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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, 1997

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

                                   11-2622630
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                       (I.R.S. Employer Identification No.)
                       
                              900 Walt Whitman Road
                          Huntington Station, NY 11746
                                 (516) 549-5900
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    (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 21, 1998,
computed by reference to the closing sale price of the registrant's Common Stock
on the  NASDAQ  National  Market  System  on such date  ($3.25):  $158,437,617.

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 21, 1998, the registrant had outstanding  57,861,176 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.  The Company also is  continuing  its
research and development  activities for ultra-high  resolution  video and color
flat panel 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  telecommunications  product
developed by the Company is MAGICOM(R) 2000, a telephone based  multi-functional
product  that can  simultaneously  provide  voice,  electronic  handwriting  and
editing of  documents  over a single  public  telephone  line.  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. The printer
is being produced for the Company by the Japanese Supplier and is being marketed
by the Company through its  distributor and dealer network,  including in China,
for  use  with  MAGICOM(R)  2000  or in  conjunction  with  personal  or  laptop
computers.

To date, the Company has had no revenues to support its operations. Although the
Company  generated  limited  sales to certain of its  distributors,  revenue and
related gross profit  recognition  on these initial sales was deferred in fiscal
1997  until the  Company  determines  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 $24.4 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 success and  profitability  of these
products will depend upon many factors, including those normally associated with
any new product.  See "MAGICOM(R) 2000 - General Risk 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 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;  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 its 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;  and the
possible  development  of  competitive  products that could render the Company's
products obsolete or unmarketable.

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

         General
         -------

MAGICOM(R) 2000  incorporates  CopyTele's  E-Paper(TM)Flat  Panel Display.  This
product  offers  many  features,  including  simultaneous  voice and  electronic
handwriting  and  editing of  documents  over a single  public  telephone  line;
digital  voice mail  system;  full  duplex  digital  speakerphone;  sending  and
receiving  fax (full page  transmission  and  paperless  reception);  electronic
handwriting;  e-mail  communication;  data  transmission;  storage and  computer
interface;  a scanner, as well as personal copying  capabilities with the use of
MAGIC  PRINTER;  and the  ability to transmit  alphanumeric  messages to a pager
using a touch sensitive  keyboard screen, all in a compact  easy-to-use  desktop
unit. In addition to using a single public  telephone  line,  MAGICOM(R) 2000 is
also capable of performing  simultaneous voice and electronic  handwriting using
two public  telephone  lines or one public  telephone  line and a cellular phone
link. MAGICOM(R) 2000 also has other  telecommunications  capabilities,  such as
speed dialing, pause, re-dial, flash, electronic directory, date and time and is
capable of  incorporating  on a continuing  basis,  future functions that may be
developed from the Company's  proprietary software  development.  The Company is
continuing to develop  proprietary  software to provide interfacing with on-line
services and the Internet.

                                       2


<PAGE>

The  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 viewed on 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  CopyTele  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.

         1997 Developments
         -----------------

During 1997,  the Company  developed and  incorporated  into  MAGICOM(R)  2000 a
number of  enhanced  features in response  to  marketing  requirements  from its
distribution  network  involving  system  applications  of MAGICOM(R)  2000. The
Company also  incorporated  technology  into MAGICOM(R) 2000 in order to meet UL
and  FCC   requirements  in  the  United  States  and  national  telecom  agency
requirements  for certain of those foreign  countries in which  distributors are
marketing the  Company's  product.  See  "Marketing"  below.  Among the enhanced
features incorporated in MAGICOM(R) 2000 during 1997 are the following:
          
         Use of a single  public phone line and a 33.6K BPS  internal  modem to
         provide simultaneous voice, handwriting and editing of documents over 
         a wide range of quality of public lines that exist in  developed  and  
         developing countries.
          
         Use of software  capability  to provide for  variations  in  telephone
         network interfaces as required by various national telecom agencies.
          
