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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    Form 10-K


[x]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
         EXCHANGE ACT OF 1934 For the fiscal year ended October 31, 1998
                                       or
[_]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
         EXCHANGE ACT OF 1934 (No Fee Required)For the transition period from 
         ___________ to ___________                                    
                     
                         Commission file number: 0-11254

                                 
                                 COPYTELE, INC.
--------------------------------------------------------------------------------
             (Exact Name of Registrant as Specified in its Charter)
                         
                                    Delaware
--------------------------------------------------------------------------------
         (State or Other Jurisdiction of Incorporation or Organization)


                                   11-2622630
--------------------------------------------------------------------------------
                      (I.R.S. Employer Identification No.)
                       
                                                
                              900 Walt Whitman Road
                          Huntington Station, NY 11746
                                 (516) 549-5900
--------------------------------------------------------------------------------
 (Address, Including Zip Code, and Telephone Number, Including Area Code, of 
                    Registrant's Principal Executive Offices)

               Securities registered pursuant to Section 12(b) of
                                    the Act:
                                          
                                                      
                                               Name of Each Exchange
            Title of Each Class                on Which Registered
            -------------------                ----------------------
                  NONE                                  NONE

               Securities registered pursuant to Section 12(g) of
                                    the Act:


                          Common Stock,$.01 par value
--------------------------------------------------------------------------------
                                (Title of Class)

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 if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive  proxy or information  statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [x].

Aggregate  market value of the voting stock (which  consists solely of shares of
Common Stock) held by  non-affiliates  of the registrant as of January 22, 1999,
computed by reference to the closing sale price of the registrant's Common Stock
on the NASDAQ National Market System on such date ($1.91): $95,593,898.

Indicate  by check mark  whether  the  registrant  has filed all  documents  and
reports  required  to be  filed by  Section  12,  13 or 15(d) of the  Securities
Exchange Act of 1934 subsequent to the  distribution of securities  under a plan
confirmed by a court. Yes [_] No [_]

On January 22, 1999, the registrant had outstanding  58,111,176 shares of Common
Stock, par value $.01 per share,  which is the registrant's only class of common
stock.

                      DOCUMENTS INCORPORATED BY REFERENCE:
                                      NONE
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<PAGE>

                                     PART I
                                     ------   

Item 1.  Business
        ---------

General
-------

CopyTele, Inc. (the "Company" or "CopyTele"),  is a development stage enterprise
whose principal activities include the development,  production and marketing of
a telephone based multi-functional  telecommunications product incorporating the
Company's patented compact, ultra-high resolution, charged particle, E-Paper(TM)
flat panel display  technology (the "E-Paper(TM)  Flat Panel Display"),  and the
operations of Shanghai CopyTele Electronics Co., Ltd. ("SCE"), the Company's 55%
owned joint  venture in  Shanghai,  China.  In  addition,  the Company is in the
process of  developing  three new products:  (i) a compact and portable  digital
encryption  device which could  provide  high-grade  information  security for a
telephone, computer, fax machine, MAGICOM(R) 2000, or "e-way"; (ii) a peripheral
product  called "e-way" which could be used with a telephone,  computer,  or fax
machine to provide internet  e-mail,  simultaneous  voice and  handwriting,  and
caller ID all over a single telephone line; and (iii) coated  particles  derived
from its  E-Paper(TM)  Flat Panel  Display  which could  potentially  be used by
manufacturers  of toners  and  pigments.  The  Company  also is  continuing  its
research and development  activities for additional  ultra-high  resolution flat
panel display technologies including video and color displays.

SCE  was  formed  to  produce  and  market  multi-functional  telecommunications
products in China,  utilizing the Company's  E-Paper(TM)  Flat Panel Display and
associated  proprietary  hardware  and  software  technology  and to supply such
products to CopyTele  for sale  outside of China.  The first  telecommunications
product  developed  by the  Company  was  MAGICOM(R)  2000,  a  telephone  based
multi-functional  product that can provide over a single  telephone line various
functions,   including  internet  e-mail,  and  simultaneous  voice,  electronic
handwriting and editing of documents.  SCE is producing  MAGICOM(R) 2000 for its
distribution  channels in China and CopyTele's  distribution  network in various
regions of the world including the United States.

The Company also has  developed,  in  conjunction  with a Japanese  company (the
"Japanese  Supplier"),  a small portable  printer  called MAGIC  PRINTER.  In an
effort to reduce costs, however, the Company has also initiated discussions with
a second  supplier (the "Second  Printer  Supplier") to produce a new lower cost
small portable printer according to the Company's  design,  with essentially the
same features as the original MAGIC PRINTER. See "Products -- MAGIC PRINTER".

To date,  the Company has had no revenues to support its  operations  other than
limited  sales to certain of its  distributors.  Revenue will not be recorded on
these sales , which were not  material,  until the Company  determines  that its
products have been accepted by the end-users (see Notes 1 and 2 to the Company's
Financial  Statements).  The Company has expended  approximately $28 million for
research and development since its inception in 1982.  MAGICOM(R) 2000 and MAGIC
PRINTER  are only in their  initial  stages of  production  and  marketing.  The
compact encryption device,  "e-way",  the new lower cost printer, and the coated
particles for toners and pigments are under  development as more fully discussed
below  under  "Products  - New  Products  Under  Development".  The  success and
profitability  of these products will depend upon many factors,  including those
normally  associated  with any new  product or product  under  development.  See
"Business - General Risks and Uncertainties"  below.  Consequently,  there is no
assurance  that the Company  will  generate  sufficient  revenues to support its
operations in the future,  will have sufficient  revenues to generate profits or
that other products will not be produced by other companies that will render the
products of the  Company and of SCE  obsolete  or  unmarketable.  The  Company's
existing cash  resources may not be sufficient to enable the Company to continue
its  operations as currently  conducted  beyond the first quarter of fiscal year
2000 without revenues or additional financing.  See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources".

The Company's Chief Executive Officer, Denis A. Krusos, its President,  Frank J.
DiSanto,  and  other  senior  executives  are  engaged  in  the  management  and
operations  of the Company and SCE,  including  all aspects of the  development,
production  and  marketing  of the  Company's  products  and flat panel  display
technology,  and are important to the future business and financial arrangements
of the Company and SCE.

                                   1
<PAGE>
The Company was incorporated on November 5, 1982, under the laws of the State of
Delaware.  Its principal executive offices are located at 900 Walt Whitman Road,
Huntington Station, New York 11746 and its telephone number is 516-549-5900.

Safe Harbor  Statement  Under the Private  Securities  Litigation  Reform Act of
--------------------------------------------------------------------------------
1995.  
----

Certain  statements  in  this  Annual  Report  on  Form  10-K  constitute
"forward-looking  statements"  within  the  meaning  of the  Private  Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown  risks,  uncertainties  and other  factors  which  may cause the  actual
results,  performance or achievements of the Company to be materially  different
from any future  results,  performance or  achievements  expressed or implied by
such  forward-looking  statements.  Such  factors  include,  among  others,  the
following:  production capability by SCE and the Japanese Supplier of MAGICOM(R)
2000 and MAGIC PRINTER, respectively; the ability of the Second Printer Supplier
to produce and supply a lower cost printer;  long-term  product  performance and
the  capability  of the  Company,  SCE,  its  distributors  and its  dealers  to
adequately  service the  Company's  products;  the ability of  distributors  and
dealers to market their contracted quantities of the Company's products in their
respective  territories;  the  ability  of the  Company  and SCE to  obtain  all
required  foreign  government  approvals;  the  volatility  of foreign  currency
exchange  rates;   political  and  economic   stability  in  targeted  marketing
territories;  the ability of the Company to reduce the cost of  MAGICOM(R)  2000
and the related printer; political and economic stability in China and Russia in
which research,  development or production activities are taking place on behalf
of the Company; the ability of the Company to commercially develop and establish
a market for its new products  under  development;  the possible  development of
competitive  products  that could  render the  Company's  products  obsolete  or
unmarketable; and the ability of the Company to obtain additional financing.

Products
--------

         MAGICOM(R) 2000
         -------------

The Company's first product is the MAGICOM(R)  2000.  Since its  introduction in
1997, the Company has been developing and  incorporating  into MAGICOM(R) 2000 a
number of enhanced  features.  The most significant  features of MAGICOM(R) 2000
include the capability,  with the addition of a Company developed  keyboard:  to
communicate by e-mail over the internet;  to provide all functions over a single
telephone  line,  including  simultaneous  voice and electronic  handwriting and
editing of  documents  ("SVD");  to input and  retrieve  documents to and from a
computer's storage; to edit and transmit received documents; to send and receive
full page paperless fax; to rapidly scan documents,  pictures, and drawings into
a  computer;  to  send  and  receive  handwritten  information;  and to  provide
peripheral  functions to computers.  MAGICOM(R)  2000 is compatible with and can
send  information  to fax  machines and  computers,  has the ability to transmit
alpha-numeric  messages to pagers,  and possesses all basic telephone  features,
including digital voice mail.
                                  
The Company's  E-Paper(TM)  Flat Panel Display  incorporated  in MAGICOM(R) 2000
brings an advanced  standard of  readability  to visually  displayed  electronic
information,  since its display image forms in a manner  closely  resembling the
way a printed  image forms on a page.  Business  documents,  letters,  diagrams,
written  messages  or notes,  magazine  articles,  pictures  and other  forms of
information that can be received  electronically can be read and viewed with the
ease  approaching  that of a printed page. Users can view, in a single image, an
entire page of  information.  The displayed  images can be viewed from any angle
under all lighting  conditions.  Once an image is scanned into this display,  it
can  be  retained  with  minimal   display  power.   This  provides   additional
user-friendliness   since  no   refreshing   is  necessary  to  view  an  image.
Conventional  displays,  such as cathode ray tubes  ("CRTs") and liquid  crystal
displays  ("LCDs"),  require refresh (quick repetition of an image) which is one
reason why people find reading a printed page on paper easier and more  natural.
The E-Paper(TM)  Flat Panel Display,  in combination with a high quality writing
screen and plastic tip pen, allows electronic  writing with the ease approaching
that of writing on paper. The display-writing  screen combination can be used to
create and transmit  information  and edit received  documents.  The Company has
described these display features as "electronic  paper".  In addition,  the high
resolution  of its  E-Paper(TM)  Flat Panel  Display  has enabled the Company to
produce a compact,  lightweight  product  capable of  displaying  a full page of
information,  considerably  smaller than conventional lower resolution  displays
would allow. The product size is suitable for office and home use.

                              2
<PAGE>
During 1998,  the Company  began  developing  a peripheral  compact and portable
digital  encryption  device that could provide  security for all MAGICOM(R) 2000
functions,  including  internet  e-mail,  SVD,  voice,  fax,  data, and cellular
communication.  See "New Products Under Development -- Encryption Device" below.
The Company  believes that with the addition of security,  MAGICOM(R) 2000 could
fulfill many  governmental,  industrial,  and personal  applications both in the
domestic and international markets.

The  Company  also  instituted  a  program  during  1998 to  reduce  the cost of
producing  MAGICOM(R)  2000. In accordance with this program,  the Company is in
the  process of  locating  contractors  who have  economy of scale in  producing
similar types of electronic  components  as those used in MAGICOM(R)  2000,  and
finding competitive sources for the product's major cost components, such as the
E-Paper(TM)  Flat Panel Display,  which  represents the most costly component of
the product.  In order to reduce the cost of the E-Paper(TM) Flat Panel Display,
the Company has begun  working with two  companies,  one of which is Volga Svet.
Limited  ("Volga"),  a Russian display  company,  to develop and produce a lower
cost version of the substrates for the E-Paper(TM) Flat Panel Display. See "Flat
Panel Display  Technology -- E-Paper(TM) Flat Panel Display" below. There can be
no  assurances  that  these  companies  will be  successful  or that a  mutually
acceptable  agreement for the supply of such substrates will ever be reached. In
order to  lower  the cost of the  display,  the  Company  also  transferred  the
production of fluid for the  E-Paper(TM)  Flat Panel Display to SCE during 1998.
See "Production" below.
                              
         MAGIC PRINTER
         -------------

The Company has developed,  in conjunction with the Japanese  Supplier,  a small
portable  printer called MAGIC PRINTER.  The Company's  MAGIC PRINTER,  which is
produced  by  the   Japanese   Supplier  in   accordance   with  the   Company's
specifications,  is small in size and  lightweight,  and is being marketed as an
optional  accessory for the MAGICOM(R)  2000 where desk space is at a premium or
for use with personal,  notebook, or laptop computers. The Japanese Supplier has
already  produced  a  sufficient  quantity  of  printers  to meet the  Company's
anticipated short-term needs. In an effort to reduce costs, however, the Company
has initiated  discussions  with a Second  Printer  Supplier to produce  another
small portable printer according to the Company's  design,  with essentially the
same features as the current MAGIC PRINTER, but at a significantly reduced cost.
If produced,  this new printer would  supercede the original MAGIC PRINTER.  The
Company  expects to develop models for this new printer during the first half of
1999.  There  can  be  no  assurance,  however,  that  a  new  printer  will  be
successfully  developed or that a mutually  acceptable  supply agreement will be
reached with the Second  Printer  Supplier for the production of the new printer
or, if no  agreement  is  reached,  with the  Japanese  Supplier  for the future
production of MAGIC PRINTER. If the Company is unable to reach an agreement with
either  supplier,  there can be no  assurance  that the Company  will be able to
obtain a printer similar to MAGIC PRINTER from another manufacturer.

                                
         New Products Under Development
         ------------------------------

                  Encryption Device
                  -----------------

During 1998,  the Company  began  development  of a high grade,  hardware  based
peripheral digital  encryption device suitable for protecting  multiple forms of
communication.  The Company plans to  incorporate  into the device the Company's
technology  derived from  MAGICOM(R)  2000 and "e-way".  In order to provide the
encryption  for  the  devise,   the  Company  is  in  negotiations  with  Harris
Corporation  (Harris)to  be able to  embed a  Digital  Cryptographic  chip - The
Citadel(TM)  (a  trademark  of  Harris)  into  the  device.  The  Citadel(TM)was
developed  by  Harris  to  meet  current  and  future   demands  for  high-grade
information  security and, as such,  provides  state-of-the-art  protection  for
domestic and international  users over virtually any  communications  media. The
encryption  device would connect (via  appropriate  connectors)  to a telephone,
computer, fax machine, MAGICOM(R) 2000, or "e-way" to secure the transmission of
information, including SVD (simultaneous voice and data), using a 56k BPS modem,
over a single  telephone  line.  The device would permit  secure  computer  file
encryption  for safe  storage and  transmission  over the  Internet as an e-mail
attachment.  The device also would incorporate a public key exchange system that
would allow for a convenient  and simple  method for users to establish a secure
connection.  Switching between secure and non-secure modes would be accomplished
by the push of a single  button.  The  device  is  expected  to be  compact  and
portable,  having  approximate  dimensions of 5" W x 4" D x 1" H, and weigh less
than 8 ounces with low power  consumption.  The Company is in negotiations  with
Harris to provide the Company with  engineering  support for this product during
the prototype  phase of development  and in connection  with  integration of the
Citadel(TM) into the encryption  device.  The Company expects that the prototype
will be completed  within the first half of 1999. There can be no assurance that
a successful  prototype or commercially  marketable product will be developed or
that  acceptable  arrangements  for the  production and marketing of the product
will ever be reached.

                                  3
<PAGE>
                                 
                  "e-way"
                  -------

In light of market indicators,  the Company believes that a simplified and lower
cost product that utilizes  some, but not all, of MAGICOM(R)  2000's  technology
could provide another opportunity for the Company. As a result,  during 1998 the
Company began  developing  "e-way",  a product that could be a peripheral to any
computer,  telephone,  or fax machine. It is anticipated that its features would
include the ability,  with the aid of a Company developed  keyboard,  to send or
receive e-mail over the internet,  send  handwritten or e-mail  information to a
computer,   perform  SVD,  provide  caller  ID,  receive  and  send  handwritten
information, and receive handwritten information in memory all with the use of a
single telephone line. The product also would include a display having 480 lines
in the horizontal direction by 320 lines in the vertical direction overlaid by a
writing screen.  Its size would be  approximately 7 inches wide by 5.5 inches in
depth and sloped to a maximum  height of 1.5 inches.  The display  would be used
for both  handwriting and typing e-mail with the keyboard.  It is estimated that
its weight would be as low as one pound.  The design includes two telephone line
jacks, a serial port to connect to computers,  and a parallel port to connect to
the optional Magic Printer.  The design also would allow  compatibility with the
Company's  encryption  device which,  if developed,  would provide  security for
voice, e-mail, and handwritten information. The Company expects that a prototype
will be developed in the first half of 1999 but there can be no assurance that a
commercially marketable product can be successfully developed.

The Company has been  discussing  the  application  of this product with several
companies,  including  telecommunication  and  office  equipment  companies  and
distributors of home and office  electronic  products.  The Company will seek to
establish a market for this product based on these  investigations.  SCE is also
performing similar marketing investigations in China. If "e-way" is successfully
developed as a commercially marketable product, the Company anticipates that the
product would be produced by SCE, or possibly by the Second Printer Supplier.

The display for "e-way" is a liquid crystal  display (LCD)  generally  available
from a number of large LCD flat  panel  suppliers.  The  Company,  however,  has
entered into an agreement with Volga for the production of LCDs which would meet
the Company's  specifications  and interface  requirements.  See "Liquid Crystal
Display"  below.  The Company is expecting an initial  quantity of displays from
Volga in the first half of 1999. The long-term  availability  of supply for LCDs
from Volga, however, will be subject to future negotiations, and there can be no
assurance  that the  Company  and Volga  will be able to  arrive  at a  mutually
acceptable agreement.
                                  
                  Coated Particles
                  ----------------

During  1998  the  Company,  using  the  coated  particles  technology  that was
developed for the fluid contained in the E-Paper(TM)  Flat Panel Display,  began
developing  coated  particles  that  could be used in  pigments  and  toners for
printers and copiers.  These particles would have a very narrow range of size as
compared to those currently  available in printers and copiers thereby resulting
in better  resolution,  less color  degradation  with time, and more  consistent
response to an applied  electric  field  (which is necessary in order to deposit
the particles on paper) than is presently available in commercial  products.  In
addition,  it is anticipated that the coated particles  fabrication process will
be  simplified  and will not require  mechanical  procedures  of  grindings  and
extensive  sieving.  The Company is  investigating  the possibility of licensing
this  technology  or forming  joint  arrangements  with  companies  that produce
pigments and toners

Flat Panel Display Technology
-----------------------------

In 1998, the Company continued to produce its E-Paper(TM) Flat Panel Display and
also to pursue its efforts to develop four new  technologies for color and video
flat panel displays (see "Color and Video Flat Panel" below).

                                 4
<PAGE>

         E-Paper(TM) Flat Panel Display
         ---------------------------

The E-Paper(TM) Flat Panel Display  possesses a combination of features that are
not presently available in other display screens, such as ultra-high resolution,
compatibility with facsimile terminals (200 lines per inch in the horizontal and
vertical  directions  with  up to a full  page  of  information  with  real-time
display),  a minimal amount of inactive space between pixels or picture elements
(allowing the image to appear  smoother),  image  retention  without  refreshing
(eliminating the need for image  repetition with resulting  flicker and operator
fatigue),  approximately  180 degree viewing angle,  low power  consumption  for
writing and image  retention with minimal power  consumption.  The Company's 7.8
inch diagonal flat panel is one of the principal features of the MAGICOM(R) 2000
product.  This flat panel has 1,280 lines by 896 lines with a resolution  of 200
lines per inch in both directions containing approximately 1,150,000 pixels, and
has an image area of approximately 6.4 x 4.5 inches.

The Company has been  purchasing  flat panel  substrates  from Hoya  Corporation
("Hoya"), a major Japanese high technology manufacturer of glass products. These
substrates  are  produced  by Hoya  using the  Company's  technology  and design
specifications  and are then incorporated into MAGICOM(R) 2000 units produced at
SCE.  The  Company  has  instituted  a program to develop  other less  expensive
sources  for these  substrates.  One  possible  source is Volga.  The Company is
currently  providing  Volga with  technical  support in this  effort.  Volga has
supplied  engineering  samples to the  Company  and their  performance  is being
evaluated.  If Volga can satisfy the Company's performance,  cost and production
requirements,  the Company may change the source of the substrates  from Hoya to
Volga. There can be no assurance,  however, that a mutually acceptable agreement
for the supply of the substrates will be reached.

The Company's  E-Paper(TM)  Flat Panel Display design  utilizes a chip which has
128 outputs. The chip has the required speed to accommodate panel operation, and
is capable of using minimal power when viewing an image. The chip, in accordance
with the Company's design and  specification,  is being purchased by the Company
and is being supplied to SCE for incorporation into production units.

The flat panel also  utilizes  fluids  which were  developed  by the Company and
which are suitable  for  production  processing.  See "Fluid"  below.  The fluid
contains coated yellow  particles  suspended in a dark dye. Thus, the flat panel
contains a yellow background with black writing or vice versa. In order to lower
the cost of the E-Paper(TM) Flat Panel Display,  the Company  transferred  fluid
production to SCE during 1998. See "Production" below. The Company,  however, is
still  producing the charged  particles at its  facilities  on Long Island,  New
York, which represent the key know-how for the fluid technology.
                                    
