of this  Quarterly  Report on Form 10-Q and other
risk factors as described in Part I, Item 1 of the Company's 2006 Annual Report,
which are  incorporated  herein by  reference.  There have not been any material
changes to the risk factors  previously  disclosed in the Company's  2006 Annual
Report other than as set forth below.  The risks described in the Company's 2006
Annual  Report  and below are the ones the  Company  currently  considers  to be
material but are not the only risks facing our  business.  Additional  risks and
uncertainties  not  currently  known to us or that we  currently  consider to be
immaterial also could materially and adversely  affect our business,  prospects,
financial condition, and operating results.

The proposed tender offer by and merger with affiliates of The Gores Group,  LLC
("Gores") (see Note 12 of Notes to Consolidated Financial Statements) is subject
to certain  closing  conditions that could result in the tender offer and merger
not being  completed,  which may in turn result in a decline in the price of the
Company's common stock.

The proposed  tender offer by and merger with  entities  primarily  sponsored by
affiliates of Gores is subject to customary conditions,  including that at least
53% of the outstanding  shares of the Company's  common stock on a fully diluted
basis shall have been validly tendered and not withdrawn. Many of the conditions
to closing the tender offer and the merger are outside of the Company's control.
If any  condition  to the  closing  of the  tender  offer and the  merger is not
satisfied or, if permissible,  waived,  the tender offer and the merger will not
be completed.

If the tender offer or the merger is not  completed,  the price of the Company's
common stock may decline to the extent that the current  market price reflects a
market  assumption  that the tender offer and the merger will be completed  with
stockholders  receiving  $7.00 for each share of common stock held.  The Company
will also be obligated to pay certain  professional fees and related expenses in
connection with the tender offer and the merger, whether or not the tender offer
and the merger are completed.  In addition,  the Company has expended,  and will
continue to expend,  significant  management and other resources in an effort to
complete the tender offer and the merger. If the tender offer and the merger are
not completed,  the Company will have incurred significant costs,  including the
diversion  of  management  resources,  for little or no benefit.  Further,  upon
termination of the merger agreement under certain specified  circumstances,  the
Company  will be required to pay a  termination  fee of $3.5  million to certain
other parties to the merger agreement.

Whether  or not the  tender  offer by and the  merger  with  entities  primarily
sponsored by Gores is  completed,  the  announcement  and pendency of the tender
offer and the merger could cause disruptions in operations,  which could have an
adverse effect on the Company's business and financial results.

Whether  or not the  tender  offer by and the  merger  with  entities  primarily
sponsored  by Gores is  completed,  there are  various  uncertainties  and risks
associated  with the  announcement  and  pendency  of the  tender  offer and the
merger, including the following:

     o    The Company management's attention may be diverted to efforts to
          complete the tender offer and the merger and away from the execution
          of existing business plans, which could disrupt operations and have a
          material adverse effect on the Company's operating results;

     o    Perceived uncertainties as to the Company's future direction may
          result in the loss of employees, customers, suppliers and other
          business partners.

The market  value of the  Company's  common stock will be impacted by the tender
offer and merger.

Stock price changes may result from the market's  assessment  of the  likelihood
that the  merger  will be  completed  and the  timing of the  completion  of the
merger.  The Company is not permitted to "walk away" from the merger,  terminate
the merger agreement or resolicit the vote of its stockholders solely because of
changes in the market price of CompuDyne common stock.

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

Proposal #1 - Election of Directors.

At the Annual Meeting of Shareholders on May 23, 2007, the shareholders  elected
Geoffrey  F.  Feidelberg  Director  for a period of three years to expire at the
2010 Annual Meeting. The votes were cast as follows:

                                       36
<PAGE>

         For - 5,387,738                           Withheld - 1,169,595
               ---------                                      ---------

At the Annual Meeting of Shareholders on May 23, 2007, the shareholders elected
John H. Gutfreund Director for a period of three years to expire at the 2010
Annual Meeting. The votes were cast as follows:

         For - 5,647,761                           Withheld -   909,572
               ---------                                      ---------

At the Annual Meeting of Shareholders on May 23, 2007, the shareholders elected
Martin Roenigk Director for a period of three years to expire at the 2010 Annual
Meeting. The votes were cast as follows:

         For - 5,628,338                           Withheld -  928,995
               ---------                                      ---------

         Item 6:  Exhibits.

Exhibits

2.1       Agreement and Plan of Merger, dated August 6, 2007, by and among
          CompuDyne Corporation, Gores Patriot Holdings, Inc. and Patriot
          Acquisition Corp, incorporated herein by reference to Exhibit 2.1
          to the Current Report on Form 8-K filed on August 8, 2007.

10.1      Employment Agreement dated April 10, 2007 between CompuDyne
          Corporation and Geoffrey F. Feidelberg, incorporated herein by
          reference to Exhibit 10.1 to the Current Report on Form 8-K filed on
          April 13, 2007.

10.2      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,
          incorporated herein by reference to Exhibit 10(C) to the Quarterly
          Report on Form 10-Q filed on May 15, 2007.

10.3      Amendment No. 1 to CompuDyne Corporation Retention Plan for Selected
          Employees, incorporated herein by reference to Exhibit 10.1 to the
          Current Report on Form 8-K filed on June 18, 2007.

10.4      Amendment No. 2007-1 to CompuDyne Corporation 2005 Stock Incentive
          Plan for Employees, incorporated herein by reference to Exhibit 10.1
          to the Current Report on Form 8-K filed on August 7, 2007.

10.5      Amendment No. 2007-1 to CompuDyne Corporation 2005 Stock Option Plan
          for Non-Employee Directors, incorporated herein by reference to
          Exhibit 10.2 to the Current Report on Form 8-K filed on August 7,
          2007.

10.6      Amendment No. 2007-1 to Amended and Restated CompuDyne Corporation
          1996 Stock Incentive Compensation Plan for Employees, incorporated
          herein by reference to Exhibit 10.3 to the Current Report on Form 8-K
          filed on August 7, 2007.

10.7      Amendment No. 2007-1 to CompuDyne Corporation 1996 Stock Option Plan
          for Non-Employee Directors, incorporated herein by reference to
          Exhibit 10.4 to the Current Report on Form 8-K filed on August 7,
          2007.

10.8#     Bonus awards to Martin A. Roenigk and Geoffrey F. Feidelberg and
          Compensation Committees conclusion concerning the Company's Option
          Plans, incorporated by reference to the Current Report on Form 8-K
          filed on August 10, 2007.

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

#         Compensation plans and arrangements for executives.

                                       37
<PAGE>

SIGNATURE
---------

        Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

                                                      COMPUDYNE CORPORATION


Date: August 13, 2007                                 /s/ Martin Roenigk
                                                      ------------------
                                                      Martin Roenigk
                                                      Chief Executive Officer


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

                                       38