         Selection  by a user of the  number of rings  before  MAGICOM(R)  2000
         answers a voice call  during the "day" mode.  During the "night"  mode,
         MAGICOM(R) 2000 answers in one ring.
          
         Elimination of audible ringing on all fax calls.
          
         Use of  software  to  communicate  with fax  machines  having  special
         standards in various developing countries.
          
         New coated  particles in the E-Paper(TM) Flat Panel Display which have
         increased the display's contrast, brightness, and longevity.



                                       3

<PAGE>

In  addition,  the  Company  continually  endeavors  to  improve  and make  more
efficient  the  production  process  used  by SCE to  produce  MAGICOM(R)  2000.
Specifically,   the  Company  has  simplified  the  process  of  assembling  the
E-Paper(TM)  Flat Panel  Display by modifying  the software  used to connect the
C-MOS driver chips on its display and by improving its flat panel  structure for
better contrast.  The Company also has produced a second generation power supply
and control logic which is expected to reduce production cost. In addition,  the
Company has expanded SCE's  production  capacity for the fluid  insertion in its
E-Paper(TM)  Flat Panel  Display  and has  developed  a process  to make  larger
quantities of coated particles used in the display's fluid.

         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 or laptop computers.  The following are the printer's main
features:

          Approximately 1 inch high by 2 inches deep and 10 inches wide.

          Weight approximately 1 pound including a battery.

          High quality images.

          Printer speed of two pages per minute.

          Operation via AC adapter, that automatically switches between 115 and
          230 volts, or an optional battery.

          Parallel interface for quick downloading of bit-mapped images.

          Can be driven directly from most Windows  software  applications  with
          the supplied Windows(R) 95 or Windows(R) 3.1 drivers.

          Variable paper sizes: U.S. letter, U.S. legal or A4.

          Requires paper to be fed one piece at a time.

The Japanese Supplier  currently is producing a sufficient  quantity of printers
to meet the Company's anticipated  short-term needs. The long-term  availability
of the  printer's  supply,  however,  will be  subject  to future  negotiations.
Therefore,  there can be no assurance that the Company and the Japanese Supplier
will be able to arrive at a mutually  acceptable  agreement  with respect to the
production  of MAGIC  PRINTER in the  future.  If the Company is unable to reach
such  agreement,  there can be no  assurance  that the  Company  will be able to
obtain a printer similar to MAGIC PRINTER from another manufacturer.

                                       4


<PAGE>

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.  The Company has been advised that SECC is wholly-owned by the government
of China.

SCE required an initial  aggregate  capital  investment of $3.5 million from the
parties  to the joint  venture.  The Joint  Venture  Agreement  contemplates  an
additional $3.5 million  investment  which may be borrowed from third parties of
which $500,000 has been borrowed to date. CopyTele, which owns a 55% interest in
SCE, has contributed  $1,225,000 in cash, and technology (valued for purposes of
the Joint Venture  Agreement at $700,000 and  representing 20% of the registered
capital)  which  has been  licensed  to SCE  pursuant  to a  Technology  License
Agreement,  dated  as of  March  28,  1995,  between  SCE and the  Company  (the
"Technology License  Agreement").  In accordance with Chinese  regulations,  the
maximum  percentage of technology which can be contributed as registered capital
is 20%. SECC and Shanghai  International  Trade and Investment  Developing Corp.
("SIT") have contributed an aggregate of $1,575,000 in cash to SCE. SIT, a state
owned investment and trade development company operating under the leadership of
the Shanghai Foreign Economic Relations and Trade Commission in Shanghai, China,
acquired  a 10%  economic  interest  in SCE  from  SECC in 1996.  Recently,  SCE
approved an additional assignment by SECC of a 30% interest in the joint venture
to Shanghai  Instrumentation  and Electronics  Holding Group Company ("SIEC") of
Shanghai China, SECC's parent company,  and SECC's remaining 5% interest to SIT,
bringing SIT's total  interest to 15%. As a result,  SECC would no longer have a
direct  economic  interest in SCE. The  assignments  are awaiting  final Chinese
government  approval  which  CopyTele has been  informed  should be  forthcoming
shortly.  The Board of  Directors of SCE is  comprised  of seven  directors.  In
accordance  with the  Joint  Venture  Agreement,  CopyTele  has  appointed  four
directors,  the Vice-Chairman and the General Manager,  and SECC and SIT jointly
have appointed three directors,  the Chairman and the Vice-General  Manager. The
Company  accounts  for  its  investment  in  SCE  under  the  equity  method  of
accounting. See Notes 2 and 3 to the Company's Financial Statements.