Included as an integral part of the Company's  E-Paper(TM) Flat Panel Display is
a plastic tip pen and touch writing screen. Due to the ultra-high  resolution of
the display, any language may be clearly written with the use of the plastic tip
pen. An integrated front illumination system (see "Illumination"  below) is also
incorporated  into the  E-Paper(TM)  Flat Panel  Display.  This system  provides
viewing of the flat panel from nighttime to sunlight  ambient light  conditions.
By  incorporating  these  capabilities,  the  Company's  E-Paper(TM)  Flat Panel
Display  provides clear and  comfortable  viewing,  from any angle, of pictures,
text in any language, and graphics.

         Illumination
         ------------

The Company has developed a front light illumination  system for the E-Paper(TM)
Flat Panel Display used in MAGICOM(R)  2000. This allows viewing of images under
nighttime  to  sunlight  conditions.  The  front  illumination  system  has been
integrated with the flat panel assembly.  The light is generated by cold cathode
fluorescent  lamps.  The design of these lamps was developed in conjunction with
another  company in accordance  with the Company's  specifications.  The Company
determined  experimentally  the  phosphor  color of the  fluorescent  lamp.  The
development also included the design of the optical system, its optical quality,
mechanical  mounting  techniques  and the  generation  of standards  for quality
control of the system's brightness, contrast and uniformity.

                                5
<PAGE>

         Fluid
         -----

The Company  utilizes  equipment which allows large batches of specially  coated
yellow particles to be produced for insertion into the fluid.  Equipment is also
being used to characterize sample batches and particle consistency.  A number of
coatings  are  applied  in  the  production  process  to the  Company's  pigment
particles  to increase  contrast and to enhance  stability  and  longevity.  SCE
utilizes equipment similar to the Company's to produce the fluid.

The Company believes that the E-Paper(TM) Flat Panel Display is  environmentally
comparable to a liquid crystal display and the Company presently is not aware of
any  environmental  hazards  associated  with the small quantity of fluid medium
inside the display.

         Color and Video Flat Panels
         ---------------------------

                  Solid State and Optical Display
                  -------------------------------

During 1998,  the Company  continued  its efforts to develop  digital  video and
color  capability  pursuant to development  arrangements  with a network of U.S.
companies  and U.S.  Universities,  including  The Center for Advanced Thin Film
Technology at the State  University of New York at Albany.  The Company believes
that, if  successful,  the  technology  under  development,  which  involves the
Company's  proprietary  design for solid state and optical  technology,  will be
most suitable to obtain  ultra-high  resolution  in color at video speeds,  with
minimal  power,  high contrast and long life.  The Company's  goal is to achieve
color implementation  without the use of the traditional color filters which are
currently used in LCDs.

The  Company's  design for this color and video  flat panel  display  utilizes a
display  structure  which is wafer  thin  (less  than 1/30 of an inch) and which
would have the control logic, drivers and display structure all produced on this
thin  substrate.  The Company's  design could also be implemented on glass.  The
display  could plug-in to products that the Company may develop in the future or
products developed by other companies.  The flat panel fabrication utilizes CMOS
and MEMS (micro electromechanical systems) wafer processing.  MEMS technology is
the  process  by  which   precise   electromechanical   parts  can  be  made  by
micromachining  - a  batch-fabrication  technology  similar to the  process  for
making very large integrated (VLSI) circuits.
                                
The basic display principle utilizes a thin film optical modulator  developed by
the Company on the pixel array to create high resolution images. The pixel array
is on a static  MEMS  structure  that  includes  the optical  modulator  and the
associated  pixel  activator.  It also includes an active matrix array for image
control and memory. The dimensional  structural  feasibility was confirmed using
MEMS structures patterned by photolithography  and using standard  semiconductor
production equipment.  Pixel designs including limited format and core 640 x 480
format  display  arrays are  completed  and are  presently  being  fabricated to
produce the initial engineering prototypes.  This is expected to be completed in
the first half of 1999.  The solid state and optical  flat panel  display  under
development is being designed to include the following features:

*       Ultra-high resolution of 216 by 216 lines per inch.
*       Video frame rate capability which is faster than 30 frames per second 
        (normal TV rate).
*       Color achieved with control of the final thin film.
*       16 levels of gray scale.
*       Thin film display with CMOS pixel drives, two dimensional pixel areas 
        and control logic on a single wafer.
*       Initial screen having an array of 640 x 480 pixels with larger sizes 
        fabrication facilities which includes thin film, CMOSplanned in future.
*       Production  fabrication requires standard 2 micron  semiconductor wafer
        and MEMS wafer processing.

Other capabilities include the following:

*        Display components are fully operational over a wide range of 
         temperatures.
*        Incremental  gray-scales of monochrome or color can be controlled by 
         several techniques.  One technique provides a video frame rate of up to
         5 msec per pixel period.  Another  technique permits fixed images to be
         retained for long periods with a minimal amount of refresh.
*        System can be battery operated with standard power supply voltages.
*        The technology lends itself to both active matrix and passive matrix 
         technology.
*        A range of display sizes can be fabricated using the same production 
         facility.

                                       6
<PAGE>

                  Thin Film Video Color Display (Field Emission Display)
                  -----------------------------

In late 1997, the Company entered into a Joint Cooperation Agreement (the "Joint
Cooperation  Agreement") with Volga to co-develop an ultra-high  resolution thin
film color and video emissive flat panel display.  This flat panel display would
complement the Company's other passive display technologies in that it would use
emission of light to create images.  The Company is providing  technical support
and funding the project,  while Volga is contributing  its proprietary thin film
technology.  All know-how developed pursuant to the Joint Cooperation Agreement,
if any, would  initially  become the joint property of the Company and Volga. It
is the present  intent of the parties to form a joint  venture in Russia for the
manufacture of the display if and when a limited quantity of prototypes has been
developed  and  tested  demonstrating  the  feasibility  of the  display.  It is
contemplated  that  sixty  percent  (60%) of the  venture  would be owned by the
Company and forty percent  (40%) would be owned by Volga,  and that each company
would  grant to the joint  venture  an  exclusive  license  with  respect to all
know-how developed and a royalty-free,  nonexclusive license with respect to the
preexisting  know-how  contributed  by Volga.  In the event that the parties are
unable  after a  specified  time to reach  agreement  upon the  terms of a joint
venture,  all know-how  developed  pursuant to the Joint  Cooperation  Agreement
would  become the  property of the Company and Volga.  The Company  would have a
royalty-free,  nonexclusive,  worldwide  license with respect to the preexisting
know-how contributed by Volga.

The Company believes that this thin film technology,  if successfully developed,
could  create an  ultra-high  resolution  color video  emissive  display  with a
simplified  production  process as  compared  to other  similar  field  emission
technologies being used by other companies. The thin film video color flat panel
display under  development is initially  being designed to include the following
features:

*        Resolution 230 vertical by 230 horizontal lines per inch.
*        T.V. video frame rate.
*        640 x 280 RGB or 640 x 840 monochrome and 640 x 480 RGB.
*        Contrast ratio approximately 100:1.
*        Brightness 100 cd/m2.
*        Viewing angle approximately 160 degrees in both horizontal and vertical
         directions.
*        Power consumption less than 1 watt.

The Company and Volga believe that their technology offers the following 
advantages as compared to other field emission technologies:

*        Film-Edge Cathode - Simple technology (no sub-micron photolithography)
*        Self aligned, single substrate, pixel design - compatible with 
         semi-conductor batch fabrication technology
*        New, controllable, method of phosphor deposition
*        New low-voltage operation, low-voltage phosphors
*        Pixel design:
                  Low degration (long life-time)
                  High resolution (no cross-talk)
                  Higher optical output
                  Low input capacitance

Engineering  prototype models are expected to be delivered by Volga in the first
calendar quarter of 1999.

                  Vacuum Fluorescent Display (VFD)
                  --------------------------

The Company has entered  into an  agreement  with Volga for the  development  of
prototypes   for  a  VFD  display.   The  Company's   requirements   and  design
specifications  are different from VFD displays that Volga has  manufactured for
others in the past.  The  prototype  VFD  displays  to be provided by Volga will
provide  color and video  having  320 x 240 RGB with a diagonal  of 7.0  inches.
Delivery of engineering prototypes is expected in the first half of 1999. If the
prototype displays are acceptable to the Company, and Volga can demonstrate that
it is capable of producing  such displays in the  quantities and pursuant to the
delivery schedules required by the Company,  then both companies will attempt to
negotiate a long-term  supply  agreement for the purchase of VFD displays by the
Company. There can be no assurance,  however, that the Company and Volga will be
able to arrive at a mutually acceptable agreement.

                                 7
<PAGE>

                  Video and Color Flat Panel Display Applications
                  -----------------------------------------------

The Company  believes  that if its  ultra-high  resolution  video and color flat
panel displays can be fully developed,  the  technologies  could be of universal
use, involving passive (requires external lighting to view an image) or emissive
(self-emits light to view an image)  technology,  in such products as computers,
digital  television,  high  definition  television,  desk  top  monitors,  video
conferencing,  multi-media  devices,  personal  telecommunication  devices,  new
versions of MAGICOM(R) 2000 and e-way products,  and network computers (NC), and
for accessing  on-line  information  services and the Internet.  The Company has
filed or is planning to file patent  applications for these technologies and has
received a notice of allowance of a basic patent for its solid state and optical
display.  There can be no assurance,  however,  that the Company will be able to
develop the video color flat panel displays having the features  described above
or that such displays will be acceptable for use in products of third parties or
commercially acceptable for use in products that may be developed by the Company
in the future.

                  Liquid Crystal Display (LCD)
                  -----------------------

The Company has entered into an agreement with Volga to provide the Company,  in
accordance  with its  technical  and  performance  requirements,  with a limited
number of LCD  displays.  The LCD displays to be produced by Volga are different
from LCD displays  manufactured  by Volga for others and are intended solely for
use as a  component  of the  "e-way"  product.  Volga is  expected to supply the
Company  with the  displays  in the  first  half of 1999.  Provided  that  these
displays  are  acceptable  to the Company and Volga can  demonstrate  that it is
capable of  producing  such  displays  in the  quantities  and  pursuant  to the
delivery schedules required by the Company,  then both companies will attempt to
negotiate a long-term  supply  agreement for the purchase of LCD displays by the
Company. There can be no assurance,  however, that the Company and Volga will be
able to arrive at a mutually acceptable agreement.  See "Products - New Products
Under Development - "e-way".

Joint Venture
-------------

SCE was formed on April 10, 1995  pursuant to a Joint  Venture  Agreement  dated
March 28, 1995 (the "Joint  Venture  Agreement")  between  CopyTele and Shanghai
Electronic Components Corp. ("SECC"). With this Joint Venture Agreement, SCE was
formed as a limited liability company in Shanghai, China having a duration of 20
years.  See  Note 3 to the  Company's  Financial  Statements  and  "Management's
Discussion  and  Analysis of  Financial  Condition  and Results of  Operations -
Liquidity and Capital Resources".

SECC  has   assigned   30%  of  its   economic   interest  in  SCE  to  Shanghai
Instrumentation  and  Electronics  Holding  Group  Company  ("SIEC") of Shanghai
China,  SECC's  parent  company,  and 15% of its  economic  interest to Shanghai
International  Trade and Investment  Developing Corp. ("SIT"). As a result, SECC
no longer has a direct economic interest in SCE. The Company's  interest remains
at 55%.

Production
----------

SCE utilizes  multi-purpose  production  and assembly line  equipment to produce
MAGICOM(R)  2000.  The  production   process  primarily  involves  a  series  of
multi-stations where employees progressively assemble and test the product prior
to shipment.  Approximately  thirty of SCE's forty-two employees are involved in
the assembly and production of MAGICOM(R) 2000. However, the number of employees
is  subject to change  depending  upon SCE's  ongoing  production  requirements.
MAGICOM(R) 2000's main sub-assemblies  include printed circuit boards containing
the power supply, the control logic and the telephone  interface,  which circuit
boards  are  being  automatically   populated  with  electronic   components  by
sub-contractors.  The other assemblies  include a document scanner,  keypad, and
function  controls.  The E-Paper(TM)  Flat Panel Display  assembly area contains
multiple  stations  of  equipment  which  automatically  insert and bond the 128
output chips located on the flat panel and assemble the illumination  system and
the touch screen on the flat panel. The Company provides SCE with the 128 output
chips,  the flat panel coated yellow  particles used in the fluid,  and the flat
panel  substrates.  See  "Flat  Panel  Display  Technology".   The  Company  has
transferred  production of the fluid for the  E-Paper(TM)  Flat Panel Display to
SCE  which  also  fills  the  displays  with the  fluid in a 5,000  square  foot
environmentally  controlled "clean room" area, mounts and electrically  connects
the 128 output chips to the E-Paper(TM) Flat Panel Displays,  and integrates the
illumination  system and touch  screen to complete  the  E-Paper(TM)  Flat Panel
Display  assembly.  The Company has provided  multiple testing systems to SCE to
check the operation of MAGICOM(R) 2000 units prior to shipment. The Company also
receives sample quantities of SCE produced MAGICOM(R) 2000 units to continuously
monitor the quality of the production process.

                                 8
<PAGE>
MAGICOM(R)  2000 contains  various  electronic  components.  The  commodity-type
components, such as resistors,  capacitors and multi-purpose chips are available
and are  being  purchased  from  various  vendors  world-wide.  Special  purpose
components,  such as the fax and data chip set, the 33.6K BPS modem, and the 128
output drive chips are being  purchased from single vendors which  represent the
major suppliers of these components throughout the telecommunications,  consumer
electronics and other industries. The Company does not presently anticipate that
it will  experience  any  difficulty  in obtaining the required  components  for
MAGICOM(R) 2000 at acceptable prices.

Production  of  MAGICOM(R)  2000 is being  performed in SCE's 30,000 square foot
facility in the Shanghai Songjiang  Industrial Zone. This facility has warehouse
space,  administrative  offices,  and the capability to house multiple equipment
stations  to assemble  the  product.  SCE  believes it  currently  has  adequate
management,  technical and  production  personnel to operate the  facility.  See
"Employees and Consultants."

During  1998,  the  Company  and SCE took a  number  of  steps  to  improve  the
efficiency  and quality of  production at SCE's  facility.  SCE set up a managed
environmental  facility  which  controls  airborne  particles,  temperature  and
humidity.  The Company  trained SCE's  employees in the manufacture of the fluid
for use in the  production of the  E-Paper(TM)  Flat Panel  Display.  Also,  the
Company helped SCE to enhance its quality control procedures. These efforts have
been  documented  with the goal of achieving  accreditation  pursuant to the ISO
9002 international quality management standard.

The Company also implemented a cost reduction  program during 1998 to reduce the
overall manufacturing cost of MAGICOM(R) 2000. Savings were achieved by reducing
the cost of purchased components, and by reducing manufacturing overhead through
the  introduction of efficiencies in the assembly  process.  The Company and SCE
are continuing to pursue an active quality  improvement program aimed at further
reducing cost and enhancing product quality.

In response to marketing  suggestions from its distribution network, the Company
developed and  incorporated  into MAGICOM(R) 2000 a number of enhanced  features
during 1998.  Some of these  features,  such as the internet  e-mail,  have only
recently been completed and,  therefore,  the Company is still in the process of
updating units that had been previously shipped to its distributors and dealers.
SCE is also in the process of updating the  Company's  inventory  of  MAGICOM(R)
2000  which  are used to  support  the  marketing  operations  of the  Company's
international distributors and U.S. dealers.

During 1997 and 1998, SCE produced  approximately  700 and 2,300 MAGICOM(R) 2000
units, respectively. Production activity has been limited as a result of efforts
by the Company to  incorporate  engineering  enhancements  into the product,  to
evaluate and implement  the quality  control  program  described  above,  and to
evaluate  alternative  lower  cost  components  for the  E-Paper(TM)  Flat Panel
Display  assembly.  SCE currently has major  sub-assemblies  in inventory  which
could  be  used to  produce  approximately  3,000  additional  assembled  units.
Although  it is  anticipated  that  production  levels  will be adjusted to meet
anticipated  product  demand in 1999,  the  Company is unable to predict  actual
production levels.

The  Company is in the  process  of  developing  its new  "e-way"  product  (see
"Products - New Products Under  Development -- "e-way") and is formulating plans
with  SCE to  utilize  SCE's  current  production  facilities  to  produce  both
MAGICOM(R)  2000 and  "e-way".  The  Company  has  provided  SCE  with  detailed
sub-assembly  designs of this  product and SCE has  instituted a cost and vendor
sourcing program for the product's components and assemblies. It is contemplated
that prior to the  commencement  of production  of "e-way",  the Company and SCE
will enter into agreements  similar to those entered into in connection with the
production  of  MAGICOM(R)  2000  regarding,   among  other  things,  technology
licensing and marketing arrangements and additional financing requirements.

                                  9
<PAGE>

Marketing
---------

         MAGICOM(R) 2000 and MAGIC PRINTER
         ---------------------------------

Pursuant to the Joint  Venture  Agreement,  the Company is solely  authorized to
purchase  MAGICOM(R) 2000 from SCE for marketing and sale outside China. In this
regard, the Company has established a Sales and Marketing office consisting of a
marketing  team of sales  personnel and  independent  sales  representatives  to
implement its marketing strategy.  As of December 31, 1998, the Company employed
six sales personnel in the United States and five independent representatives in
several   countries,   including  the  United  States.   The  independent  sales
representatives  are responsible for soliciting  distributors and referring them
to the Company. The independent sales  representatives will receive a commission
for the Company's sales to such distributors.

During 1998, the Company continued its overall marketing strategy of penetrating
world-wide  markets in progressive  stages.  As a result of these  efforts,  the
Company has entered into agreements with 31 foreign  distributors and 10 dealers
in the United States to sell and service MAGICOM(R) 2000 and MAGIC PRINTER,  and
with one foreign  distributor  in China to sell and service MAGIC  PRINTER.  The
Company  has been  marketing  its  current  MAGIC  PRINTER  as an  accessory  to
MAGICOM(R) 2000 and as a portable printer to be used with personal, notebook, or
laptop   computers.   The  product  has  been  marketed  through  the  Company's
distributors  and dealers.  In addition,  the Company has recently been directly
marketing this product to independent  computer outlets and distributors of home
and office  electronic  products.  The Company  believes  that  further  pricing
efficiencies could potentially  increase the marketability of the printer.  As a
result,  the Company is working  with  another  company to produce a new printer
that would be similar to MAGIC  PRINTER but less  expensive.  See  "Products  --
MAGIC PRINTER".

The  foreign  distributor  agreements  provide  for  the  sale  and  service  of
MAGICOM(R) 2000 and MAGIC PRINTER in Russia, its former Republics, North Africa,
Egypt,  Philippines,  Indonesia,  Malaysia,  Thailand,  Hong Kong, Brazil, South
Korea, Italy,  Yemen, Saudi Arabia,  India, Oman,  Romania,  Bahrain,  Bulgaria,
Poland, Nigeria, Taiwan, Qatar, Bermuda and Chile. The dealer agreements provide
for the sale and service  MAGICOM(R)  2000 and MAGIC PRINTER in various parts of
the United  States,  including the New York and  Washington,  D.C.  Metropolitan
areas;  Boston,  Massachusetts;  Dallas,  Austin and Houston,  Texas;  Miami and
Orlando, Florida;  Louisville,  Kentucky; Phoenix, Arizona; St. Louis, Missouri;
and Los Angeles,  California.  See "Business -- General Risks and Uncertainties"
above for certain risks associated with these products.

The Company's  initial foreign  distribution  agreements were for terms of three
years or less and provided for periodic purchase orders in increasing quantities
accompanied by irrevocable bank letters of credit.  In light of adverse economic
and  political  conditions  in a majority  of the regions  where  these  initial
distributors  market  MAGICOM(R) 2000 and MAGIC PRINTER,  namely Southeast Asia,
Russia and South  America,  the  Company  has  determined  not to enforce at the
present time the specific  minimum  purchase  order  provisions set forth in the
Company's distribution agreements and continues to foster its relationships with
its distributors.  The Company's more recent foreign distribution agreements are
for terms of three years or less and provide for periodic  purchase orders based
on  the  distributor's  requirements.  The  Company's  dealers  are  subject  to
renewable one year  agreements.  The Company has not amended any of the forgoing
agreements with its dealers and distributors.

The  Company's  distributors  and  dealers  are in various  stages of  marketing
MAGICOM(R)  2000 and MAGIC PRINTER,  ranging from  performing  test marketing in
their respective territories and obtaining national telecom agency approvals, to
purchasing  product from the Company and  soliciting  orders from their customer
base.  During 1998, the Company and its  distributors  and dealers  demonstrated
MAGICOM(R)  2000 at trade  shows  and to their  customer  bases to  measure  its
performance and marketability. Based on the results of these efforts, production
was limited while certain feature  enhancements  were developed and incorporated
into the product.  See  "Products --  MAGICOM(R)  2000" and  "Production".  As a
result of the  continuing  development of feature  enhancements  and the adverse
economic and political conditions affecting many of the Company's  distributors,
the Company supplied or sold only a limited quantity of MAGICOM(R) 2000 units to
its distributors and dealers during 1998. Revenue on these sales, which were not
material,  will not be recorded until the Company  determines  that its products
have been  accepted  by the  end-users.  In an effort to  stimulate  sales,  the
Company had reduced the selling price of  MAGICOM(R)  2000 and MAGIC PRINTER and
is  attempting  to lower the cost of  producing  these  products so that further
price  reductions may be made.  While some of the products sold to  distributors
and dealers have been paid for, the Company has permitted the remainder of these
products to be paid for upon their  resale.  Although the  Company's  agreements
with its  distributors  and  dealers do not provide for a right of return of any
units,  it is likely  that  under  special  circumstances  during  this  initial
marketing period the Company would accept the return of unpaid units.

                                    10
<PAGE>
The  Company  provides  service  training  and  technical  support to all of its
distributors and dealers.  In addition,  the Company works with its distributors
to obtain  certification of MAGICOM(R) 2000 by the national telecom agencies for
those foreign  countries in which  distributors are marketing the product.  Such
approval is generally  required before the MAGICOM(R) 2000 unit can be sold in a
specific country. The MAGIC PRINTER,  however, does not require national telecom
agency  approvals.  The  distributors  have  continued  to pursue  certification
despite  economic  conditions  that may adversely  affect the  marketability  of
MAGICOM(R) 2000 in certain  countries.  The certification  process is an ongoing
effort as  distributors  are selected in additional  countries.  The Company has
obtained UL and FCC  approvals  in the United  States and CSA approval in Canada
and CE in Europe. To date MAGICOM (R) 2000 has received  certification in eleven
contries and  territories  covering  approximately  twenty-two  of the Company's
distributors and dealers.

The Company is currently  engaged in  preliminary  discussions  with  additional
distributors  in both the United  States and China to sell  MAGICOM(R)  2000 and
MAGIC PRINTER.  There can be no assurance,  however, that marketing arrangements
will ever be achieved with these distributors.

         Products Under Development
         --------------------------

Based on marketing  investigations by the Company and several distributors,  the
Company  initiated a program  during the latter part of 1998 to add  security to
MAGICOM(R)  2000. See "Products -- New Products Under  Development -- Encryption
Device" and "Products -- MAGICOM(R)  2000".  In order to implement the marketing
portion of this program,  the Company is working with a marketing expert who has
been  involved  in  evaluating  the  potential   applications  of  the  proposed
encryption device. If a commercially  successful encryption device is developed,
the Company  anticipates  that this  marketing  expert will direct the Company's
program to market  MAGICOM(R)  2000,  with the  addition  of the new  encryption
device, as a new secure  multi-functional  communication system. The Company has
already  demonstrated  MAGICOM(R)  2000 to  several  governmental  agencies  and
industrial companies and its dealers in the United States and has discussed with
them the potential applications  incorporating the Company's proposed encryption
device.  The  Company  also  anticipates  that it would  attempt  to market  the
encryption  device  separately  in the United  States and  abroad  directly  and
through office equipment and  communication  companies and industrial and retail
equipment  distributors as a peripheral  product to telephones,  computers,  fax
machines  or  cellular   phones   which  could  be  utilized  to  secure   their
communications.

If "e-way" can be developed as a commercially  successful  product,  the Company
believes that the most promising  opportunities for marketing this product would
be to seek  arrangements with major  communication  carriers and distributors of
electronic  products.  The Company is in  preliminary  discussions  with several
companies who have expressed an initial  interest in the product,  but there can
be no assurance that the Company will enter into any marketing arrangements with
such companies.

         SCE
         ---

SCE is  solely  responsible  for  marketing  MAGICOM(R)  2000  in  China.  SCE's
marketing  strategy  consists of soliciting  large government owned entities and
governmental bureaus. For this effort, SCE has established a marketing and sales
department  and  has  hired a  marketing  team,  including  a  senior  marketing
director,  to implement  marketing  strategies in China. SCE has a total of five
marketing/sales personnel. SCE's domestic marketing plan is being carried out in
six different regions of China,  including the greater Shanghai region, the east
region, the south region, the north region, the northeast region and the central
region.  During  1998,  MAGICOM(R)  2000  was  shown at seven  trade  shows  and
exhibitions  including three in the Shanghai and east regions,  two in the north
region, one in the central region and one in the northeast region, respectively.
To date SCE has made arrangements for periodic purchase orders with four dealers
in China, including one in the northeast region, one in the north region, one in
the east  region,  and one  distributor  in the south region for the purchase of
MAGICOM(R) 2000.

                                   11
<PAGE>

General Risks and Uncertainties
-------------------------------

MAGICOM(R)  2000 and MAGIC PRINTER are in their initial stages of production and
marketing, while the Company's proposed encryption device, "e-way", new printer,
and coated particles for toners and pigments are under development.  The success
and  profitability  of these  products will depend upon many factors,  including
those  normally  associated  with any new product or product under  development.
These factors include the capability of SCE and the Japanese Supplier to produce
sufficient  quantities of MAGICOM(R) 2000 and MAGIC PRINTER,  respectively;  the
ability  of the  Second  Printer  Supplier  to  produce  and supply a lower cost
printer;  the ability of the Company and SCE to maintain an  acceptable  pricing
level to end-users for the Company's products;  the ability of suppliers to meet
the Company's  requirements and schedule;  the long-term product performance and
the  capability  of the  Company,  SCE  and  its  distributors  and  dealers  to
adequately  service the  Company's  products;  the ability of  distributors  and
dealers to market their contracted quantities of the Company's products in their
respective  territories;  the ability of SCE to obtain  additional  financing on
favorable  terms and conditions;  the quality of available phone lines;  rapidly
changing consumer preferences;  the ability of the Company to reduce the cost of
MAGICOM(R)  2000  and  the  related  printer;  the  ability  of the  Company  to
commercially develop,  produce and establish a market for its new products under
development;  the possible development of competitive products that could render
the Company's products obsolete or unmarketable;  and the ability of the Company
to obtain additional  financing.  In addition,  since the Company's products are
sold internationally,  the Company is subject to the risks associated with doing
business in foreign markets.  These risks include the potential difficulties for
the  Company  and SCE to  obtain  required  foreign  government  approvals;  the
volatility  of  foreign  currency  exchange  rates and  political  and  economic
instability   in  targeted   marketing   territories;   political  and  economic
instability  in Russia and China in which  research,  development  or production
activities  are taking place on behalf of the  Company;  and  increased  foreign
government  restrictions,  including  additional  duties,  taxes and quotas. The
occurrence  of any  combination  of  these  events  could  have  the  effect  of
diminishing product sales,  development and potential  profitability in affected
countries.

MAGICOM(R)  2000 is produced  through  SCE, a joint  venture in China,  which is
subject to the rules and  regulations  of China's  legal and economic  system as
well as its  political  and economic  environment.  Although  China is currently
encouraging a favorable business  environment with foreign businesses  operating
in China,  there can be no assurance that rules or  regulations  will not be put
into effect in the future that could  diminish or  eliminate  the ability of the
Company  to produce  its  product in China or  successfully  participate  in the
operations of SCE.

Other Developments
------------------

The Company announced in July of 1998 that its previously announced  discussions
with SIEC  advanced  to the stage of  signing an  Agreement  in  Principle.  The
Agreement in Principle provides for an investment in each other's company with a
view to sharing the  benefits  that may result from the  co-development  of high
technology products and the international  co-marketing of SIEC's industrial and
consumer electronics.  Under the Agreement in Principle, an Investment Agreement
would be entered  into  whereby  the Company  would  issue to SIEC 11.5  million
shares  of  its  Common  Stock,  representing  slightly  less  than  20%  of the
approximately 58 million shares currently  outstanding.  In return,  the Company
would receive an approximately 20% ownership  interest in SIEC subject to mutual
agreement as to the fair value in relation to the value of the  Company's  stock
issued to SIEC. The exact  ownership  interest to be issued to the Company would
be  determined  after  negotiations  over  the  final  terms  of the  Investment
Agreement. The Agreement also provides the basis for establishing co-development
and co-marketing agreements.

There  have  been  ongoing   discussions   with  SIEC  regarding  the  Company's
acquisition of a controlling  interest in certain holdings of SIEC in lieu of an
interest in SIEC.  Discussions  have also taken  place  involving  the  possible
establishment of a United  States-based,  jointly owned company to market SIEC's
industrial  and  consumer  electronic  products  and for the Company and SIEC to
co-develop high technology  products.  No definitive  arrangements have resulted
from these discussions.

                                   12
<PAGE>

The  Agreement in Principle may be terminated by either party at any time and is
subject to a number of conditions, including the execution and delivery of final
agreements  satisfactory to the parties,  principally an Investment Agreement, a
Co-Development  Agreement  and  a  Co-Marketing  Agreement,  and  obtaining  all
necessary  governmental  approvals.  There can be no assurance  that the parties
will be able to arrive at mutually acceptable agreements or obtain the requisite
final governmental approvals.

SIEC has advised the Company that it is a large Chinese government-owned company
whose holdings include investments in wholly owned enterprises, listed companies
on the Shanghai Stock Exchange, and foreign joint ventures. Its products include
electronics instruments, household electric apparatus, electronic components and
devices, telecommunications products, computers, semiconductor discrete devices,
integrated  circuits,  thick film circuits,  and analytic,  automation and optic
instruments.

Competition
-----------

MAGICOM(R)  2000 and MAGIC  PRINTER are, and each of the  Company's new products
under  development  would be, subject to the intense  competition that exists in
the telecommunications and related industries.  The telecommunications  products
industry has a substantial number of competitors which are significantly  larger
and possess financial resources  significantly greater than those of the Company
or SCE. The telecommunications  products industry is extremely price competitive
and, therefore, the success of MAGICOM(R) 2000 and MAGIC PRINTER and each of the
Company's  new  products  under  development  will  also be  dependent  upon the
Company's ability to compete on price and performance.

Certain  competitive  products  contain  displays which primarily  include LCDs.
These  products,  however,  do not  have  all  the  features  of  the  Company's
MAGICOM(R) 2000 product and the displays have  significantly less resolution and
information  content capability than the Company's E-PaperTM Flat Panel Display.
The Company's  E-PaperTM Flat Panel Display is being utilized for the first time
in the marketplace in MAGICOM(R) 2000.

The Company believes MAGICOM(R) 2000 is a unique product in that it incorporates
features of many different products on the market, such as computers, telephones
and fax machines.  The product  allows the user to talk and write on the machine
at the same time as well as exchange information,  faxes and messages with other
MAGICOM(R) 2000 units,  terminals,  computers,  fax machines and pagers,  and to
communicate by e-mail over the internet with the addition of a Company developed
keyboard.  Other products  currently  available on the market do not combine all
these features  together with a high  resolution  flat panel display.  It is the
E-PAPER(TM) Flat Panel Display,  with its associated features,  that the Company
believes  principally  will  distinguish  MAGICOM(R) 2000 from other  comparable
products that may be developed by other  manufacturers  in the future.  However,
there is no  assurance  that  comparable  or  superior  products  or  systems to
MAGICOM(R)  2000 will not be  developed  which would render  MAGICOM(R)  2000 or
other products of the Company and SCE difficult to market or otherwise obsolete.


Patents
-------

The Company has received  approximately  166 patents,  including  those from the
United  States and certain  foreign  patent  offices,  expiring at various dates
between 2005 and 2015. At the present time,  additional patent  applications are
pending with the United States and certain foreign patent offices. The foregoing
patents are related to the design,  structure and methods of construction of the
E-PaperTM  Flat Panel  Display,  methods of operating the  E-PaperTM  Flat Panel
Display,  particle  generation,  applications  using the  E-PaperTM  Flat  Panel
Display,  and new applications for SCE's planned products.  The Company also has
filed or is planning to file patent applications for its solid state and optical
and thin film video  color  flat panel  display  technologies,  currently  under
development,  and for its coated particles.  The Company has been advised by its
patent  counsel  that  a  notice  of  allowance  has  been  issued  on a  patent
application  for the  solid  state and thin film  video  and  color  flat  panel
display.  The Company has also been advised by its patent  counsel that in their
opinion  the  subject  matter of the pending  applications  contains  patentable
material.

                                  13
<PAGE>

The Company has  licensed a number of its patents  covering the  E-PaperTM  Flat
Panel  Display  (but  excluding  its  manufacturing  technology)  to  SCE  on an
exclusive basis in China.

There is no  assurance  that  patents  will be  obtained  for any of the pending
applications.  In  addition,  there is no  assurance  that any  patents  held or
obtained  will protect the Company  against  competitors  either with or without
litigation. The Company is not aware that MAGICOM(R) 2000 is infringing upon the
patents of others. There is no assurance, however, that other products developed
by the Company,  if any, will not infringe  upon the patents of others,  or that
the  Company  and SCE will not have to  obtain  licenses  under the  patents  of
others.

The Company  believes that the foregoing  patents are  significant to the future
operations of the Company.

Research and Development Expenses
---------------------------------

Research and development expenses, which have comprised a significant portion of
the Company's selling,  general and administrative expenses since its inception,
were approximately $3,926,000,  $3,642,000,  $3,858,000, and $28,311,000 for the
fiscal  years  ended  October  31,  1998,  1997 and 1996 and for the period from
November  5, 1982  (inception)  through  October  31,  1998,  respectively.  See
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations" below and the Company's Financial Statements.

Employees and Consultants
-------------------------

The Company had  thirty-four  full-time  employees and eleven  consultants as of
December 31, 1998.  Twenty four of these  individuals,  including  the Company's
Chairman  of  the  Board  and  its  President,   are  engaged  in  research  and
development.  Their backgrounds include expertise in physics,  chemistry, optics
and  electronics.  Seven  individuals are engaged in marketing and the remaining
individuals  are  engaged in  administrative  and  financial  functions  for the
Company. None of the Company's employees are represented by a labor organization
or union.

As of December 31, 1998,  SCE had  approximately  forty two (42)  employees,  of
which  thirty (30) were  engaged in  production  and twelve (12) were engaged in
administrative and other functions.

Item 2.  Properties.
         -----------

The Company  leases  approximately  11,200 square feet of office and  laboratory
research facilities at 900 Walt Whitman Road,  Huntington Station, New York (its
principal  offices)  from an unrelated  party  pursuant to a lease which expires
November 30, 2001, for a base rent of approximately $201,000 per annum with a 3%
annual  increase and an  escalation  clause for  increases in certain  operating
costs. The Company has the right to cancel a portion of the lease as of November
30, 1999 and 2000.  This lease does not contain  provisions  for its renewal and
management will continue to evaluate the future  adequacy of this facility.  The
Company anticipates securing a lease renewal for this facility at the end of the
lease  term if it  determines  to  remain  in the  facility.  See  Note 5 to the
Company's Financial Statements.

In February 1996,  the Company  entered into a five year lease with an unrelated
party for approximately 2,300 square feet of office space in Valhalla, New York.
The lease, which expires on June 30, 2001 and is non-renewable,  has a base rent
of  $51,175  per  annum in  years  one and two and  $55,775  per  annum  for the
remainder of the lease.

In October 1996,  the Company  entered into a lease with an unrelated  party for
approximately  2,000  square  feet of  office  and  laboratory  space  near  its
principal  offices.  In May 1997 this lease was  modified  to add an  additional
optical facility of  approximately  5,000 square feet of space and to extend the
lease to June 30, 2000. The modified lease provides for escalating base rents of
approximately $46,000, $48,000 and $50,000 respectively, for each year beginning
July 1, 1997 and an escalation clause for increases in certain operating costs.

                                    14
<PAGE>
SCE owns and operates from a 30,000 square foot, one-story office, warehouse and
production facility in the Shanghai Songjiang  Industrial Zone, on land acquired
pursuant to a 50 year land-use  contract  dated October 11, 1995,  with the Land
Administration Bureau of Shanghai County. SCE has obtained short-term loans from
a Chinese bank aggregating  approximately  U.S.  $1,120,000 which are secured by
the  land-use  contract  and  building.  See Note 3 to the  Company's  Financial
Statements.

Management  believes that the  facilities  described  above are adequate for the
Company's and SCE's current  requirements.  It is  anticipated  that  additional
space may be needed in the  future  depending  upon the nature and extent of the
Company's and SCE's activities.


Item 3.  Legal Proceedings.
         ------------------

The Company is not a party to any pending legal proceedings.

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

During the fourth  quarter of the Company's  fiscal year ended October 31, 1998,
no matters were  submitted by the Company to a vote of its shareholders.


Executive Officers of the Company
---------------------------------

The only  executive  officers  of the  Company  are  Denis A.  Krusos,  Frank J.
DiSanto, Frank W. Trischetta and Gerald J. Bentivegna.  The information required
to be furnished  with respect to these  executive  officers is set forth in, and
incorporated  by reference  from, Item 10 Part III of this Annual Report on Form
10-K.

                                  15
<PAGE>

                                     PART II
                                     -------

Item 5.  Market for the Registrant's Common Equity and
        ----------------------------------------------
                  Related Stockholder Matters.
                  ----------------------------

The common stock of the Company has been traded on the National  Association  of
Securities  Dealers,  Inc. Automated Quotation National Market System ("NASDAQ -
NMS"), the automated quotation system of the National  Association of Securities
Dealers,  Inc. ("NASD") under the symbol "COPY", since October 6, 1983, the date
public trading of the Company's common stock  commenced.  The high and low sales
prices as  reported  by NASDAQ  for each  quarterly  fiscal  period  during  the
Company's fiscal years ended October 31, 1997 and 1998 have been as follows:

================================================================================
 Fiscal Period               High                                  Low
================================================================================
 1st quarter 1997           $7.38                                 $3.75
 2nd quarter 1997            7.25                                  4.25
 3rd quarter 1997            5.88                                  4.50
 4th quarter 1997            5.25                                  3.63
--------------------------------------------------------------------------------
 1st quarter 1998            4.75                                  2.38
 2nd quarter 1998            4.63                                  1.78
 3rd quarter 1998            4.13                                  1.13
 4th quarter 1998            2.13                                  0.63
--------------------------------------------------------------------------------

As of January 22, 1999 the approximate  number of record holders of common stock
of the Company was 1,266.

No cash  dividends  have been paid on the common stock of the Company  since its
inception and the Company has no present  intention to pay any cash dividends in
the foreseeable future.

If at any time the bid price for an issuer's  common stock falls below $1.00 per
share for a period of thirty consecutive business days, NASDAQ-NMS has the right
to delist the stock if within ninety days thereafter the bid price for the stock
is not at least $1.00 per share for a minimum of ten consecutive  business days.
If the Company's stock were delisted,  the delisting could  potentially  have an
adverse  affect on the price of the Company's  common stock and could  adversely
affect the liquidity of the shares held by the Company's stockholders.

                                  16
<PAGE>

Item 6.  Selected Financial Data.
         ------------------------

The following data has been derived from the Financial Statements of the Company
and should be read in conjunction with those  statements,  and the notes related
thereto, which are included in this report.
<TABLE>
<CAPTION>



                                -------------------------------------------------------------------------
                                                                                                             For the period
                                                                                                          from November 5, 1982
                                                As of and for the year ended October 31,                   (inception) through
                                                                                                            October 31, 1998
                                 ========================================================================
                                      1998          1997            1996             1995          1994
====================================================================================================================================
<S>                           <C>            <C>            <C>                 <C>            <C>            <C>

Sales                               $    -          $   -           $   -          $   -         $    -           $     -
------------------------------------------------------------------------------------------------------------------------------------
Selling General and
Administrative Expenses             7,231,557      6,378,368       6,017,580       3,332,312     3,651,334         45,590,134 
------------------------------------------------------------------------------------------------------------------------------------
Loss from SCE                         377,219        335,391         148,630          17,813         -                879,053
------------------------------------------------------------------------------------------------------------------------------------
Interest Income                       472,822        913,184         722,800         356,226       223,817          4,774,278
------------------------------------------------------------------------------------------------------------------------------------
Net (Loss)                         (7,135,954)    (5,800,575)     (5,443,410)     (2,993,899)   (3,427,517)       (41,694,909)
------------------------------------------------------------------------------------------------------------------------------------
Net (Loss) Per Share of  Common
Stock (a)                               ($.12)         ($.10)          ($.10)          ($.06)       ($.07)             ($.89)
------------------------------------------------------------------------------------------------------------------------------------
Total Assets                        13,334,972     19,988,207      24,710,420       9,695,398    6,614,332
------------------------------------------------------------------------------------------------------------------------------------
Long Term Obligations                $    -         $    -           $    -         $    -       $     -
------------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity                11,860,913     18,779,142      22,750,273       9,436,708    6,415,233
------------------------------------------------------------------------------------------------------------------------------------
Cash Dividends Per Share             $    -         $    -           $    -          $    -      $    -             $     -
of Common Stock
------------------------------------------------------------------------------------------------------------------------------------
         

<FN>

(a)      Adjusted for three-for-one  stock split declared in October 1985,  
         five-for-four stock split declared in August 1987,two-for-one stock
         split declared in February 1991 and two-for-one stock split declared 
         in May 1996.
</FN>
</TABLE>

                                             17
<PAGE>
Item 7.  Management's Discussion and Analysis of Financial
         --------------------------------------------------
              Condition and Results of Operations.
              ------------------------------------

Safe Harbor  Statement  Under the Private  Securities  Litigation  Reform Act of
--------------------------------------------------------------------------------
1995.  
----

Certain   statements   in  this   Annual   Report   on  Form   10-K   constitute
"forward-looking  statements"  within  the  meaning  of the  Private  Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown  risks,  uncertainties  and other  factors  which  may cause the  actual
results,  performance or achievements of the Company to be materially  different
from any future  results,  performance or  achievements  expressed or implied by
such  forward-looking  statements.  Such  factors  include,  among  others,  the
following:  production capability by SCE and the Japanese Supplier of MAGICOM(R)
2000 and MAGIC PRINTER, respectively; the ability of the Second Printer Supplier
to produce and supply a lower cost printer;  long-term  product  performance and
the  capability  of the  Company,  SCE,  its  distributors  and its  dealers  to
adequately  service the  Company's  products;  the ability of  distributors  and
dealers to market their contracted quantities of the Company's products in their
respective  territories;  the  ability  of the  Company  and SCE to  obtain  all
required  foreign  government  approvals;  the  volatility  of foreign  currency
exchange  rates;   political  and  economic   stability  in  targeted  marketing
territories;  the ability of the Company to reduce the cost of  MAGICOM(R)  2000
and the related printer; political and economic stability in China and Russia in
which research,  development or production activities are taking place on behalf
of the Company; the ability of the Company to commercially develop and establish
a market for its new products  under  development;  the possible  development of
competitive  products  that could  render the  Company's  products  obsolete  or
unmarketable; and the ability of the Company to obtain additional financing. See
"Business" and Note 1 to the Company's Financial Statements contained herein for
discussions regarding uncertainties that may significantly affect the results of
operations, future liquidity and capital resources.