The parties  have agreed in principle  to increase  the  investment  in SCE to a
maximum of $25 million depending on the nature and extent of SCE's business.  It
is  contemplated  that  additional  financing  for SCE will be  obtained  from a
combination of third party borrowings and equity investments  contributed by the
Company and the other parties to SCE 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  SCE  following  its  initial  capital
contributions and to continue its research and development activities. There can
be no  assurance,  however,  that  adequate  financing  will be available to the
Company or SCE, or that, if available,  it will be available on favorable  terms
and conditions.

                                       5

<PAGE>

CopyTele  has licensed  only its flat panel  application  technology  to SCE for
exclusive  use in China.  SCE does not have the right to  produce  the thin film
coated glass for the Company's  flat panel which is being supplied to SCE by the
Company.  As a  result  of  licensing  the  technology,  CopyTele  will  receive
royalties for the duration of the Technology  License Agreement on all net sales
by SCE,  including  sales to CopyTele for resale  outside of China.  The Company
received  royalties on SCE's initial sales of MAGICOM(R) 2000 to CopyTele during
1997 in the form of a lower selling  price.  These units were used primarily for
marketing  purposes by the  Company.  Pursuant to the Joint  Venture  Agreement,
CopyTele is solely authorized to market and sell SCE's products outside of China
while SCE is responsible for marketing and sales within China.

In  December  1996,  SCE  completed  construction  of a new 30,000  square  foot
facility in the Shanghai Songjiang Industrial Zone (see "Properties" below), and
commenced  production  of  MAGICOM(R)  2000 in this  facility  during  the first
calendar quarter of 1997 after relocating  production from a previously occupied
leased facility ( see "Production" below). The capital contributions made to SCE
were  sufficient  to enable SCE to cover the costs of building the new facility,
which totaled  approximately U.S. $1 million in the aggregate.  SCE has obtained
two  short-term  loans from a Chinese  bank  aggregating  U.S.  $500,000 for the
purpose of purchasing production materials and supplies. These loans are secured
by a land-use  contract with the Land  Administration  Bureau of Shanghai County
(see "Properties"  below and Note 3 to the Company's  Financial  Statements) and
equipment.  Funding for the purchase of additional equipment,  if required,  and
working  capital  requirements  are expected to be financed  through  additional
third party  borrowings,  but there can be no assurance that, if available,  SCE
will be able to obtain such financing on favorable terms and conditions.

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.  As of December 31, 1997,  approximately sixty of SCE's seventy-two
employees  were  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 is providing  SCE with the 128 output chips,  the flat panel fluid,  and
the flat panel substrates which are being produced by Hoya Corporation ("Hoya"),
a major Japanese high technology manufacturer of glass products. See "Flat Panel
Display  Technology  -- General"  below.  The Company is also  receiving  sample
quantities  of  assembled  flat  panel  substrates  from Hoya to  monitor  their
performance.  SCE is filling  the  E-Paper(TM)  Flat Panel  Displays  with fluid
containing   the  coated   yellow   particles   in  a  new  5,000   square  foot
environmentally   controlled  "clean  room"  area,   mounting  and  electrically
connecting the 128 output chips to

                                       6

<PAGE>

the E-Paper(TM) Flat Panel Displays, and integrating 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 is also receiving  sample
quantities of SCE produced  MAGICOM(R)  2000 units to  continuously  monitor the
quality of the production process.

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,  the 128
output drive chips and the E-Paper(TM) Flat Panel Display's coated glass plates,
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 and
intends to increase  personnel as needed.  See "Employees and Consultants".  The
Songjiang  Industrial Zone is approximately 20 miles from downtown Shanghai,  30
miles  from  a deep  harbor  and 13  miles  from  an  international  airport. A
transportation system of connecting expressways, railroads and waterways provide
efficient  routes to  import  raw  materials  and to export  SCE's  products  to
world-wide markets.

During 1997,  the Company  developed and  incorporated  into  MAGICOM(R)  2000 a
number of  enhanced  features in response  to  marketing  requirements  from its
distribution  network.  See "1997 Developments"  above. The major enhancement to
MAGICOM(R)  2000 involved adding the capability to provide  simultaneous  voice,
electronic  handwriting,  and editing of  documents  or  drawings  over a single
public telephone line.  Previously this feature was  accomplished  only by using
two public  telephone  lines.  The  addition  of this  feature  required a major
engineering  effort by the Company which resulted in the addition of a 33.6K BPS
modem module with its associated  proprietary  software and hardware  inside the
product.  The Company  determined  to limit SCE's  production  efforts until the
changes could be incorporated into the finished product.


                                       7

<PAGE>

The Company  completed the  implementation  of the product changes by the end of
1997,  including designing a second generation of sub-assemblies to simplify the
production  process and reduce its cost.  Upon such  completion,  SCE  increased
production to appoximately 300 assembled MAGICOM(R) 2000 units in December. As a
result of adding new  capabilities to the product,  however,  SCE was limited to
producing  approximately  seven hundred  assembled  MAGICOM(R) 2000 units during
1997.  Production is expected to increase to meet anticipated  product demand in
1998, but the Company is unable to predict actual production levels. The Company
currently  maintains a small  inventory of units in the United States to support
the marketing operations of its international  distributors and U.S. dealers and
continues to develop additional software features.

During the period of limited  production  of assembled  units,  SCE continued to
produce  sub-assemblies  that required only minimal  changes.  The production of
E-Paper(TM) Flat Panel Display sub-assemblies, for example, continued throughout
1997 since the feature enhancements  requested by the Company's distributors did
not  involve  the flat  panel  assembly.  During  1997,  more than two  thousand
E-Paper(TM) Flat Panel Display assemblies were produced, many of which were used
for performance testing, including bonding efficiency, reliability, illumination
levels,  electronic  handwriting quality,  packaging for shipment and for use in
fully assembled units. As a result of these continued  production  efforts,  SCE
was able to maintain a supply of  E-Paper(TM)  Flat Panel  Displays that will be
readily available for use in the production of MAGICOM(R) 2000.

         Marketing
         ---------

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 and has hired a
marketing team, including  independent sales  representatives,  to implement its
marketing  strategy.  As of December  31, 1997,  the Company  employed six sales
personnel  and  had  retained  five  independent   representatives   in  several
countries,  including the United  States.  To date, the Company also has entered
into agreements with twelve foreign  distributors  and two dealers in the United
States to sell and  service  MAGICOM(R)  2000 and MAGIC  PRINTER and one foreign
distributor in China to sell and service MAGIC PRINTER.