General
-------

The Company,  which is a  development  stage  enterprise,  was  incorporated  on
November 5, 1982. The Company's  principal  activities  include the development,
production    and    marketing   of   a   telephone    based    multi-functional
telecommunications   product   incorporating  the  Company's   patented  compact
ultra-high resolution charged particle E-Paper(TM) Flat Panel Display technology
and the  operations  of SCE, the  Company's 55% owned joint venture in Shanghai,
China which is accounted for under the equity method of accounting.  The Company
is also in the  process of  developing  three new  products:  (i) a compact  and
portable digital  encryption device which could provide  high-grade  information
security for a telephone,  computer,  fax machine,  MAGICOM(R)  2000 or "e-way";
(ii) a peripheral  product  called "e-way" which could be used with a telephone,
computer  or fax  machine to provide  internet  e-mail,  simultaneous  voice and
handwriting  and Caller ID all over a single  telephone  line;  and (iii) coated
particles  derived from its E-PaperTM Flat Panel Display which could potentially
be used by  manufacturers of toners and pigments.  See  "Business--Products--New
Products  Under  Development".  The Company also is continuing  its research and
development  activities for additional  ultra-high resolution flat panel display
technologies  including  video and color  displays.  See  "Business - Flat Panel
Display  Technology - Color and Video Flat  Panels".  There can be no assurance,
however, that the Company's efforts in these areas will be successful.  There is
also no assurance  that the Company will  generate  significant  revenues in the
future,  will have sufficient revenues to generate profit or that other products
will not be produced  by other  companies  that will render the  products of the
Company or SCE  obsolete or  unmarketable.  See  "Business  - General  Risks and
Uncertainties".

In reviewing  Management's  Discussion  and Analysis of Financial  Condition and
Results of Operations,  reference is made to the Company's Financial  Statements
and the notes thereto.

                                   18
<PAGE>
Results of Operations
---------------------

The Company plans to sell its products to end-users through a distributor/dealer
network.  All of the critical  elements of the earnings process will be complete
when a distributor/dealer sells these products to end-users. The Company has had
no sales since its inception other than sales of a limited  quantity of products
to its  distributors.  Revenue  will not be  recorded on sales until the Company
determines that its products have been accepted by the end-users.

Selling, general and administrative  expenses,  excluding the loss from SCE, for
the fiscal years ended  October 31, 1998,  1997 and 1996 and for the period from
November  5, 1982  (inception)  through  October  31,  1998  were  approximately
$7,232,000, $6,378,000, $6,018,000 and $45,590,000,  respectively. These amounts
include  research,  development and tooling costs of  approximately  $3,926,000,
$3,642,000,  $3,858,000  and  $28,311,000,   respectively,  as  well  as  normal
operating expenses.

Selling,  general  and  administrative  expenses,  excluding  the loss from SCE,
increased  approximately  $854,000 during fiscal 1998 as compared to fiscal 1997
resulting primarily from increases in expenditures for research and development,
employee   compensation   and  related  costs,   stock  based   compensation  to
consultants,  and to a lesser  extent  communication  costs,  rent,  travel  and
professional fees. 

Research  and  development  costs  increased  principally  as a result  of costs
incurred in connection  with the  development  of the Company's  solid state and
thin film flat panel displays programs.  Employee compensation and related costs
increased  in fiscal  1998 over fiscal 1997 as a result of a full year's cost of
the hiring of additional marketing and engineering  personnel during fiscal 1997
which had only a partial year's costs. To a lesser extent some employee  benefit
programs incurred a slight increase in rates in fiscal 1998.

In fiscal 1998 the  Company  recorded a non-cash  charge to  earnings  for stock
based  compensation  to  consultants  mandated by SFAS No. 123 with an offset to
Additional Paid-In Capital. There was no such charge in 1997.  Communication and
travel costs  increased,  although to a lesser  extent than other  expenses that
increased,  as a result of  increased  activity  associated  with the  Company's
distributor and dealer program. Rent increased as a result of leasing additional
space in fiscal  1998 and the effect of a full year's rent in fiscal 1998 versus
a partial  year's rent in fiscal 1997 for other leases.  Professional  fees were
also slightly  higher in fiscal 1998 as a result of additional  accounting  fees
associated with SCE and the proposed transaction with SIEC.

Engineering supplies remained  approximately the same in fiscal 1998 as compared
to fiscal  1997  primarily  as a result of reduced  purchases  of  panels,  chip
drivers and MAGICOM(R) 2000s used for testing and evaluation  purposes offset by
the cost to implement  engineering  changes to  MAGICOM(R)  2000 and the related
cost to eliminate obsolete  components as a result of these changes. A charge to
earnings was recorded in order to bring inventory valuation in line with current
estimates and to reflect a lower selling price to dealers and distributors. Some
marketing  costs  decreased  in fiscal 1998 as a result of  non-recurring  costs
associated with the start-up costs in the prior year.

The Company's portion of SCE's loss for the fiscal years ended October 31, 1998,
1997 and 1996 and for the  period  from  November  5, 1982  (inception)  through
October 31, 1998 were approximately $377,000,  $335,000,  $149,000 and $879,000,
respectively.  The  increase  in the loss for fiscal 1998 over the prior year of
approximately  $42,000 was the result of manufacturing costs being absorbed over
a limited  quantity of product  produced,  cost incurred in connection  with the
implementation of a quality management program, and initial marketing costs. The
increase  in the loss for fiscal  1997 over the prior year of  $186,000  was the
result of manufacturing  costs being absorbed over a limited quantity of product
produced.The Company's proportionate share of future losses in SCE will continue
to reduce the  carrying  value of the  investment  in SCE until  such  amount is
exhausted.  If, after the Company fully writes off its investment,  it makes any
additional investments,  such additional investments will be charged directly to
the statement of operations.

                                   19
<PAGE>
Selling,  general  and  administrative  expenses,  excluding  the loss from SCE,
increased  approximately  $360,000 during fiscal 1997 as compared to fiscal 1996
resulting   primarily  from  increases  in  expenditures  for  salaries,   costs
associated with marketing and to a lesser extent, communication costs and rents.
Salaries increased in 1997 primarily as a result of the Company incurring a full
year of salaries for marketing  personnel compared with partial year salaries in
1996,  when the  Company  commenced  its  marketing  efforts,  and the hiring of
additional  engineering  personnel.  Marketing  related costs  including  travel
increased  in the current  year as the Company  marketed its products in various
regions throughout the world.  Depreciation  expenses increased as the equipment
purchased   during  the  1996  year   depreciated  for  a  full  year  in  1997.
Telecommunication  costs and rents  increased to a lesser  extent over the prior
year as  compared  to  other  cost  increases.  Engineering  supplies  decreased
primarily as a result of reduced  purchases of panels and chip drivers which are
used for testing and evaluation  purposes.  The decrease was partially offset by
the purchase of MAGICOM(R)  2000 units from SCE for similar  purposes.  Employee
benefit  related costs  decreased as a result of the decrease in the exercise of
stock  options,  which  consequently  reduced  payroll  taxes.  The  decrease in
workers' compensation costs was offset by an increase in pension and other group
insurance  coverage as a result of the addition of new  personnel.  Professional
fees  decreased in the aggregate  during the 1997 fiscal year as patent  related
costs  decreased  significantly  and  offset by a lesser  increase  in all other
professional fees.

While there is no formal agreement,  the Company's Chairman of the Board and its
President have waived salary and related  pension  benefits for an  undetermined
period of time commencing  November 1985. Four other  individuals,  including an
officer and three senior level personnel,  then employed at the Company,  waived
salary and related  pension  benefits from January 1987 through  December  1990.
While there are no formal agreements,  commencing January 1991 these individuals
waived such rights for an  undetermined  period of time and they did not receive
salary or related pension benefits through December 1992. The Company's Chairman
of the Board,  its President and the three senior level  personnel  continued to
waive such rights commencing in January 1993 for an undetermined period of time.
From February 1993 to September  1998 one  additional  employee also waived such
salary  and  benefit  rights.  See  "Executive  Compensation"  and Note 8 to the
Company's Financial  Statements for a more complete discussion  regarding salary
and related pension benefit waivers.

The decrease in interest  income of $440,000 from $913,000 during fiscal 1997 as
compared to $473,000  during fiscal 1998 resulted  primarily  from a decrease in
average funds  available for  investment  aided  slightly by a small increase in
interest  rates.  The increase in interest income during fiscal 1997 as compared
to fiscal 1996 of $190,000 resulted from a significant increase in average funds
available for investment, offset slightly by a decrease in interest rates. Funds
available  for  investment  during 1998,  1997 and 1996,  on a monthly  weighted
average basis,  were  approximately  $8,557,000,  $17,394,000  and  $16,011,000,
respectively. The investment instruments selected by the Company are principally
money market accounts and commercial paper.

                                  20
<PAGE>
Year 2000 Issue
---------------

The Year 2000 issue  relates to computer  systems  programmed  to use two digits
rather  than four digits to define the  applicable  year.  Computer  systems and
other programmable devices utilizing  date/time-sensitive  software and hardware
may  recognize  a date using "00" as the year 1900  rather  than Year 2000 which
could  result in the  computer or device  shutting  down,  performing  incorrect
computations or performing inconsistently.

         State of Readiness
         ------------------

The Company is in the initial stages of determining its risks regarding the Year
2000 issue.  The Company  expects to complete its assessment of this issue as it
pertains to its computer  hardware and software,  machinery and equipment  which
may have embedded technology,  such as micro-controllers,  and how it may affect
the Company's  dealings with material third parties by the middle of 1999.  Once
the assessment is complete,  the Company will formulate and begin to implement a
plan to  correct  or  establish  contingencies  for any Year  2000  problems  it
uncovers.  However,  the Company cannot  guarantee that its remediation  efforts
will prevent the occurrence of all Year 2000 problems.

The  Company   utilizes   brand  name  personal   computers  and   predominately
off-the-shelf software to perform its daily functions. Its financial records are
maintained  on a local area  network of personal  computers  and a server  which
utilize system operating software generally  available to the public. An initial
assessment  of the  hardware  indicates  that the  hardware is already Year 2000
compliant,   the  system   operating   software  would  be  compliant  with  the
installation  of a readily  available  update,  and the  financial  software has
already been upgraded to be Year 2000 compliant.  The Company's  MAGICOM(R) 2000
product  is  Year  2000  compliant.  The  Company's  engineering  and  marketing
personnel are beginning the initial  assessment of their personal  computers and
software at the present  time.  The  results of the  initial  assessment  by the
Company's  engineering  personnel  does not  indicate  any  material  Year  2000
problems.  SCE has performed their initial  assessment and will implement a plan
to correct deficiencies, which do not appear to be material.

The Company has  several  material  third  party  relationships  primarily  with
financial institutions, utilities, and telecommunications companies. The Company
is planning to take reasonable  steps to verify the Year 2000 readiness of these
companies. The Company is also planning to contact its key customers,  suppliers
and vendors regarding their readiness.

         Cost to Address
         ---------------

Initial  cost to begin the  assessment  process and the cost  expended to update
some items has not been  material to date.  The Company  believes that its total
cost to test and  correct  any Year 2000  deficiencies  will be in line with its
annually budgeted expense for  computerization and is estimating the cost not to
exceed $20,000.

         Risk to the Company
         -------------------

Failure by the Company to resolve a material Year 2000 issue could result in the
interrupting or failure of, certain business  activities or operations and could
materially  adversely affect the financial  condition,  results of operation and
cash flow of the Company.  If an interruption or failure does occur,  the extent
of the  Company's  exposure  would  depend  primarily  upon the time it takes to
remedy the problem.

Based on the Company's  current  knowledge of its systems,  operations and third
party  relationships,  the Company does not anticipate  that the Year 2000 issue
will have a material adverse impact on the Company.

         Contingency Plan
         ----------------

The Company  contemplates  formulating a Year 2000 contingency plan in the event
of  possible  interruptions  in  business  operations.  This  plan is  currently
expected to be  completed by the middle of calendar  year 1999.  There can be no
assurance,  however,  that the  Company  will be able to develop or  implement a
successful  contingency  plan addressing the Year 2000 issue or that such a plan
will be economically feasible

See "Business" and Note 1 to the Company's Financial  Statements for discussions
regarding  uncertainties  that may  significantly  affect the  results of future
operations.

                                    21
<PAGE>
Liquidity and Capital Resources
-------------------------------

Since its inception,  the Company has met its liquidity and capital  expenditure
needs  primarily  from the  proceeds of sales of its common stock in its initial
public  offering,  in private  placements,  upon exercise of warrants  issued in
connection with the private placements and public offering and upon the exercise
of stock  options  pursuant to the Company's  Stock Option Plan,  adopted by the
Board of Directors on April 1, 1987 (the "1987 Plan"),  and the  CopyTele,  Inc.
1993 Stock Option Plan,  adopted by the Board of Directors on April  28,1993 and
amended on May 3, 1995 and May 10, 1996 (the "1993 Plan").

For the fiscal years ended October 31, 1998, 1997 and 1996, the Company received
proceeds  aggregating  approximately  $28,000,   $1,754,000,   and  $18,757,000,
respectively, from the exercise of stock options and warrants to purchase shares
of its common  stock and the  exercise of  warrants by members of the  immediate
families of its Chairman of the Board and its President.  During the period from
November  1,  1998  through  January  28,  1999 the  Company  received  proceeds
aggregating  approximately  $765,000 from the exercise of stock options pursuant
to the 1993 Plan.  Working capital  decreased by  approximately  $9,400,000 from
approximately  $17,000,000  at October 31, 1997 to  approximately  $7,600,000 at
October  31,  1998  as  a  result  of  the  loss  incurred  for  the  year,  the
reclassification  of a portion  of the  amount due from SCE to long term and the
purchase of property and equipment.

The Company's  operations  used  approximately  $7,700,000 in cash during fiscal
1998. The current working capital includes approximately  $5,400,000 of cash and
approximately  $812,000 (net of  approximately  $662,000 due to SCE) of accounts
payable  and  accrued  liabilities.  The  Company  believes  that these net cash
resources  will be sufficient  to continue its  operations,  as presently  being
conducted, until the end of the first quarter of fiscal 2000 after giving effect
to anticipated  reductions in SCE's requirements for component purchases,  which
amounted to $1,275,000 during fiscal 1998, and reductions in administrative  and
support personnel, if necessary.

During its fiscal  year ended  October  31,  1998,  the  Company  increased  its
inventory to  approximately  $2.7 million to prepare for the distribution of its
products.  Management  has recorded the  Company's  inventory at its current net
realizable value, which is based upon the current  anticipated  selling price of
the Company's  MAGICOM(R) 2000 units, and provides for no further  reductions of
the selling price of the product.  To date,  shipments of the Company's  product
have been limited. Accordingly,  there can be no assurance that the Company will
not be required to further reduce the selling price of the MAGICOM(R) 2000 below
its current carring value to accomplish certain business  strategies which would
require a further  reduction of such carrying  value.  In addition,  amounts due
from SCE totaled approximately $3.9 million as of October 31, 1998. The advances
to SCE have primarily funded the purchase of inventory components to manufacture
the Company's  MAGICOM (R) 2000. The ultimate  realizability of amounts due from
SCE are  also  likely  dependent,  in part,  on  future  sales of the  Company's
products.  The Company  will  continue to evaluate  the  realizability  of these
assets on an ongoing  basis and will make such  adjustments,  as  necessary,  to
reflect net realizable values based on current facts and circumstances.

The Company is seeking to improve its  liquidity  through the sale of  products,
the collection of amounts due from SCE, and through possible sales of its common
stock, each as more fully described below.

                                 22
<PAGE>
In an effort to stimulate  sales,  the Company has reduced the selling  price of
MAGICOM(R)  2000 and  MAGIC  PRINTER  and is  attempting  to  lower  the cost of
producing  these  products so that further  price  reductions  may be made.  The
Company  is  hopeful,  although  there is no  assurance,  that  with  the  price
reductions  and the  addition of the  encryption  device,  which is still in the
process  of  being  developed  (see   "Business--Products--New   Products  Under
Development--Encryption Device"), sales of MAGICOM(R) 2000 will increase.

The  amounts  due from  SCE are  primarily  related  to the  purchase  by SCE of
components for use in MAGICOM(R) 2000 units. It is expected,  although there can
be no assurance, that SCE will pay the Company during the current and succeeding
year through the sales of units and financing from banks. SCE repaid the Company
approximately  $165,000 in November  1998. As of December 31, 1998,  the Company
owed SCE  approximately  $662,000  which when paid would be used by SCE to repay
the  Company.  Sales of units by SCE to the Company may result in an increase in
the  Company's  inventory  before  units  are then  sold by the  Company  in the
ordinary course of its business.

The Company may also attempt to raise  additional  funds, if necessary,  through
private sales of its common stock at offering  prices at or near the then market
price of the Company's  stock.  The market price of the  Company's  stock at the
time of the sales,  would  affect the amount of  dilution  that would  result to
stockholders  from such  sales.  There can be no  assurance,  however,  that the
Company will be able to consummate any private sales of its common stock.

The NASD  requires  that the  Company  maintain  a minimum  of $4 million of net
tangible  assets to maintain its NASDAQ-NMS  listing.If the Company's stock were
delisted, the delisting could potentially have an adverse affect on the price of
the  Company's  common  stock and could  adversely  affect the  liquidity of the
shares held by the Company's stockholders.  The Company anticipates that it will
seek additional sources of funding, when necessary, in order to satisfy the NASD
requirements.

The Company's estimated funding capacity indicated above assumes, although there
is no assurance,  that the waiver of salary and pension benefits by the Chairman
of the Board,  the  President  and senior level  personnel  will  continue.  The
Company  anticipates  that it may  require  additional  funds  to  continue  its
research and development  activities,  maintain the NASD funding requirement and
participate  in SCE beyond its  initial  capital  contribution.  There can be no
assurance  that  adequate  funds  will be  available  to the  Company or that if
available,  the Company will be able to obtain such funds on favorable terms and
conditions. The Company currently has no definitive arrangements with respect to
additional financing.

SCE required an initial  aggregate  capital  investment of  $3,500,000  from the
parties  to the joint  venture.  The Joint  Venture  Agreement  contemplates  an
additional  $3,500,000 of funding which may be borrowed  from banks,  of which
$1,120,000 has been borrowed to date.  Three  short-term  loans  aggregating the
$1,120,000  are from a Chinese bank and are secured by a land-use  contract with
the Land  Administration  Bureau of Shanghai County (see "Properties" below) and
the building.  The Company has  contributed  $1,225,000 in cash,  and technology
valued for the purposes of SCE at $700,000,  and the Chinese parties contributed
$1,575,000 in cash to SCE. SCE may require additional  capitalization  depending
upon the nature and extent of its business activities. There can be no assurance
that  adequate  funds will be available  to SCE,  including  any future  capital
contributions,  if any,  beyond its initial  capital  contributions  or that, if
available,  SCE  will be able to  obtain  such  funds  on  favorable  terms  and
conditions. 
                              
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
         -----------------------------------------------------------

Not applicable.

Item 8. Financial Statements and Supplementary Data.
        ---------------------------------------------

See accompanying "Index to Financial Statements".

Item 9.  Disagreements on Accounting and Financial Disclosure.
         -----------------------------------------------------

Not applicable.