The Company's overall marketing  strategy is to penetrate  world-wide markets in
progressive  stages,  beginning with those markets which the Company believes to
have lower entry barriers.  The Company's strategy with respect to MAGIC PRINTER
specifically  is to  market  the  printer  as  both  an  optional  accessory  to
MAGICOM(R)  2000 and as a portable  printer to be used with  personal  or laptop
computers.  As a result of its marketing  efforts,  the Company has entered into
distribution and dealer agreements to sell and service MAGICOM(R) 2000 and MAGIC
PRINTER in Russia,  its former  Republics,  North  Africa,  Egypt,  Philippines,
Indonesia, Malaysia, Thailand, Hong Kong, Brazil and South Korea and to sell and
service  MAGIC  PRINTER  in China.  See  "MAGICOM  2000 (R) - General  Risks and
Uncertainties" below for certain risks associated with these products. Depending
upon the growth of SCE's production  capabilities and the marketing requirements
of  MAGICOM(R)  2000 and MAGIC  PRINTER,  the  Company  plans to add  additional
distributors in existing markets as well as new regions of the world to increase
marketing  potential.  In this regard, the Company currently is pursuing further
representation  in Europe,  the Middle East and Latin America.  The Company also
has selected  dealers in various parts of the United  States,  including the New
York and Washington D.C.  Metropolitan Areas to sell and service MAGICOM(R) 2000
and MAGIC  PRINTER under  renewable  one-year  agreements.  If these efforts are
successful, the Company plans to add additional dealers to service other regions
of the country.

                                       8

<PAGE>

The Company's  foreign  distribution and dealer agreements are each for terms of
three  years or less.  In light of the recent  adverse  economic  conditions  in
certain regions,  particularly  Southeast Asia,  however, it is anticipated that
either the term of the agreements  with  distributors in those countries will be
extended  over  a  longer  period  or  the   quantities   contracted   for  sale
renegotiated.  The agreements provide for periodic purchase orders in increasing
quantities accompanied by irrevocable bank letters of credit,  acceptable to the
Company, furnished by the distributors.

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.

The Company's  distributors and independent sales representatives  currently are
in the  process of  marketing  MAGICOM(R)  2000 and MAGIC  PRINTER to  telephone
companies,   government  agencies  and  industrial,   professional  and  service
entities.   In  an  effort  to  support   its   distributors   and   independent
representatives  and to facilitate  the opening of new markets,  the Company has
developed brochures,  videos, exhibition booths for trade shows, sales handbooks
and other sales and marketing tools. The Company and representatives of SCE also
have  participated in trade exhibitions and seminars,  including  displaying the
equipment in exhibitions in China, Tunisia, Egypt, Russia, Germany and the Latin
American Comdex Show in Miami,  Florida.  Furthermore,  the Company has provided
service  training  and  technical   support  to  specific  system   applications
identified by its distributors.

The  Company  is   continuously   working  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 required certifications for MAGICOM(R) 2000 have been obtained in
North Africa,  Russia and China.  The Company's  distributors  are continuing to
pursue  certification  in  Egypt,  Brazil,  Indonesia,  Malaysia,   Philippines,
Thailand and Hong Kong despite the recent economic conditions that may adversely
affect the  marketability  of  MAGICOM(R)  2000 and MAGIC  PRINTER in certain of
those  countries.  The  certification  process will be an ongoing effort as more
distributors are selected in different countries.  The Company also has obtained
UL and FCC approvals in the United States and CSA approval in Canada.

During 1997, the Company and its distributors demonstrated MAGICOM(R) 2000 units
in various business and governmental  organizations to measure their performance
and  marketability.  As a  result  of  this  evaluation,  a  number  of  feature
enhancements  were requested by the Company's  distributors and it was necessary
to limit  production  efforts until the changes were  implemented  by the end of
1997. See "1997  Developments" and "Production" above. Units that previously had
been acquired by distributors were updated by the Company,  and the distributors
were then able to proceed with their  marketing  efforts in accordance  with the
terms  of  their  agreements  with  the  Company.  As a  result  of  adding  new
capabilities  to the  product,  however,  the  Company  supplied  or sold to its
distributors  only a limited  quantity of  assembled  MAGICOM(R)  2000 units for
marketing purposes during 1997.

                                       9

<PAGE>

The  Company's  distributors  and  dealers  are in various  stages of  marketing
MAGICOM(R) 2000 and MAGIC PRINTER,  ranging from  performing test marketing, to
obtaining  national telecom agency approvals,  to soliciting orders. The Company
has  supplied  or sold a  limited  quantity  of  units to its  distributors  for
marketing  purposes and  continuously  monitors  their  progress in an effort to
evaluate their ability to market the products in their  respective  territories.
It is the  policy of the  Company  to take  remedial  action,  including  adding
additional  distributors,  in any territory where it believes that a distributor
will not achieve the marketing potential of the products.