                                  23
<PAGE>

                                                              PART III
                                                              --------

Item 10.  Directors and Executive Officers of the Registrant.
          ---------------------------------------------------

The following table sets forth certain information with respect to all of the 
directors and executive officers of the Company:
<TABLE>
<CAPTION>

====================================================================================================================================
                                                                                                       Director and/or
                                        Position with the Company and Principal                        Executive Officer 
Name                                                 Occupation                             Age        Since
====================================================================================================================================
<S>                                 <C>                                                   <C>            <C>    

Denis A. Krusos                         Director, Chairman of the Board and Chief            71             1982
                                        Executive Officer
------------------------------------------------------------------------------------------------------------------------------------
Frank J. DiSanto                        Director and President                               74             1982
------------------------------------------------------------------------------------------------------------------------------------
Gerald J. Bentivegna                    Director, Vice President - Finance and Chief         49             1994
                                        Financial Officer
------------------------------------------------------------------------------------------------------------------------------------
John R. Shonnard                        Director                                             83             1988
------------------------------------------------------------------------------------------------------------------------------------
George P. Larounis                      Director                                             70             1997
------------------------------------------------------------------------------------------------------------------------------------
Frank W. Trischetta                     Senior Vice President - Marketing and Sales          58             1996
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

Mr.  Krusos  has been a  Director,  Chairman  of the Board  and Chief  Executive
Officer of the Company since  November  1982.  He holds an M.S.E.E.  degree from
Newark College of Engineering, a B.E.E. degree from City College of New York and
a Juris Doctor from St. John's University and is a member of the New York bar.

Mr.  DiSanto has been a Director  and  President of the Company  since  November
1982.  He holds a B.E.E.  degree from  Polytechnic  Institute of Brooklyn and an
M.E.E. degree from New York University.

Mr.  Bentivegna  has been Vice President - Finance and Chief  Financial  Officer
since  September 1994 and was elected a Director in July 1995.  Prior to joining
the  Company,  Mr.  Bentivegna  was  employed  at Marino  Industries  Corp.  for
approximately  10  years,  where he served as  Controller,  Treasurer  and Chief
Financial  Officer.  He holds a M.B.A.  degree from Long Island University and a
B.B.A. from Dowling College.

Mr.  Shonnard has been a Director of the Company since January 1988. He had been
a research  consultant  to the Company from August 1983 until his  retirement in
May  1988.  Mr.   Shonnard  was  engaged  in  development   engineering  in  the
communications  field for over fifty years and has held numerous  patents in the
communications field.

Mr.  Larounis has been a Director of the Company since  September  1997 prior to
which he served as a  consultant  to the Company.  Mr.  Larounis  held  numerous
positions as a senior international executive of Bendix International and Allied
Signal.  He has also served on the Board of Directors of numerous  affiliates of
Allied Signal in Europe,  Asia and Australia.  He holds a B.E.E. degree from the
University of Michigan and a J.D. degree from New York University.

Mr.  Trischetta  has been  Senior Vice  President  -  Marketing  and Sales since
February  1996.  Prior to joining the Company,  Mr.  Trischetta  was employed by
Panasonic  Corporation  for  approximately  15 years  where he served as General
Manager Marketing and Sales for Panasonic Office Automation  Products.  Prior to
that,  Mr.  Trischetta  was employed by 3-M Company for  approximately  17 years
where he advanced to a senior sales and marketing executive position. He holds a
B.B.A. from the University of Miami.

                                   24
<PAGE>
Item 11.  Executive Compensation.
          -----------------------

Messrs.  Denis A. Krusos,  Chairman of the Board,  Chief  Executive  Officer and
Director, Frank J. DiSanto, President and Director, Frank W. Trischetta,  Senior
Vice President - Marketing and Sales, and Gerald J. Bentivegna, Vice President -
Finance, Chief Financial Officer and Director, are the executive officers of the
Company.  While  there are no formal  agreements,  Denis A.  Krusos and Frank J.
DiSanto waived any and all rights to receive salary and related pension benefits
for an undetermined period of time commencing November 1, 1985. As a result, Mr.
Krusos  received no salary or bonus during the last three fiscal  years.  Except
for Mr.  Trischetta,  no other executive  officer  received a salary or bonus in
excess of $100,000  during the fiscal year ended October 31, 1998. The following
is  compensation  information  regarding Mr. Krusos and Mr.  Trischetta  for the
fiscal years ended October 31, 1998, 1997 and 1996:

<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------------------------

                                                SUMMARY COMPENSATION TABLE
------------------------------------------------------------------------------------------------------------------------------------
                                                                   
                                                                                                    Long-Term
                                                                                               Compensation Awards  
                                                                                               ---------------------
                                                                      
                                                   Fiscal                   
                   Name and                        Year                 Annual                 Securities Underlying
              Principal Position                   Ended             Compensation                   Options (#)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                            <C>              <C>                              <C>    
Denis A. Krusos,                                 10/31/98                -                          600,000
Chairman of the Board,                           10/31/97                -                          575,000
Chief Executive Officer and Director             10/31/96                -                          575,000
------------------------------------------------------------------------------------------------------------------------------------
Frank W. Trischetta                              10/31/98            $153,008                        60,000
Senior Vice President -                          10/31/97            $152,500                        30,000
Marketing and Sales                              10/31/96            $117,600                       155,000
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

The following is information  regarding  stock options granted to Mr. Krusos and
Mr.  Trischetta  pursuant to the 1993 Plan during the fiscal year ended  October
31, 1998:
<TABLE>
<CAPTION>

                                        25
<PAGE>

------------------------------------------------------------------------------------------------------------------------------------
                                                 OPTION GRANTS IN LAST FISCAL YEAR
====================================================================================================================================
                                       Individual Grants                                           Potential Realizable Value at
                                                                                                Assumed Annual Rates of Stock Price
                                                                                                   Appreciation for Option Term
====================================================================================================================================
                        Number of         Percent of
                       Securities        Total Options
                   Underlying Options     Granted to          Exercise
                         Granted         Employees in          Price           Expiration
Name                     (#) (1)          Fiscal Year         ($/Share)           Date              5% ($)             10% ($)
====================================================================================================================================
<S>                    <C>                <C>               <C>               <C>               <C>              <C>                
Denis A. Krusos          300,000            10.88%            $3.375 (2)         11/11/07          $636,756         $ 1,613,664
------------------------------------------------------------------------------------------------------------------------------------
Denis A. Krusos          300,000            10.88%            $2.281 (2)          7/13/08          $430,353         $ 1,090,598
------------------------------------------------------------------------------------------------------------------------------------

Frank W. Trischetta          400             0.01%            $3.375 (2)         11/11/07             $ 849             $ 2,152
------------------------------------------------------------------------------------------------------------------------------------
Frank W. Trischetta       29,600             1.07%            $3.375 (3)         11/11/07          $ 62,827           $ 159,215
------------------------------------------------------------------------------------------------------------------------------------
Frank W. Trischetta       30,000             1.09%            $2.281 (3)          7/13/08            43,035           $ 109,060
------------------------------------------------------------------------------------------------------------------------------------
<FN>

(1)       The  options  are  exercisable  in  whole  or in part  commencing  one  
          year following the date of grant unless  otherwise  accelerated.  The
          options are not issued  in  tandem  with  stock  appreciation  or  
          similar  rights  and  are not transferable  other than by will or the
          laws of descent  and  distribution.  The options  terminate upon 
          termination  of employment,  except that in the case of death, 
          disability or termination  for reasons other than cause,  options may 
          be exercised for certain periods of time thereafter as set forth in 
          the 1993 Plan.

(2)      The exercise  price of these options was equal to the fair market value 
         of the  underlying  common stock on the date of grant.These options are 
         nonqualified options.

(3)      The exercise  price of these options was equal to the fair market value 
         of the  underlying  common stock on the date of grant.These  options 
         are  intended  to qualify as  incentive  stock  options  within the 
         meaning of Section 422 of the  Internal Revenue Code of 1986, as 
         amended.
</FN>

                                      26
<PAGE>
</TABLE>

The following is information regarding stock option exercises during fiscal 1998
by Mr. Krusos and Mr.  Trischetta  and the values of their options as of October
31, 1998:

<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------------------------
                                  AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
                                                 FY-END OPTION/VALUES
====================================================================================================================================
                                                           Number of Securities                    Value of Unexercised
                                                       Underlying Unexercised Options          In-the-Money Options at Fiscal
                                                          at Fiscal Year End (#)                       Year End ($) 
                  Shares Acquired   Value Realized   
      Name        on Exercise (#)        ($)         
                                                    --------------------------------------------------------------------------------
                                                       Exercisable     Unexercisable          Exercisable        Unexercisable
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>                <C>                    <C>            <C>           

Denis A. Krusos          -                -             2,935,180            -                       -               -
------------------------------------------------------------------------------------------------------------------------------------
Frank W.                 -                -               453,000             -                      -               -
Trischetta
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

There is no present  arrangement for cash compensation of directors for services
in that capacity. Under the 1993 Plan, each non-employee director elected to the
Board of Directors is entitled to receive nonqualified stock options to purchase
20,000  shares  of  common  stock  upon his  initial  election  to the  Board of
Directors  and  nonqualified  stock  options  to  purchase  40,000  shares  each
subsequent year that such director is elected to the Board of Directors.

                                  27
<PAGE>
Item 12.  Security Ownership of Certain Beneficial Owners
          -----------------------------------------------
              and Management.
              ---------------

The following table sets forth certain information with respect to the Company's
common stock beneficially owned as of January 22, 1999 by (a) each person who is
known by the management of the Company to be the  beneficial  owner of more than
5% of the Company's  outstanding  common  stock,  (b) each director or executive
officer of the Company and (c) all directors and executive officers as a group:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
                                                                    Amount and Nature of
                                                                         Beneficial                   Percent of 
             Name and Address of Beneficial Owner                      Ownership(1)(2)                   Class
-------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>                      <C>   

Denis A. Krusos                                                          7,376,440(3)                  12.08%
900 Walt Whitman Road
Huntington Station, NY  11746
-------------------------------------------------------------------------------------------------------------------
Frank J. DiSanto                                                         6,254,335(4)                  10.27%
900 Walt Whitman Road
Huntington Station, NY  11746
-------------------------------------------------------------------------------------------------------------------
Gerald J. Bentivegna                                                       281,000                       .48%
900 Walt Whitman Road
Huntington Station, NY  11746
-------------------------------------------------------------------------------------------------------------------
George P. Larounis                                                         242,500                       .42%
15-17 A. Tsoha St.
11521 Athens, Greece
-------------------------------------------------------------------------------------------------------------------
John R. Shonnard                                                           269,600(5)                    .46%
12521 Rios Road
San Diego, CA  92128
-------------------------------------------------------------------------------------------------------------------
Frank W. Trischetta                                                        453,000                       .77%
900 Walt Whitman Road
Huntington Station, NY  11746
-------------------------------------------------------------------------------------------------------------------
All Directors and Executive Officers as a Group                        14,876,875(3)(4)(5)             22.91%
(6 persons)
-------------------------------------------------------------------------------------------------------------------
____________________
</TABLE>



(1)      A beneficial owner of a security  includes any person who directly or
         indirectly has or shares voting power and/or  investment power with 
         respect to such  security or has the right to obtain such voting power 
         and/or  investment  power within sixty (60)days.  Except as otherwise 
         noted,  each designated  beneficial owner in this report has sole
         voting power and investment power with respect to the shares of the
         Company's common stock beneficially owned by such person.

(2)      Includes 2,935,180 shares,  2,765,180 shares,  279,000 shares,  242,500
         shares,  140,000 shares,  453,000 shares and 6,814,860 shares as to 
         which Denis A. Krusos, Frank J. DiSanto,  Gerald J. Bentivegna, 
         George P. Larounis,  John R. Shonnard,  Frank W.Trischetta and all 
         directors and executive  officers as a group,  respectively,  have the 
         right to acquire within 60 days upon exercise of options granted 
         pursuant to the 1993 Plan.

(3)      Includes 29,500 shares of the Company's common stock owned by Mrs. C.
         Krousos, the wife of Denis A. Krusos, as to which beneficial ownership
         is disclaimed by Mr. Krusos.

(4)      Includes  2,000,000  shares held by the Frank J.  DiSanto  Revocable  
         Living  Trust.  Mr.  DiSanto is the trustee and has sole voting and 
         investment power of the trust.

(5)      Includes  129,600  shares of the Company's  common stock,  all of which
         are held in a revocable  trust by the Wells Fargo Bank   (successor of
         the First  Interstate  Bank), as trustee of such trust.  Mr. Shonnard
         and his wife,  Janet L. Shonnard,  are the beneficiaries  of such trust
         and,  under  certain  circumstances,  may exercise the voting power and
         investment  power of the  trust jointly.

                                     28
<PAGE>
Item 13.  Certain Relationships and Related Transactions.
          -----------------------------------------------

Not applicable.

                                                       PART IV
                                                       -------

Item 14.          Exhibits, Financial Statement Schedules, and
                  --------------------------------------------
                  Reports on Form 8-K.
                  --------------------

(a)(1)(2)         Financial Statement Schedules
                  -----------------------------

                  See accompanying "Index to Financial Statements".

  (a)(3)          Executive Compensation Plans and Arrangements
                  ---------------------------------------------

                  Stock  Option Plan  (1987)  (filed as Exhibit  10.18 to the 
                  Company's  Quarterly  Report on Form 10-Q for the fiscal
                  quarter ended April 30, 1987).

                  Amendment to Stock Option Plan (1987)  (filed as Exhibit  
                  10.69 to the  Company's  Annual Report on Form 10-K for the
                  fiscal year ended October 31, 1990).

                  CopyTele, Inc. 1993 Stock Option Plan (filed as Annex A to the
                  Company's Proxy Statement dated June 10, 1993).

                  Amendment to CopyTele,  Inc. 1993 Stock Option Plan (filed as 
                  Exhibit 4(d) to the Company's Form S-8 dated  September
                  6, 1995).

                  Amendment to CopyTele,  Inc. 1993 Stock Option Plan (filed as
                  Exhibit 10.32 to the Company's Quarterly Report on Form 10-Q 
                  for the fiscal quarter ended April 30, 1996).

      (b)         Reports on Form 8-K
                  -------------------

                  No  current  report on Form 8-K was filed for the  Company  
                  during  the  fourth  quarter  of its  fiscal  year  ended
                  October 31, 1998.

                                           29
<PAGE>

      (c)         Exhibits
                  ---------

                  (a)      3.1              Certificate of Incorporation, as 
                                            amended.

                  (b)      3.2              By-laws, as amended and restated.

                           3.3              Amendment to By-laws.

                  (c)      10.1             Stock Option Plan, adopted on April 
                                            1, 1987 and approved by shareholders
                                            on May 27, 1987.

                  (d)      10.2             Amendment to Stock Option Plan, 
                                            adopted on March 12, 1990 and 
                                            approved by  shareholders on May 24,
                                            1990.

                  (e)      10.3             CopyTele,  Inc.  1993  Stock  Option
                                            Plan,  adopted  on April  28,  1993
                                            and  approved  by shareholders on
                                            July 14, 1993.

                  (f)      10.4             Joint  Venture  Contract,  dated as 
                                            of March 28, 1995, by and between  
                                            Shanghai  Electronic Components 
                                            Corp. and CopyTele, Inc.

                  (f)      10.5             Technology  License  Agreement,  
                                            dated  as of  March  28,  1995,  by 
                                            and  between  Shanghai  CopyTele 
                                            Electronics Co., Ltd. and CopyTele,
                                            Inc.

                  (g)      10.6             Amendment  No. 1 to the CopyTele, 
                                            Inc. 1993 Stock Option Plan,  
                                            adopted on May 3, 1995 and approved
                                            by shareholders on July 19, 1995.

                  (h)      10.7             Assignment  Agreement,  dated  as of
                                            July  10,  1995,  by and  among  
                                            Shanghai  Electronic  Components  
                                            Corp.,  Shanghai  International  
                                            Trade  and  Investment  Developing  
                                            Corp.  and CopyTele, Inc.

                  (i)      10.8             Amendment No. 2 to the CopyTele, 
                                            Inc. 1993 Stock Option Plan,  
                                            adopted on May 10, 1996 and approved
                                            by shareholders on July 24, 1996.

                  (j)      10.9             Contract   Granting   Land-Use
                                            Rights,   dated   October  11,  
                                            1995,   between  the  Land
                                            Administration Bureau Songjiang  
                                            County and Shanghai CopyTele 
                                            Electronics Co., Ltd.

                           21               List of Significant Subsidiaries.

                           23.1             Consent of Arthur Andersen LLP.

                           27               Financial Data Schedule.

                                         30
<PAGE>

         (k)      99.1     Financial  Statements of Shanghai 
                           CopyTele  Electronics Co., Ltd.
                                            
                  (a)      Incorporated by reference to Form 10-Q for the fiscal
                           quarter ended July 31, 1992 and to Form 10-Q for the
                           fiscal quarter ended July 31, 1997.

                  (b)      Incorporated by reference to  Post-Effective  
                           Amendment No. 1 to Form S-8  (Registration No. 
                           33-49402) dated December 8, 1993.

                  (c)      Incorporated by reference to Form 10-Q for the fiscal
                           quarter ended April 30, 1987.

                  (d)      Incorporated by reference to Form 10-K for the fiscal
                           year ended October 31, 1990.

                  (e)      Incorporated by reference to Proxy Statement dated 
                           June 10, 1993.

                  (f)      Incorporated by reference to Form 8-K dated March 28,
                           1995.

                  (g)      Incorporated by reference to Form S-8 (Registration
                           No. 33-62381) dated September 6, 1995.

                  (h)      Incorporated by reference to Form 10-K for the fiscal
                           year ended October 31, 1995.

                  (i)      Incorporated by reference to Form 10-Q for the fiscal
                           quarter ended April 30, 1996.

                  (j)      Incorporated by reference to Form 10-Q for the fiscal
                           quarter ended January 31, 1997.

                  (k)      To be filed by amendment.
 
                                        31
<PAGE>

                                  SIGNATURES
                                   ----------

Pursuant to the  requirements of Section 13 or 15(d) 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.

                                        COPYTELE, INC.

                                        By:/s/ Denis A. Krusos
                                           -------------------
                                        Denis A. Krusos
                                        Chairman of the Board and
January 29, 1999                        Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  registrant and
in the capacities and on the date indicated.

                                         By:/s/ Denis A. Krusos             
                                            -------------------
                                         Denis A. Krusos
                                         Chairman of the Board,
                                         Chief Executive Officer
                                         and Director (Principal Executive
January 29, 1999                         Officer)

                                         By:/s/ Frank J. DiSanto           
                                            --------------------
                                         Frank J. DiSanto
January 29, 1999                         President and Director

                                         By:/s/ Gerald J. Bentivegna         
                                            ------------------------
                                         Gerald J. Bentivegna
                                         Vice President - Finance,
                                         Chief Financial Officer and
                                         Director (Principal Financial
January 29, 1999                         and Accounting Officer)

                                         By:/s/ John R. Shonnard             
                                            ---------------------
                                         John R. Shonnard
January 29, 1999                         Director

                                         By:/s/ George P. Larounis           
                                            ----------------------
                                         George P. Larounis
January 29, 1999                         Director


                                        32
<PAGE>

                                                    EXHIBIT INDEX
         Exhibit
Ref.     Number            Description
----     -------           ------------

(a)      3.1                 Certificate of Incorporation, as amended.

(b)      3.2                 By-laws, as amended and restated.

         3.3                 Amendment to By-Laws. 

(c)      10.1                Stock Option Plan, adopted on April 1, 1987 and 
                             approved by shareholders on May 27, 1987.

(d)      10.2                Amendment to Stock Option Plan, adopted on March 
                             12, 1990 and approved by  shareholders  on May 24, 
                             1990.

 (e)     10.3                CopyTele,  Inc. 1993 Stock Option Plan, adopted on 
                             April 28, 1993 and approved by shareholders on July
                             14, 1993.

(f)      10.4                Joint Venture Contract,  dated as of March 28, 
                             1995, by and between Shanghai  Electronic  
                             Components Corp. and CopyTele, Inc.

(f)      10.5                Technology  License  Agreement,  dated as of March
                             28, 1995, by and between Shanghai CopyTele  
                             Electronics Co., Ltd. and CopyTele, Inc.

(g)      10.6                Amendment  No. 1 to the  CopyTele,  Inc.  1993 
                             Stock Option  Plan,  adopted on May 3, 1995 and 
                             approved by shareholders on July 19, 1995.

(h)      10.7                Assignment  Agreement,  dated as of July 10, 1995, 
                             by and among  Shanghai  Electronic  Components  
                             Corp., Shanghai International Trade and Investment 
                             Developing Corp. and CopyTele, Inc.

(i)      10.8                Amendment  No. 2 to the  CopyTele,  Inc.  1993 
                             Stock Option Plan,  adopted on May 10, 1996 and 
                             approved by shareholders on July 24, 1996.

(j)      10.9                Contract Granting Land-Use Rights, dated October 
                             11, 1995, between the Land Administration Bureau 
                             Songjiang County and Shanghai CopyTele Electronics 
                             Co., Ltd.

         21                  List of Significant Subsidiaries.

         23.1                Consent of Arthur Andersen LLP.

         27                  Financial Data Schedule.

(k)      99.1                Financial Statements of Shanghai CopyTele
                             Electronics Co., Ltd. 

                                       33
<PAGE>
(a)      Incorporated by reference to Form 10-Q for the fiscal quarter ended 
         July 31, 1992 and the fiscal quarter ended July 31, 1997.
(b)      Incorporated by reference to Post-Effective Amendment No. 1 to Form S-8
         (Registration No. 33-49402) dated December 8, 1993.
(c)      Incorporated by reference to Form 10-Q for the fiscal quarter ended 
         April 30, 1987.
(d)      Incorporated by reference to Form 10-K for the fiscal year ended
         October 31, 1990.
(e)      Incorporated by reference to Proxy Statement dated June 10, 1993.
(f)      Incorporated by reference to Form 8-K dated March 28, 1995.
(g)      Incorporated by reference to Form S-8 (Registration No. 33-62381) dated
         September 6, 1995.
(h)      Incorporated by reference to Form 10-K for the fiscal year ended 
         October 31, 1995.
(i)      Incorporated by reference to Form 10-Q for the fiscal quarter ended
         April 30, 1996.
(j)      Incorporated by reference to Form 10-Q for the fiscal quarter ended 
         January 31, 1997.
(k)      To be filed by amendment

                                  34
<PAGE>


                            UNANIMOUS WRITTEN CONSENT
                            -------------------------
                                  IN LIEU OF A
                                  ------------
                        MEETING OF THE BOARD OF DIRECTORS
                        ---------------------------------
                                       OF
                                       --
                                 COPYTELE, INC.
                                 --------------



THE  UNDESIGNED,  being all of the  directors  of  CopyTele,  Inc.,  a  Delaware
corporation (the "Corporation"),  do hereby consent,  pursuant to Section 141(f)
of the General Corporation Law of the State of Delaware,  to the adoption of the
following  resolutions  in lieu of a meeting  of the Board of  Directors  of the
Corporation:

RESOLVED,  that Article I, Section 10 of the Amended and Restated By-Laws of the
Corporation is hereby amended to read in its entirety as follows:

                "SECTION 10. Business at Stockholders' Meetings.
                ------------------------------------------------

(a)

Except as  otherwise  provided  by law,  at any  annual or  special  meeting  of
stockholders  only such business  shall be conducted as shall have been properly
brought before the meeting in accordance  with the provisions of the Certificate
of Incorporation  and these By-laws of the Corporation.  In order to be properly
brought before the meeting, such business must have either been (i) specified in
the  written  notice  of the  meeting  (or  any  supplement  thereto)  given  to
stockholders  of  record  on the  record  date  for  such  meeting  by or at the
direction  of the Board of  Directors,  (ii)  brought  before the meeting at the
direction of the Board of  Directors  of the  Chairman of the meeting,  or (iii)
specified in a written  notice given by or on behalf of a stockholder  of record
on the  record  date  for  such  meeting  entitled  to  vote  thereat  or a duly
authorized proxy for such  stockholder,  in accordance with all of the following
requirements.  A notice  referred  to in clause  (iii) of this  Section  must be
delivered  personally to, or mailed to and received at, the principal  executive
office of the Corporation,  addressed to the attention of the Secretary,  in the
case of business to be brought  before a special  meeting of  stockholders,  not
more than ten (10) days  after the date of the  initial  notice  referred  to in
clause (i) of this Section, and, in the case of business to be brought before an
annual meeting of stockholders,  not less than forty five (45) days prior to the
first  anniversary  date of the initial notice referred to in clause (i) of this
Section of the previous  year's annual  meeting;  provided,  however,  that such
notice shall not be required to be given more than  seventy-five (75) days prior
to the annual meeting of  stockholders.  Such notice referred to in clause (iii)
of this  Section  shall set forth  (A) a full  description  of each such item of
business proposed to be brought before the meeting,  (B) the name and address of
the person  proposing to bring such business  before the meeting,  (C) the class
and number of shares held of record,  held beneficially and represented by proxy
by such person as of the record date for the meeting (if such date has then been
made publicly  available) and as of the date of such notice,  (D) if any item of
such business involves a nomination for director, all information regarding each
such  nominee  that  would be  required  to be set forth in a  definitive  proxy
statement filed with the Securities and Exchange  Commission pursuant to Section
14 of the Securities  Exchange Act of 1934, as amended (the "Exchange  Act"), or
any successor thereto,  and the written consent of each such nominee to serve if
elected,  and (E) all other  information that would be required to be filed with
the Securities and Exchange Commission if, with respect to the business proposed
to be brought  before the meeting,  the person  proposing  such  business were a
participant in a solicitation  subject to Section 14 of the Exchange Act, or any
successor  thereto.  No business  shall be brought  before any annual or special
meeting of  stockholders  of the  Corporation  otherwise than as provided in the
Section 10".

                                   35
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Written Consent as of the
3rd day of June, 1998.
                                                    


                      By:/s/ Denis A. Krusos             
                         -------------------
                          Denis A. Krusos
                          Chairman of the Board,
                          Chief Executive Officer
                          and Director (Principal Executive
                          Officer)

                      By:/s/ Frank J. DiSanto           
                         --------------------
                         Frank J. DiSanto
                         President and Director

                      By:/s/ Gerald J. Bentivegna         
                         ------------------------
                         Gerald J. Bentivegna
                         Vice President - Finance,
                         Chief Financial Officer and
                         Director (Principal Financial
                         and Accounting Officer)

                      By:/s/ John R. Shonnard             
                         ---------------------
                         John R. Shonnard
                         Director

                      By:/s/ George P. Larounis           
                         ----------------------
                         George P. Larounis
                         Director

                 
                                   36
<PAGE>




                                 COPYTELE, INC.
                                 --------------
                         (Development Stage Enterprise)
                         ------------------------------
                          INDEX TO FINANCIAL STATEMENTS
                          -----------------------------
                                OCTOBER 31, 1998
                                ----------------


<TABLE>
<CAPTION>

                                                                                                Page
<S>                                                                                        <C>    
Report of Independent Public Accountants                                                         F-1

Balance Sheets as of October 31, 1998 and 1997                                                   F-2

Statements of Operations for each of the three years ended October 31, 1998 and
   for the period from November 5, 1982 (inception) through October 31, 1998                     F-3

Statements  of  Shareholders'  Equity  for the  period  from  November  5,  1982
   (inception) through October 31, 1983 and for each of the fifteen years ended
    October 31, 1998                                                                          F-4 - F-7

Statements of Cash Flows for each of the three years ended October 31, 1998 and
   for the period from November 5, 1982 (inception) through October 31, 1998                     F-8

Notes to Financial Statements                                                                 F-9 - F-19



</TABLE>

Information  required by schedules called for under Regulation S-X is either not
applicable or is included in the financial statements or notes thereto.



<PAGE>


                                                           
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
                    ----------------------------------------


To CopyTele, Inc.:

We have audited the  accompanying  balance sheets of CopyTele,  Inc. (a Delaware
corporation in the development stage -- Note 1) as of October 31, 1998 and 1997,
and the related  statements of  operations  and cash flows for each of the three
years in the period ended October 31, 1998,  and for the period from November 5,
1982 (inception) to October 31, 1998, and the statements of shareholders' equity
for the period from November 5, 1982  (inception)  through October 31, 1983, and
for each of the  fifteen  years in the period  ended  October  31,  1998.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 1 to the financial statements,  the Company continues to be
in its development stage, and during its year ended October 31, 1998,  increased
its  inventory  to  approximately  $2.7  million.  Reference  is  made to Note 1
discussing the Company's future plans.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial  position of CopyTele,  Inc. as of October
31, 1998,  and 1997,  and the results of its  operations  and its cash flows for
each of the three years in the period ended  October 31, 1998 and for the period
from November 5, 1982  (inception)  to October 31, 1998,  and the changes in its
shareholders'  equity for the period from November 5, 1982  (inception)  through
October 31, 1983,  and for each of the fifteen years in the period ended October
31, 1998, in conformity with generally accepted accounting principles.





                                                      ARTHUR ANDERSEN LLP



New York, New York
January 27, 1999


                                   F-1
<PAGE>
<TABLE>
<CAPTION>

                                                        COPYTELE, INC.
                                                        --------------
                                                (Development Stage Enterprise)
                                                ------------------------------
                                                        BALANCE SHEETS
                                                        --------------


                                                                                                October 31,         October 31,
                                          ASSETS                                                    1998               1997
                                          ------                                                    ----               ----
<S>                                                                                             <C>                <C>    
CURRENT ASSETS:
  Cash (including cash equivalents and interest bearing accounts of
    $5,363,522 and $11,977,526, respectively)                                                    $5,406,017         $12,329,171
  Marketable securities, at amortized cost (Note 2)                                                    -                997,173
  Accrued interest receivable                                                                         3,983              18,429
  Inventory                                                                                       2,719,215             131,498
  Prepaid expenses and other current assets (including amounts due from Joint
    Venture of approximately $825,000 and $4,304,000, respectively)
                                                                                                    904,656           4,721,961
                                                                                                 -----------         ----------
         Total current assets                                                                     9,033,871          18,198,232

PROPERTY AND EQUIPMENT (net of accumulated depreciation
  and amortization of $1,351,778 and $1,062,949, respectively)                                     766,106              947,643

INVESTMENT IN JOINT VENTURE (Notes 1, 2 and 3)                                                     345,947              723,166

AMOUNTS DUE FROM JOINT VENTURE                                                                   3,091,628                 -

OTHER ASSETS                                                                                        97,420              119,166

DEFERRED TAX BENEFITS (net of valuation allowance of $30,910,000
  and $28,295,000, respectively)                                                                      -                    -
                                                                                                -----------        ------------
                                                                                                $13,334,972         $19,988,207
                                                                                                ===========        ============


                            LIABILITIES AND SHAREHOLDERS' EQUITY
                            ------------------------------------

CURRENT LIABILITIES:
  Accounts payable (including amounts due to Joint Venture                                       
    of approximately $662,000 and $11,000, respectively)                                         $1,392,321          $1,111,760
  Accrued liabilities                                                                                81,738              97,305
                                                                                                ------------        ------------
         Total current liabilities                                                                1,474,059           1,209,065

COMMITMENTS AND CONTINGENCIES (Note 5)

SHAREHOLDERS' EQUITY (Note 4):
  Preferred stock, par value $100 per share; authorized 500,000 shares;
    no shares outstanding                                                                            -                   -     
  Common stock, par value $.01 per share; authorized 240,000,000 shares;
    outstanding 57,871,176 and 57,861,176 shares, respectively                                      578,712             578,612
  Additional paid-in capital                                                                     52,977,110          52,759,485
  Accumulated (deficit) during development stage                                                (41,694,909)        (34,558,955)
                                                                                                ------------    ---------------
                                                                                                 11,860,913          18,779,142
                                                                                                 ----------     ---------------
                                                                                                $13,334,972         $19,988,207
                                                                                                ===========      ==============
The  accompanying  notes  are an  integral  part of these balance sheets.

</TABLE>

                                    F-2
<PAGE>
<TABLE>
<CAPTION>



                                                        COPYTELE, INC.
                                                        --------------
                                                (Development Stage Enterprise)
                                                ------------------------------
                                                   STATEMENTS OF OPERATIONS
                                                   ------------------------


                                                                                                                
                                                                                                                For the Period From
                                                                For the Years Ended October 31,                 November 5, 1982
                                                       ---------------------------------------------------     (inception) through
                                                          1998               1997               1996            October 31, 1998
                                                          ----               ----               ----            --------------------
<S>                                                  <C>                 <C>               <C>                   <C>    
SALES                                                   $   -              $   -              $    -                $    -
                                                      -------------      -------------      -------------          -------------

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
  (including research and development 
  expenses of approximately
  $3,926,000, $3,642,000, $3,858,000 and 
  $28,311,000, respectively)                            7,231,557           6,378,368          6,017,580             45,590,134
                                                      -------------      -------------       -------------         -------------

LOSS FROM JOINT VENTURE (Notes 1, 2 and 3)                377,219             335,391            148,630                879,053
                                                      -------------     ---------------      -------------         -------------

INTEREST INCOME                                           472,822             913,184            722,800              4,774,278
                                                      -------------     ---------------      -------------        -------------

NET (LOSS)                                            $(7,135,954)        $(5,800,575)        $(5,443,410)         $(41,694,909)
                                                      =============     ===============      =============         =============

NET (LOSS) PER SHARE OF COMMON STOCK:
  BASIC AND DILUTED                                   $      (.12)        $      (.10)        $      (.10)         $       (.89)
                                                      =============      ==============      ==============        =============

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
  BASIC AND DILUTED                                     57,865,834          57,667,787         54,771,891            46,647,914
                                                      =============       =============      =============         =============


</TABLE>


The accompanying notes are an integral part of these statements.

                                   F-3
<PAGE>
<TABLE>
<CAPTION>

                                                              
                                 COPYTELE, INC.
                                 --------------
                         (Development Stage Enterprise)
                         ------------------------------
                       STATEMENTS OF SHAREHOLDERS' EQUITY
                       ----------------------------------
                FOR THE PERIOD FROM NOVEMBER 5, 1982 (INCEPTION)
                ------------------------------------------------
                          THROUGH OCTOBER 31, 1983 AND
                          ----------------------------
                  FOR THE FIFTEEN YEARS ENDED OCTOBER 31, 1998
                  --------------------------------------------


                                                                                                                       Accumulated
                                                                                                                        (Deficit)
                                                                              Common Stock             Additional        During
                                                                     ------------------------------     Paid-in        Development
                                                                         Shares        Par Value        Capital           Stage
                                                                         ------        ---------       --------           -----

<S>                                                                  <C>             <C>            <C>             <C>   
BALANCE, November 5, 1982 (inception)                                      -           $   -           $    -          $     -     
  Sale of common stock, at par, to incorporators on November 8,
    1982                                                               1,470,000         14,700             -                -     
  Sale of common stock, at $.10 per share, primarily to officers
   and employees, from November 9, 1982 to November 30, 1982             390,000          3,900           35,100             -     
  Sale of common stock, at $2 per share, in private offering
    from January 24, 1983 to March 28, 1983                              250,000          2,500          497,500             -     
  Sale of common stock, at $10 per share, in public offering
    on October 6, 1983, net of underwriting discounts of $1
    per share                                                            690,000          6,900        6,203,100             -     
  Sale of 60,000 warrants to representative of underwriters
    at $.001 each, in conjunction with public offering                      -               -                 60             -     
  Costs incurred in conjunction with private and public offerings           -               -           (350,376)            -     
  Net (loss) for the period                                                 -               -               -            (976,919)
                                                                     ------------    -----------     ------------   --------------

BALANCE, October 31, 1983                                              2,800,000         28,000        6,385,384         (976,919)
  Additional costs incurred in conjunction with public offering             -              -             (11,654)            -     
  Net (loss) for the period                                                 -              -                -          (1,542,384)
                                                                     ------------    -----------     ------------   ---------------

BALANCE, October 31, 1984                                              2,800,000         28,000        6,373,730       (2,519,303)
  Common stock issued, at $12 per share, upon exercise of
    57,200 warrants from February 5, 1985 to October 16, 1985,
    net of registration costs                                             57,200            572          630,845             -     
  Proceeds from sales of common stock by individuals from
    January 29, 1985 to October 4, 1985 under agreements
    with the Company, net of costs incurred by the Company                 -               -             362,365             -     
  Three-for-one stock split (A)                                        5,714,400         57,144          (57,144)            -     
  Net (loss) for the period                                                -               -                -          (1,745,389)
                                                                     ------------    -----------     ------------   --------------

BALANCE, October 31, 1985                                              8,571,600         85,716        7,309,796       (4,264,692)
  Common stock issued, at $4 per share, upon exercise of 2,800
    warrants in December 1985                                              8,400             84           33,516             -     
  Additional costs incurred by the Company in conjunction with
    sales of common stock by individuals from January 29, 1985
    to October 4, 1985 under agreements with the Company                   -                -            (62,146)            -     
  Net (loss) for the period                                                -                -                -         (1,806,696)
                                                                     ------------      -----------     ------------   --------------

BALANCE, October 31, 1986                                              8,580,000         85,800         7,281,166      (6,071,388)



</TABLE>

                                                                   Continued

                                             F-4
<PAGE>
<TABLE>
<CAPTION>


                                 COPYTELE, INC.
                                 --------------
                         (Development Stage Enterprise)
                         ------------------------------
                       STATEMENTS OF SHAREHOLDERS' EQUITY
                       ----------------------------------
                FOR THE PERIOD FROM NOVEMBER 5, 1982 (INCEPTION)
                ------------------------------------------------
                          THROUGH OCTOBER 31, 1983 AND
                          ----------------------------
                  FOR THE FIFTEEN YEARS ENDED OCTOBER 31, 1998
                  --------------------------------------------

                                    Continued
                                    ---------

                                                                                                                     Accumulated
                                                                                                                      (Deficit) 
                                                                            Common Stock                Additional     During
                                                                      -------------- ---------------    Paid-in      Development
                                                                         Shares        Par Value        Capital         Stage
                                                                         ------       ----------        --------        -----

<S>                                                                    <C>           <C>             <C>            <C>    
Sale of common stock, at market,  to officers on January 9, 1987 
    and April 22, 1987 and to members of their immediate families
    on July 28, 1987                                                      67,350           674          861,726            -     
  Additional costs incurred by the Company in conjunction with
    sales of common stock by individuals from January 29, 1985
    to October 4, 1985 under agreements with the Company                    -             -             (1,474)            -     
  Five-for-four stock split (A)                                        2,161,735        21,617         (21,617)            -     
  Fractional share payments in conjunction with five-for-four
    stock split                                                             -             -             (1,345)            -     
  Sale of common stock, at market, to members of officers'
    immediate families on September 10, 1987 and to officers on
    October 29, 1987                                                      64,740          647           309,601            -     
  Net (loss) for the period                                                 -             -                -          (1,401,736)
                                                                      -----------    -----------     -----------     -------------

BALANCE, October 31, 1987                                             10,873,825       108,738        8,428,057       (7,473,124)
  Sale of common stock, at market, to members of officers'
    immediate  families from  November 24, 1987 to June 29,
    1988 and  additional contributions  by  officers  in  
    January 1988 and  March  1988  related  to adjustments 
    to sales price of common stock on October 29, 1987                   260,210         2,602        2,250,594            -     
  Net (loss) for the period                                                -              -               -            (1,317,305)
                                                                      -----------    -----------     -----------     -------------

BALANCE, October 31, 1988                                             11,134,035       111,340       10,678,651        (8,790,429)
  Sale of common stock, at market, to an officer on 
    February 26, 1989 and to members of officers'  
    immediate  families from February 26, 1989
    (amended on March 10, 1989) to September
     27, 1989                                                            142,725         1,427        2,093,851            -     
  Sale of common stock, at market, to senior level personnel
    on February 26, 1989                                                  29,850           299          499,689            -     
  Sale of common stock, at market, to unrelated party on
    February 26, 1989 amended on March 10, 1989                           35,820           358          599,627            -     
  Net (loss) for the period                                                -              -               -            (1,101,515)
                                                                      -----------    -----------     -----------     -------------

BALANCE, October 31, 1989                                             11,342,430        113,424      13,871,818        (9,891,944)
  Sale of common stock, at market, to members of officers'
    immediate families from November 14, 1989 to October 15,
    1990                                                                 117,825         1,179        1,140,725           -     
  Net (loss) for the period                                                -              -               -            (1,111,413)
                                                                      -----------    -----------     -----------     -------------

BALANCE, October 31, 1990                                             11,460,255        114,603      15,012,543       (11,003,357)


                                                                                                                      Continued
</TABLE>

                                        F-5
<PAGE>
<TABLE>
<CAPTION>


                                 COPYTELE, INC.
                                 --------------
                         (Development Stage Enterprise)
                         ------------------------------
                       STATEMENTS OF SHAREHOLDERS' EQUITY
                       ----------------------------------
                FOR THE PERIOD FROM NOVEMBER 5, 1982 (INCEPTION)
                ------------------------------------------------
                          THROUGH OCTOBER 31, 1983 AND
                          ----------------------------
                  FOR THE FIFTEEN YEARS ENDED OCTOBER 31, 1998
                  --------------------------------------------

                                    Continued
                                    ---------


                                                                                                                     Accumulated
                                                                                                                      (Deficit) 
                                                                           Common Stock                Additional      During     
                                                                    --------------- ---------------    Paid-in       Development
                                                                        Shares        Par Value        Capital         Stage    
                                                                        -------       ----------     -------------     ------
                                                                                                                        
 <S>                                                              <C>                <C>              <C>          <C>    
  Sale of common stock, at market, to members of officers'
    immediate families on December 4, 1990                                42,540             425         329,260          -     
  Two-for-one stock split (A)                                         11,502,795         115,028        (115,028)         -     
  Sale of common stock, at market, to members of officers'
    immediate families from April 26, 1991 to September 16, 1991         102,543           1,025       1,033,981          -     
  Net (loss) for the period                                                 -               -               -        (1,299,992)
                                                                    ------------    ------------    ------------    ------------

BALANCE, October 31, 1991                                             23,108,133         231,081      16,260,756    (12,303,349)
  Sale of common stock, at market, to members of officers'
    immediate families from December 16, 1991 to October
    27, 1992                                                             158,910           1,589       1,754,330          -     
  Costs incurred in conjunction with registration of stock
    option plan                                                           -               -             (33,251)         -     
  Net (loss) for the period                                               -               -                -         (1,827,356)
                                                                    ------------    ------------    ------------    ------------

BALANCE, October 31, 1992                                             23,267,043         232,670      17,981,835    (14,130,705)
  Common stock issued upon exercise of stock options from
    December 16, 1992 to October 22, 1993 under stock option
    Plan                                                               1,032,940          10,330       5,914,480          -     
  Common stock issued upon exercise of warrants by members
    of officers' immediate families in September 1993                    239,000           2,390         996,774          -     
  Net (loss) for the period                                               -               -               -           (2,762,849)
                                                                    ------------    ------------    ------------    ------------

BALANCE, October 31, 1993                                             24,538,983         245,390      24,893,089     (16,893,554)
  Costs incurred in connection with registration of stock
    option plan                                                           -               -              (50,324)         -     
  Common stock issued upon exercise of stock options from
    December 22, 1993 to June 14, 1994 under stock option plan           233,200           2,332       1,273,411          -     
  Common stock issued upon exercise of warrants by members
    of officers' immediate families in July 1994                          65,220             652         371,754          -     
  Net (loss) for the period                                               -               -               -           (3,427,517)
                                                                    ------------    ------------    ------------    ------------

BALANCE, October 31, 1994                                             24,837,403         248,374      26,487,930     (20,321,071)



                                                                                                                      Continued
</TABLE>

                                        F-6
<PAGE>
<TABLE>
<CAPTION>


                                 COPYTELE, INC.
                                 --------------
                         (Development Stage Enterprise)
                         ------------------------------
                       STATEMENTS OF SHAREHOLDERS' EQUITY
                       ----------------------------------
                FOR THE PERIOD FROM NOVEMBER 5, 1982 (INCEPTION)
                ------------------------------------------------
                          THROUGH OCTOBER 31, 1983 AND
                          ----------------------------
                  FOR THE FIFTEEN YEARS ENDED OCTOBER 31, 1998
                  --------------------------------------------

                                    Continued
                                    ---------
                                                                                                                      Accumulated
                                                                                                                       (Deficit) 
                                                                            Common Stock                Additional      During
                                                                      -----------------------------      Paid-in      Development
                                                                          Shares        Par Value        Capital        Stage
                                                                          ------        ---------        -------       -------
                                                                                                                          
<S>                                                                   <C>               <C>         <C>           <C>    
 Costs incurred in connection with registration of stock
    option plan                                                             -                 -          (29,759)         -     
  Common stock issued upon exercise of stock options from
    February 17, 1995 to October 30, 1995 under stock option plans       980,400           9,804        5,278,824         -     
  Common stock issued upon exercise of warrants by members
    of officers' immediate families in February, July and
    September 1995                                                       137,300           1,373          755,132         -     
 Net (loss) for the period                                                  -               -               -         (2,993,899)
                                                                     ------------    ------------     ------------   --------------

BALANCE, October 31, 1995                                             25,955,103         259,551       32,492,127     23,314,970)

 Common stock issued upon exercise of stock options from
   November 2, 1995 to June 12, 1996 under stock option plans          2,288,800          22,888       15,843,842          -     
 Common stock issued upon exercise of warrants by members
    of officers' immediate families in January and March, 1996           138,280           1,383          527,802          -     
 Two-for-one stock split (A)                                          28,382,183         283,822         (283,822)         -     
 Common stock issued upon exercise of stock options from
    July 8, 1996 to October 30, 1996 under stock option plans            532,500           5,325        1,795,395          -     
 Common stock issued upon exercise of warrants by members
   of officers' immediate families in July and October, 1996             107,790           1,078          559,262          -     
 Net (loss) for the period                                                  -               -               -          (5,443,410)
                                                                     ------------    ------------    ------------    --------------

BALANCE, October 31, 1996                                             57,404,656         574,047      50,934,606      (28,758,380)

 Costs incurred in conjunction with registration of stock option
    plan                                                                   -               -            (11,705)           -
 Common stock issued upon exercise of stock options from
    November 25, 1996 to October 6, 1997 under stock option plans        342,700           3,427      1,258,829            -     
 Common stock issued upon exercise of warrants by members
   of officers' immediate families in March 1997                          98,820             988        502,905            -     
 Common stock issued upon purchase of equipment                           15,000             150         74,850            -     
 Net (loss) for the period                                                 -               -              -            (5,800,575)
                                                                     ------------    ------------   ------------     --------------

BALANCE, October 31, 1997                                             57,861,176         578,612     52,759,485       (34,558,955)

 Stock option compensation to consultants                                  -                -           189,600            -     
 Common stock issued upon exercise of stock options                                                                    
   in May 1998                                                                                                         
                                                                          10,000            100          28,025             -     
Net (loss) for the period                                                  -                -              -           (7,135,954)
                                                                     ------------    ------------   ------------    --------------

BALANCE, October 31, 1998                                             57,871,176      $  578,712     $52,977,110     $(41,694,909)
                                                                     ============    =============  =============    ==============

<FN>

(A) Reflects  cumulative  effect on all share data prior to splits  described in
    Note 4.

</FN>
</TABLE>

The accompanying notes are an integral part of these statements.

                                  F-7
<PAGE>
<TABLE>
<CAPTION>

                                                              
                                 COPYTELE, INC.
                                 --------------
                         (Development Stage Enterprise)
                         ------------------------------
                            STATEMENTS OF CASH FLOWS
                            ------------------------


                                                                                                                
                                                                                                                For the Period from
                                                                           For the Years Ended October 31,       November 5, 1982
                                                                   ------------------------------------------- (inception) through
                                                                         1998             1997          1996     October 31, 1998
                                                                         ----             ----          ----    ----------------
<S>                                                               <C>             <C>           <C>             <C>   
CASH FLOWS FROM OPERATING ACTIVITIES:
  Payments to suppliers, employees and consultants                  $(8,249,844)    $(11,089,765)  $(4,888,843)     $(49,447,342)
  Interest received                                                      513,633         917,696       709,700         4,770,296
                                                                    -------------    ------------   ------------   -------------   
         Net cash (used in) operating activities                     (7,736,211)     (10,172,069)   (4,179,143)     (44,677,046)
                                                                    -------------    ------------   ------------   -------------
                                                                                                                       
CASH FLOWS FROM INVESTING ACTIVITIES:
  Payments for purchases of property and equipment                     (185,876)        (448,288)     (418,733)       (1,983,159)
  Disbursements to acquire certificates of deposit and
    marketable securities                                                  -            (970,808)         -          (13,045,999)
  Proceeds from maturities of investments                                970,808            -             -           13,045,999
  Investment made in Joint Venture                                         -                -         (857,500)       (1,225,000)
                                                                    -------------    ------------   ------------    -------------
         Net cash provided by (used in) investing activities             784,932      (1,419,096)   (1,276,233)       (3,208,159)
                                                                    -------------    ------------   ------------    -------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from sales of common stock and warrants, net
    of underwriting discounts of $690,000 related to initial
    public offering in October 1983                                        -               -              -           17,647,369
  Proceeds from exercise of stock options and warrants,
    net of registration disbursements                                     28,125       1,754,444     18,756,975       35,708,483
  Proceeds from sales of common stock by individuals under
    agreements with the Company, net of disbursements made
    by the Company                                                         -               -              -              298,745
  Disbursements made in conjunction with sales of stock                    -               -              -             (362,030)
  Fractional share payments in conjunction with stock split                -               -              -               (1,345)
                                                                     ------------    ------------   ------------     ------------  
         Net cash provided by financing activities                        28,125       1,754,444     18,756,975       53,291,222
                                                                     ------------    ------------   ------------     ------------

NET (DECREASE) INCREASE IN CASH AND CASH
  EQUIVALENTS                                                        (6,923,154)      (9,836,721)    13,301,599        5,406,017

CASH AND CASH EQUIVALENTS AT BEGINNING
  OF PERIOD                                                           12,329,171      22,165,892      8,864,293             -
                                                                     ------------    ------------   ------------      -----------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                            $5,406,017    $ 12,329,171   $ 22,165,892       $5,406,017
                                                                     ------------    ------------   ------------     ------------

RECONCILIATION OF NET (LOSS) TO NET CASH
  (USED IN) OPERATING ACTIVITIES:
    Net (loss)                                                       $(7,135,954)    $(5,800,575)  $(5,443,410)     $(41,694,909)
    Stock option compensation to consultants                             189,600          -              -               189,600   
    Loss from Joint Venture                                              377,219         335,391       148,630           879,053  
    Depreciation and amortization                                        288,829         257,315       126,231         1,367,436   
    Amortization of discount on marketable securities                     26,365         (26,365)         -                 -
    Decrease (increase) in accrued interest receivable                    14,446          30,877       (13,100)           (3,983)  
   (Increase) in inventory                                            (2,587,717)       (131,498)        -            (2,719,215) 
    Decrease (increase) in prepaid expenses and other
      current assets                                                   3,817,305      (4,343,544)     (325,966)         (904,656)
   (Increase) in long term amount due from joint venture              (3,091,628)            -            -           (3,091,628)
    Decrease (increase) in other assets                                   21,746         108,476       (70,082)          (97,420)
    Decrease (increase) in accounts payable and accrued
      liabilities                                                        343,578       (602,146)      1,398,554        1,398,676
                                                                    -------------    ------------   ------------     ------------- 
         Net cash (used in) operating activities                    $(7,736,211)     $(10,172,069)  $(4,179,143)     $(44,677,046)
                                                                    =============    ============   ============     =============

</TABLE>

The accompanying notes are an integral part of these statements.

                              F-8
<PAGE>



                                                                         
                                 COPYTELE, INC.
                                 --------------
                         (Development Stage Enterprise)
                         ------------------------------
                          NOTES TO FINANCIAL STATEMENTS
                          -----------------------------
                                OCTOBER 31, 1998
                                ----------------


(1)      Nature of business and funding:
         --------------------------------

         Organization
         ------------

CopyTele, Inc. (the "Company"), which was incorporated on November 5, 1982, is a
development stage enterprise whose principal activities include the development,
production    and    marketing   of   a   telephone    based    multi-functional
telecommunications   product   incorporating  the  Company's   patented  compact
ultra-high resolution charged particle E-Paper(TM) Flat Panel Display technology
and the  operations  of Shanghai  CopyTele  Electronics  Co.,  Ltd.  (the "Joint
Venture" or "SCE"),  the Company's  55% owned joint  venture in Shanghai,  China
with Shanghai Instrumentation and Electronics Holding Group Company ("SIEC") and
Shanghai  International Trade and Developing Corp. ("SIT").  The Company is also
in the process of  developing  three new  products:  (i) a compact and  portable
digital  encryption device which could provide high-grade  information  security
for any telephone,  computer,  fax machine,  MAGICOM(R) 2000 or "e-way";  (ii) a
peripheral product called "e-way" which could be used with a telephone, computer
or fax machine to provide  internet e-mail,  simultaneous  voice and handwriting
and  caller ID all over a single  telephone  line;  and (iii)  coated  particles
derived from its E-Paper(TM) Flat Panel Display which could  potentially be used
by  manufacturers  of toners and pigments.  The Company also is  continuing  its
research and development  activities for additional  ultra-high resolution video
and color flat panel displays.

         Funding and Management's Plans
         ------------------------------

Since its inception,  the Company has met its liquidity and capital  expenditure
needs  primarily  from the  proceeds of sales of its common stock in its initial
public  offering,  in private  placements,  upon exercise of warrants  issued in
connection  with  the  private  placements  and  public  offering,  and upon the
exercise of stock options.

The Company's  operations  used  approximately  $7,700,000 in cash during fiscal
1998. The current working capital includes approximately  $5,400,000 of cash and
approximately  $812,000 (net of  approximately  $662,000 due to SCE) of accounts
payable and accrued liabilities.  The Company believes that these resources will
be sufficient to continue its operations,  as presently being  conducted,  until
the end of the first quarter of fiscal 2000 after giving  effect to  anticipated
reductions in SCE's  requirements  for  component  purchases  which  amounted to
$1,275,000  during fiscal 1998,  and  reductions in  administrative  and support
personnel, if necessary.

The Company is seeking to improve its  liquidity  through the sale of  products,
the collection of amounts due from SCE, and through possible sales of its common
stock,  although  there  can be no  assurance  that  any of these  plans  can be
implemented at terms that will be favorable to the Company. 
                              
The Company plans to sell its products to end-users through a distributor/dealer
network.  All of the critical  elements of the earnings process will be complete
when a distributor/dealer sells these products to end users. The Company has had
no sales since its inception other than sales of a limited  quantity of products
to certain distributors. Revenue will not be recorded on sales until the Company
determines  that its products have been accepted by the  end-users.  There is no
assurance  that the Company will  generate  significant  revenues in the future,
will have  sufficient  revenues to generate a profit or that other products will
not be produced by other  companies that will render the products of the Company
and SCE obsolete.

The National  Association of Securities Dealers,  Inc. requires that the Company
maintain a minimum of $4,000,000 of net tangible assets to maintain its National
Association of Securities  Dealers,  Inc.  Automated  Quotation  National Market
System listing.  The Company anticipates that it will seek additional sources of
funding,  when  necessary,  to satisfy such  requirements or for other purposes.
There is no assurance  that such  funding,  if required,  will be obtained.  The
Company's estimated funding capacity indicated above assumes,  although there is
no assurance,  that the waiver of salary and pension benefits by the Chairman of
the Board,  the President and senior level  personnel will continue.  See Note 8
for a more complete discussion regarding such waivers.

                              F-9
<PAGE>

         Realizability of Assets
         -----------------------

During its fiscal  year ended  October  31,  1998,  the  Company  increased  its
inventory to  approximately  $2,700,000 to prepare for the  distribution  of its
products.  Management  has recorded the  Company's  inventory at its current net
realizable value, which is based upon the current  anticipated  selling price of
the Company's  MAGICOM(R) 2000 units, and provides for no further  reductions of
the selling price of the product.  To date,  shipments of the Company's  product
have been limited. Accordingly,  there can be no assurance that the Company will
not be required to further reduce the selling price of the MAGICOM(R) 2000 below
its current carring value to accomplish certain business  strategies which would
require a further reduction of such carrying value.

In addition, amounts due from SCE totaled approximately $3,900,000 as of October
31, 1998.  The advances to SCE have  primarily  funded the purchase of inventory
components  to  manufacture   the  Company's   MAGICOM(R)   2000.  The  ultimate
realizability  of amounts due from SCE are also likely  dependent,  in part,  on
future sales of the Company's  products.  The Company's  proportionate  share of
future losses in the Joint Venture will continue to reduce the carrying value of
the  Investment in the Joint  Venture until such amount is exhausted.  If, after
the  Company  fully  writes  off  its   investment,   it  makes  any  additional
investments,  such  additional  investments  will  be  charged  directly  to the
statement of operations.

The Company will  continue to evaluate the  realizability  of these assets on an
ongoing basis and will make such adjustments, as necessary, to reflect estimated
net realizable values based on current facts and circumstances.

           Product Development
           -------------------

The Company has received  approximately  166 patents,  including  those from the
United  States and certain  foreign  patent  offices,  expiring at various dates
between 2005 and 2015. At the present time,  additional patent  applications are
pending with the United States and certain foreign patent offices. The foregoing
patents are related to the design,  structure and methods of construction of the
E-PaperTM  Flat Panel  Display,  methods of operating the  E-PaperTM  Flat Panel
Display,  particle  generation,  applications  using the  E-PaperTM  Flat  Panel
Display,  and new applications for SCE's planned products.  The Company also has
filed or is planning to file patent applications for its solid state and optical
and thin film video  color  flat panel  display  technologies,  currently  under
development,  and for its coated  particles.  There is no assurance that patents
will be obtained for any of the pending  applications,  however, the Company has
been advised by its patent  counsel that in their opinion the subject  matter of
the pending applications contains patentable material. In addition,  there is no
assurance  that any patents held or obtained  will  protect the Company  against
competitors  either  with or without  litigation.  The Company is not aware that
MAGICOM(R) 2000 is infringing upon the patents of others. There is no assurance,
however, that other products developed by the Company, if any, will not infringe
upon the patents of others,  or that the Company and SCE will not have to obtain
licenses  under the patents of others.  The Company  believes that the foregoing
patents are significant to the future operations of the Company.
                               
During 1995,  the Company  signed a joint venture  contract (the "Joint  Venture
Contract") to form a joint venture in Shanghai,  China with a 20-year  duration.
With this  agreement,  SCE was  formed  with the  Company  owning a 55% share in
capital,  profits  and  losses.  The  remaining  45% is owned by the two Chinese
companies.  Reference is made to Note 3 for a further discussion  regarding SCE.
Pursuant to a Technology  License Agreement entered into on the same date as the
Joint  Venture  Contract,  the Company has licensed  its flat panel  application
technology to SCE for exclusive use in China.  The Company is solely  authorized
to market Joint Venture products outside of China. Additional capitalization, if
necessary,  will be financed through a combination of third party borrowings and
equity  investments  contributed  by the Company,  SIEC and SIT in proportion to
their  respective  equity  interests and on terms to be agreed upon. The Company
may require  additional  financing in order to  participate in the Joint Venture
following its initial capital contributions.  No assurance can be given that the
Company will be able to raise its share of future capitalization,  if necessary,
or that adequate  financing will be available on terms and conditions  favorable
to the Company.
                                   F-10
<PAGE>                             

The Company has produced a telephone based  multi-functional  telecommunications
product called  MAGICOM(R) 2000  incorporating the Company's flat panel display,
called E-Paper(TM), and associated proprietary hardware and software technology.
Since its  introduction  in early  1997,  the Company  has been  developing  and
incorporating  into  MAGICOM(R)  2000 a number of  enhanced  features.  The most
significant  features  of  MAGICOM(R)  2000  include  the  capability,  with the
addition of a Company  developed  keyboard,  to  communicate  by e-mail over the
internet;  to provide all  functions  over a single  telephone  line,  including
simultaneous voice and electronic  handwriting and editing of documents ("SVD");
to input and retrieve documents to and from a computer's storage device; to edit
and transmit received documents; to send and receive full page paperless fax; to
rapidly scan  documents,  pictures,  and drawings  into a computer;  to send and
receive  handwritten  information;   and  to  provide  peripheral  functions  to
computers.  MAGICOM(R) 2000 is compatible  with and can send  information to fax
machines and computers,  has the ability to transmit  alpha-numeric  messages to
pagers, and possess all basic telephone features, including digital voice mail.

The success and  profitability  of the  Company's  product will depend upon many
factors, including those normally associated with any new product. These factors
include the  capability  of SCE to produce  sufficient  quantities of MAGICOM(R)
2000, the ability of the Company and SCE to maintain an acceptable pricing level
to end-users for the product,  long-term product  performance and the capability
of the Company,  SCE and its distributors to adequately service the product, the
ability of distributors to market their contracted  quantities of the product in
their  respective  territories,  political  and  economic  stability in targeted
marketing territories, and the possible development of competitive products that
could render the Company's product obsolete or unmarketable.

The Company has also developed,  in conjunction with a Japanese company, a small
portable  printer  called Magic  Printer.  The printer is being produced for the
Company by the Japanese company and is being marketed by the Company through its
distributor and dealer network, including China, for use with MAGICOM(R) 2000 or
in conjunction with personal or laptop computers.

          (2) Summary of significant accounting policies:
              --------------------------------------------

         Revenue recognition-
         --------------------

The Company plans to sell its products to end-users through a distributor/dealer
network.  All of the critical  elements of the earnings process will be complete
when a  distributor/dealer  sells  these  products  to  end-users.  As a result,
initial  revenue and related gross profit on the sales of these products will be
recognized by the Company upon sustained acceptance by the end-users.

         Cash equivalents-
         -----------------

The Company  classifies  highly liquid  investments with original  maturities of
three months or less at their date of purchase as cash  equivalents.  These cash
equivalents,  which are principally  comprised of commercial  paper and treasury
instruments,  are  recorded at cost,  which  approximates  fair market  value at
October 31, 1998 and 1997, respectively.
                                                                
         Marketable securities-
         ----------------------

The Company accounts for investments in marketable securities in accordance with
Statement of Financial  Accounting  Standards ("SFAS") No. 115,  "Accounting for
Certain  Investments  in Debt and Equity  Securities".  Under SFAS No. 115,  the
Company is required to classify each investment in marketable  securities in one
of three  categories:  trading,  available-for-sale,  or  held-to-maturity.  The
Company's  investment at October 31, 1997, was classified as held-to-maturity as
the  Company  had the  ability  and intent to hold these  securities  until they
matured. As such, in accordance  with SFAS No. 115, the investment was presented
in the accompanying  balance sheet at its amortized cost as of October 31, 1997,
and the discount  amortization  has been included in earnings for the year ended
October 31, 1997. As of October 31, 1998,  this  investment in commercial  paper
has matured.
                                  F-11
<PAGE>

         Inventories-
         ------------

Inventories  are  valued at the lower of cost  (FIFO) or market  and are  mainly
comprised of finished goods.

         Property and equipment-
         -----------------------

Property and equipment, consisting primarily of engineering equipment, is stated
at cost. Depreciation is calculated on a straight-line basis primarily over five
years.
                            
         Investment in Joint Venture-
         ----------------------------

The  Company  controls  four of seven  votes  of the  Joint  Venture's  board of
directors.  However,  decisions  involving  the Joint Venture  require  either a
unanimous or two-thirds vote of the Joint  Venture's  board of directors.  Since
the Company has significant  influence over the Joint  Venture's  operations but
does not have control,  the Company has  reflected  its  investment in the Joint
Venture under the equity method of accounting.

         Research, development and tooling costs-
         ----------------------------------------

Research,  development and tooling costs incurred by the Company are included in
selling, general and administrative expenses in the year incurred.


         Income taxes-
         -------------

The Company  recognizes  deferred tax assets and  liabilities  for the estimated
future  tax  effects  of  events  that  have been  recognized  in the  Company's
financial statements or tax returns. Under this method,  deferred tax assets and
liabilities  are  determined  based  on the  difference  between  the  financial
statement  and tax bases of assets and  liabilities  using  enacted tax rates in
effect in the years in which the differences are expected to reverse.

         Net (loss) per share of common stock-
         -------------------------------------

Effective  October 31, 1998,  the Company  adopted SFAS No. 128,  "Earnings  Per
Share".  In accordance  with SFAS 128, basic net (loss) per common share ("Basic
EPS") is computed  by  dividing  net (loss) by the  weighted  average  number of
common shares  outstanding.  Diluted net (loss) per common share ("Diluted EPS")
is computed  by dividing  net (loss) by the  weighted  average  number of common
shares and dilutive common share  equivalents  and  convertible  securities then
outstanding.  SFAS No.  128  requires  the  presentation  of both  Basic EPS and
Diluted  EPS on the face of the  statements  of  operations.  The  impact of the
adoption of this statement was not material to previously  reported EPS amounts.
Diluted EPS for all years  presented is the same as Basic EPS, as the  inclusion
of  the  impact  of  common  stock   equivalents  then   outstanding   would  be
anti-dilutive.

         Use of estimates-
         -----------------

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts  reported in the  financial  statements  and related notes to
financial statements. Actual results could differ from those estimates.
                             
         Reclassifications-
         ------------------

Certain  prior year amounts have been  reclassified  to conform with the current
year presentation.
                                   F-12

<PAGE>

(3) Investment in Joint Venture:
    ----------------------------

The Company has  contributed to SCE $1,225,000 in cash, and technology  that has
been valued for purposes of the Joint Venture at $700,000.  SCE does not reflect
the $700,000 in  technology  as an asset or equity  investment  in the condensed
financial  statements  presented  below. The other parties have contributed cash
aggregating  $1,575,000.  The Company has reflected its  investment in SCE under
the equity method of accounting (see Note 2) and will recognize losses in SCE to
the extent of its cash investment.

Condensed financial information for SCE at October 31, 1998 and 1997 and for the
three years ended October 31, 1998, is as follows:

<TABLE>
<CAPTION>

                              Condensed Balance Sheets                            1998              1997
                              ------------------------                            ----              ----
        <S>                                                                 <C>                <C>         <C>
          Cash                                                              $    51,760       $   135,890
          Accounts receivable from CopyTele, Inc.                               661,592              -
          Inventories                                                         3,568,202         4,830,461
          Other current assets                                                   68,581            31,988
          Land occupancy rights, net of amortization; fixed assets,
            net of depreciation, and other non-current assets                 2,105,583         2,197,169
                                                                            ------------      -------------
                   Total Assets                                             $ 6,455,718       $ 7,195,508
                                                                            ============      =============

          Short term loans                                                  $   999,316       $    500,012
          Accounts payable and accrued liabilities                              338,052            504,269
          Due to CopyTele, Inc.                                               3,916,628          4,303,652
          Capital                                                             1,201,722          1,887,575
                                                                            -----------------  -------------
                   Total Liabilities and Capital                            $ 6,455,718       $  7,195,508
                                                                            =============      =============

                         Condensed Statements of Operations                       1998              1997            1996
                         ----------------------------------                       ----              ----            ----

          Net Sales                                                         $      -          $      -          $     -
          Operating (Loss)                                                     (629,578)         (599,299)       (289,447)
          Other Income (Expense)                                                (56,275)          (10,503)         19,211
                                                                            -----------------  --------------  -------------
                   Net (Loss)                                               $  (685,853)      $  (609,802)  $    (270,236)
                                                                            =============      ==============  ==============

</TABLE>

The short term loans from a Chinese  bank bear  interest  at  floating  rates of
approximately  7.69% to 8.64% per annum at October  31,  1998.  These loans will
mature in  February  and April 1999 and are secured by a land-use  contract  and
building owned by SCE. An additional short term loan of  approximately  $120,000
was obtained in November 1998 bearing a floating  interest rate of approximately
7.23% with a May 1999 maturity.

The cumulative net (loss)  incurred by SCE since its inception on April 10, 1995
is $(1,598,278).

See Note 2 regarding the Company's revenue recognition policy.


                            F-13
<PAGE>


(4) Shareholders' Equity:
    ---------------------

          Issuance of warrants-
          ---------------------

Warrants  previously  issued by the  Company  were  primarily  to members of the
immediate families of its Chairman of the Board and its President in conjunction
with the sale of its Common Stock.  The exercise price of each warrant was equal
to at least the fair market value of the underlying  common stock on the date of
issuance  of  such  warrants.   At  October  31,  1997,  after  adjustments  for
anti-dilution  provisions  during fiscal 1998 and all  applicable  stock splits,
there were 96,000 shares  covered by warrants with a weighted  average  exercise
price of $5.07 per share. During the year-ended October 31, 1998, all previously
outstanding warrants expired.

          Stock splits-
          -------------

On October 4, 1985, the Company declared a three-for-one  stock split,  effected
in  the  form  of a  200%  stock  dividend,  payable  on  November  8,  1985  to
shareholders  of record as of October 15, 1985. On August 13, 1987,  the Company
declared  a  five-for-four  stock  split,  effected  in the form of a 25%  stock
dividend,  payable on September 15, 1987 to  shareholders of record as of August
31, 1987. On February 12, 1991, the Company declared a two-for-one  stock split,
effected  in the form of a 100% stock  dividend,  payable  on March 18,  1991 to
shareholders  of record as of  February  25,  1991.  On May 24, 1996 the Company
declared  a  two-for-one  stock  split,  effected  in the  form of a 100%  stock
dividend, payable on June 17, 1996 to shareholders of record as of June 4, 1996.
The weighted average number of shares outstanding and net loss per share amounts
in the accompanying financial statements have been restated to reflect the stock
splits.

          Preferred stock-
          ----------------

On May 29,  1986,  the  Company's  shareholders  authorized  500,000  shares  of
preferred  stock  with a par value of $100 per share.  The  shares of  preferred
stock may be issued in series at the  direction of the Board of  Directors,  and
the relative  rights,  preferences  and  limitations  of such shares will all be
determined by the Board of Directors.

          Stock option plans-
          -------------------

The Company has two stock option plans,  the 1987 Stock Option Plan,  adopted by
the Board of Directors  on April 1, 1987 (the "1987  Plan"),  and the  CopyTele,
Inc. 1993 Stock Option Plan, adopted by the Board of Directors on April 28, 1993
(the "1993 Plan").

SFAS No. 123,  "Accounting for Stock Based Compensation",  encourages,  but does
not require  companies  to record  compensation  cost for  stock-based  employee
compensation  plans at fair value. The Company has chosen to continue to account
for  stock-based   employee   compensation  using  the  intrinsic  value  method
prescribed in Accounting  Principles  Board Opinion ("APB") No. 25,  "Accounting
for Stock Issued to Employees",  and related interpretations.  Compensation cost
for stock options is measured as the excess,  if any, of the quoted market price
of the Company's stock at the date of grant over the amount an employee must pay
to acquire the stock.  In  accordance  with APB Opinion No. 25, no  compensation
cost has been recognized by the Company,  as all option grants have been made at
the fair market value of the Company's stock on the date of grant.

                              F-14
<PAGE>
Had  compensation  cost for these plans been determined at fair value consistent
with SFAS No.  123,  the  Company's  net loss and net loss per share  would have
increased to the following pro forma amounts:

<TABLE>
<CAPTION>

                                                              For the Year Ended    For the Year Ended
                                                                October 31, 1998      October 31, 1997
                                                               ------------------    ------------------
          <S>                                                 <C>                  <C>    
           Basic and Diluted
           Net (Loss):                                              
           As Reported                                             $ (7,135,954)      $ (5,800,575)
           Pro Forma                                               $(11,041,940)      $(15,706,850)
           

           Basic and Diluted
           Net (Loss) Per Share:                                              
           As Reported                                                  $(.12)              $(.10)                                 
           Pro Forma                                                    $(.19)              $(.27)

</TABLE>

Options  granted  to  non-employee  consultants  are  accounted  for  using  the
fair-value method required by SFAS No. 123. Compensation expense for consultants
recognized  in the year ended  October 31, 1998 of $189,600  was measured at the
vesting  date  upon  the  Company's   determination  of  performance  commitment
achievement and is included in selling,  general and administrative expenses. No
such costs were incurred in the year-ended October 31, 1997.

The fair value of each option  grant is estimated on the date of grant using the
Black-Scholes   option  pricing  model  with  the  following   weighted  average
assumptions  used for  grants for the years  ended  October  31,  1998 and 1997,
respectively: risk free interest rates of 5.50%; expected dividend yields of 0%;
expected lives of 3.23 and 2.86 years;  and expected  stock price  volatility of
69% and 73%. The weighted  average fair value of options  granted under SFAS No.
123 for the  years  ended  October  31,  1998  and  1997 are  $1.47  and  $2.34,
respectively.

In May 1987 the Company's  shareholders approved the 1987 Plan stock option plan
which, after giving consideration to the five-for-four and two two-for-one stock
splits as well as an amendment  approved by shareholders in May 1990 to increase
the number of shares issuable under the 1987 Plan,  provided for the granting of
stock options to purchase  9,000,000 shares of common stock of the Company.  The
1987 Plan provided for the granting of incentive  stock options to key employees
and  nonqualified  options to key  employees,  consultants  and directors of the
Company.  The option price was  determined by the Board of  Directors,  but with
respect to incentive  stock  options the option price could not be less than the
fair market value at the date of grant. The stock options are exercisable over a
period not to exceed 10 years, also as determined by the Board of Directors.  In
July 1992, the Company registered the shares of common stock covered by the 1987
Plan.  Upon the approval of the 1993 Plan by the Company's  shareholders in July
1993, the 1987 Plan was terminated with respect to the grant of future options.

                                   F-15
<PAGE>

Information  regarding  the 1987 Plan for the three years ended October 31, 1998
is as follows:

<TABLE>
<CAPTION>

                                                                                                          Current Weighted
                                                                                                          Average Exercise
                                                                                         Shares           Price Per Share
                                                                                         -------          ----------------
          <S>                                                                        <C>                     <C>                  
             Shares Under Option  at October 31, 1995                                   1,768,120               $3.99
               Exercised                                                               (1,013,760)              $3.46
                                                                                       -----------
             Shares Under Option at October 31, 1996                                      754,360               $4.75
               Exercised                                                                  (68,200)              $2.93
                                                                                       -----------
             Shares Under Option at October 31, 1997                                      686,160               $4.93
               Expired                                                                    (37,600)              $2.47
                                                                                       -----------
             Shares Under Option and Exercisable at October 31, 1998                      648,560               $5.08
                                                                                       ============            =======

</TABLE>

The following table summarizes  information  about stock options  outstanding at
October 31, 1998:

<TABLE>
<CAPTION>

                                                 Options Outstanding                                   Options Exercisable        
                            -------------------------------------------------------------      -------------------------------------
                                                   
                                   Number            Weighted Average                             Number         
               Range of          Outstanding            remaining       Weighted Average        Exercisable        Weighted Average
           Exercise Prices       at 10/31/98         Contractual Life    Exercise Price         at 10/31/98         Exercise Price
           -------------------------------------------------------------------------------------------------------------------------
          <S>                 <C>                      <C>                 <C>                <C>                 <C>           
               $3.09               120,000                1.04               $3.09                120,000               $3.09

           $4.19 to $5.63          508,560                3.92               $5.47                508,560               $5.47

               $6.94                20,000                 .82               $6.94                 20,000               $6.94


</TABLE>

The  exercise  price with respect to all of the options  granted  under the 1987
Plan  from its  inception  was at least  equal to the fair  market  value of the
underlying common stock on the date of grant. As of October 31, 1998, all of the
options to purchase  shares of common stock  granted and  outstanding  under the
1987 Plan were exercisable.

On July 14, 1993, the Company's  shareholders  approved the 1993 Plan, which had
been adopted by the  Company's  Board of  Directors on April 28, 1993.  The 1993
Plan was  amended as of May 3, 1995 and May 10,  1996 to,  among  other  things,
increase  the  number of shares of the  Company's  common  stock  available  for
issuance  pursuant  to grants  thereunder  from 6 million  shares to 20  million
shares after giving  consideration  to the two-for-one  stock split in 1996. The
1993 Plan  provides  for the  granting of stock  options to  purchase  shares of
common stock of the Company or stock appreciation  rights up to the aggregate of
20 million shares.  Incentive options and rights may be granted to key employees
and  nonqualified  options  and  rights  may be  granted  to key  employees  and
consultants of the Company. As amended,  nonqualified options to purchase 40,000
shares of common stock will be granted  annually to each re-elected  nonemployee
director  of the  Company and 20,000  shares to each newly  elected  nonemployee
director.  The 1993 Plan is  administered by the Stock Option  Committee,  which
determines the option price,  term and provisions of each option;  however,  the
purchase price of shares  issuable upon the exercise of incentive  stock options
will not be less than the fair market value of such shares and  incentive  stock
options will not be exercisable for more than 10 years.

                                   F-16
<PAGE>

Information  regarding  the 1993 Plan for the three years ended October 31, 1998
is as follows:

<TABLE>
<CAPTION>

                                                                                                    Current Weighted
                                                                                                    Average Exercise
                                                                                  Shares             Price Per Share
                                                                                  ------            -----------------
               <S>                                                            <C>                     <C>                          
                Shares Under Option at October 31, 1995                           8,893,200               $4.52
                  Granted                                                         4,578,000               $5.17
                  Exercised                                                      (4,096,340)              $3.46
                  Canceled                                                         (200,000)              $4.78
                                                                               ------------
                Shares Under Option at October 31, 1996                           9,174,860               $5.32
                  Granted                                                         2,905,500               $4.73
                  Exercised                                                        (274,500)              $3.87
                  Canceled                                                         (265,500)              $5.87
                                                                               ------------
                Shares Under Option at October 31, 1997                          11,540,360               $5.19
                  Granted                                                         2,758,000               $2.82
                  Canceled                                                         (400,000)              $5.02
                  Expired                                                          (184,000)              $6.16
                  Exercised                                                         (10,000)              $2.81
                                                                               ------------
                Shares Under Option at October 31, 1998                          13,704,360               $4.71
                                                                               ============
                Options Exercisable at October 31, 1998                          12,261,360               $4.99
                                                                               ============              =======

</TABLE>

The following table summarizes  information  about stock options  outstanding at
October 31, 1998:

<TABLE>
<CAPTION>

     
                                        Options Outstanding                                   Options Exercisable        
                            -------------------------------------------------------------      -------------------------------------
                                                   
                                   Number            Weighted Average                             Number         
               Range of          Outstanding            remaining       Weighted Average        Exercisable        Weighted Average
           Exercise Prices       at 10/31/98         Contractual Life    Exercise Price         at 10/31/98         Exercise Price
           -------------------------------------------------------------------------------------------------------------------------
          <S>                    <C>                   <C>                <C>                <C>                    <C>            
            $2.19 to $3.94          4,047,000              8.23              $2.96               2,604,000              $3.33

            $4.38 to $6.38          7,601,360              7.10              $4.90               7,601,360              $4.90

            $6.88 to $8.50          2,056,000              4.86              $6.90               2,056,000              $6.90

</TABLE>

The  exercise  price with respect to all of the options  granted  under the 1993
Plan  from its  inception  was at least  equal to the fair  market  value of the
underlying  common  stock on the grant  date.  At October  31,  1998,  1,216,000
options were available for future grants under the 1993 Plan.


In December 1998, the Company cancelled and reissued 1,566,500  options,  at the
then current fair market value, to purchase the Company's  common stock pursuant
to the 1993 Plan.  The Company also  granted an  additional  100,000  options to
purchase the  Company's  common stock  pursuant to the 1993 Plan during the same
period.

From  November 1, 1998  through  January 22, 1999,  options to purchase  240,000
shares of the Company's  common stock were exercised for an aggregate  amount of
$360,000.

                                   F-17
<PAGE>

(5) Commitments and contingencies:
    ------------------------------

         Leases-
         -------

The Company  leases space at its  principal  location for office and  laboratory
research   facilities  from  an  unrelated  party.  The  current  lease  is  for
approximately 11,200 square feet and expires on November 30, 2001. The lease now
contains  base  rentals  of  approximately  $201,000  per annum with a 3% annual
increase and an escalation  clause for increases in certain operating costs. The
Company has the right to cancel a portion of the lease as of  November  30, 1999
and 2000. This lease does not contain provisions for its renewal.

In February 1996, the Company  entered into a five-year  lease with an unrelated
party for approximately  2,300 square feet of office space. The lease expires on
June 30, 2001 and is non-renewable.  It has a base rent of approximately $51,000
per  annum  for  the  first  two  years  and  approximately  $56,000  per  annum
thereafter. In October 1996, the Company entered into a third lease with another
unrelated  party for  approximately  2,000 square feet of office and  laboratory
space near its principle offices. In May 1997, this lease was modified to add an
additional  facility of  approximately  5,000  square  feet of rental  space and
extend the lease to June 30, 2000.  The modified  lease  provides for escalating
base rents of approximately $46,000, $48,000 and $50,000, respectively, for each
year  beginning  July 1, 1997 and an escalation  clause for increases in certain
operating costs.

Rent expense for the years ended October 31, 1998, 1997, 1996 and for the period
from November 5, 1982  (inception)  through  October 31, 1998 was  approximately
$287,000, $269,000, $215,000 and $2,111,000, respectively.

         Key-man life insurance-
         -----------------------

The Company maintains key-man life insurance,  aggregating  $1,500,000  insuring
the lives of its  Chairman  of the Board and its  President.  The Company is the
beneficiary under these policies. Annual expenses relating to the maintenance of
this insurance aggregated approximately $38,000.

(6) Employees' pension plan:
    -------------------------

The  Company  adopted  a  noncontributory  defined  contribution  pension  plan,
effective   November  1,  1983,   covering   all  of  its   present   employees.
Contributions,  which are made to a trust, are based upon specified  percentages
of  compensation,  as  defined in the plan.  Pension  cost,  which  approximated
$123,000,  $102,000,  $70,000 and $668,000 for the years ended October 31, 1998,
1997 and 1996 and for the period from the inception of the plan through  October
31, 1998, respectively, has been accrued and funded on a current basis.

                              F-18
<PAGE>

(7) Income taxes:
   --------------

At October  31,  1998,  the Company  had tax net  operating  loss and tax credit
carryforwards   of  approximately   $66,790,000  and  $1,616,000   respectively,
available,  within  statutory limits (expiring at various dates between 1999 and
2018), to offset any future regular Federal  corporate  taxable income and taxes
payable. The principle  differences between the net loss for financial statement
purposes and the tax net operating loss  attributable  to the year ended October
31, 1998 were  nondeductible  expenses for tax purposes of joint venture  losses
and stock option compensation to consultants. If the tax benefits are ultimately
realized  relating to deductions of option holders' income,  those benefits will
be credited  directly to additional  paid-in  capital.  Certain changes in stock
ownership can result in a limitation on the amount of net operating loss and tax
credit carryovers that can be utilized each year.

The  Company  had  tax  net  operating  loss  and tax  credit  carryforwards  of
approximately  $61,405,000  and  $122,000  respectively,  at October  31,  1998,
available,  within statutory  limits,  to offset future New York State corporate
taxable income and taxes payable,  if any,  under certain  computations  of such
taxes. The tax net operating loss carryforwards  expire at various dates between
1999 and 2013 and the tax credit carryforwards expire between 1999 and 2008.

Deferred  tax  benefits at October 31, 1998 and 1997,  which are fully offset by
valuation  allowances,  primarily  represent the estimated future tax effects of
Federal and State net operating  loss and tax credit  carryforwards  aggregating
approximately $30,910,000 and $28,295,000, respectively.

During the period from November 5, 1982  (inception)  through  October 31, 1998,
the Company incurred no Federal and no material State income taxes.


(8) Selling, general and administrative expenses:
    ----------------------------------------------

While there is no formal agreement,  the Company's Chairman of the Board and its
President have waived any and all rights to receive  salary and related  pension
benefits  for an  undetermined  period of time  commencing  November  1985.  The
aggregate annual expenses for these individuals at the time of such waivers were
approximately $325,000.


Four other  individuals,  including an officer and three senior level personnel,
then employed at the Company,  waived salary and related  pension  benefits from
January  1987  through  December  1990.  While  there are no formal  agreements,
commencing   January  1991,  these   individuals   waived  such  rights  for  an
undetermined  period of time and they did not receive salary or related  pension
benefits  through  December  1992.  The  Company's  Chairman of the Board,  it's
President  and the three senior level  personnel  continued to waive such rights
commencing  in January 1993 for an  undetermined  period of time.  From February
1993 to  September  1998 one  additional  employee  also  waived such salary and
benefit rights.  The aggregate annual expenses for these five individuals,  then
employed at the Company,  at the time of their  respective  initial  waivers was
approximately  $440,000.  The  Company  does  not  contemplate  the  retroactive
reinstatement of any of the salary or related pension benefit waivers  indicated
above.
                                   F-19