SCE is solely  responsible  for  marketing  MAGICOM(R)  2000 in  China.  SCE has
featured  MAGICOM(R)  2000 at several  trade  shows in China and has  launched a
marketing  program  pursuant to which SCE has selected  appropriate  local sales
channels for the product and has initiated  discussions with local distributors.
To date,  SCE has  entered  into a one  year  renewable  distribution  agreement
requiring  periodic  purchase  orders  with a  distributor  to sell and  service
MAGICOM(R)   2000  in  China  and  is  currently  in   discussions   with  other
distributors.

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

MAGICOM(R) 2000 and MAGIC PRINTER are only in their initial stages of production
and marketing.  The success and profitability of these products will depend upon
many factors,  including those normally  associated with any new product.  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  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;  and the possible development of competitive products that
could render the Company's products obsolete or unmarketable. 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;  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 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.

                                       10

<PAGE>

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

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

In 1997, the Company continued to enhance the characteristics of its E-Paper(TM)
Flat  Panel  Display  and  also  to  pursue  its  efforts  to  develop  two  new
technologies  for color and video flat panel displays (see "Color and Video Flat
Panel"  below).  The enhancements relating to the E-Paper(TM) Flat Panel Display
included  developing  and  producing  the  Company's  proprietary  coated yellow
particles to increase the  MAGICOM(R)  2000 display's  contrast,  brightness and
longevity.  Also,  software  modifications  were made to simplify the production
process  utilized to connect the driver chips to the flat panel  structure.  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 has
developed  flat panels with viewing  areas whose  diagonals are 7.8, 7.2 and 5.7
inches,  and containing  approximately  1,150,000,  800,000 and 630,000  pixels,
respectively. 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,  and has an
image area of approximately 6.4 x 4.5 inches.

The Company is continuing to purchase flat panel  substrates from Hoya. The flat
panel  substrates  are  produced  and  assembled  by Hoya  using  the  Company's
technology and design  specifications  and are then incorporated into MAGICOM(R)
2000 units produced at SCE. The flat panel substrates  incorporate the Company's
latest designs.  In conjunction  with Hoya, the Company has improved  production
technology by reducing the number of steps necessary to construct the flat panel
substrates,  thereby allowing multiple flat panel substrates to be produced from
a single primary glass  substrate,  while improving its structure to enhance its
image brightness and contrast.  The overall size of the flat panel substrate has
been reduced while  maintaining the same image area,  thereby  allowing a larger
number of flat panel substrates to be produced from a single glass substrate and
reducing the size and potentially the cost of the flat panel substrate.

The Company's E-Paper(TM)Flat Panel Display design utilizes a new chip which has
128 outputs, as compared to the prior chip which had 64 outputs. The new chip is
approximately  the same  size,  has higher  speed to  accommodate  faster  panel
operation,  and is capable of using minimal power when viewing an image. The new
chip  is  being  purchased  by the  Company  and is  being  supplied  to SCE for
incorporation into production units.

                                       11

<PAGE>

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.  The Company has
expanded its equipment and "clean room"  facilities in the United States and has
thereby increased the Company's capability of producing larger quantities of the
specially  coated yellow particles and fluid. The Company is supplying the fluid
with the coated yellow  particles to SCE for insertion into the E-Paper(TM) Flat
Panel Displays.

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 dimensions,  slit angle and 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.

The Company is continuing to pursue the  development of new techniques  designed
to further  improve light output  efficiency and to lower the production cost of
the illumination  system.  These development  activities involve advanced optics
and  designs,  such as light  shaping  diffusers,  edge  illuminated  holograms,
pixellated  illumination,  and optical  thin film  coatings.  These  development
activities complement the Company's front illumination system using conventional
optical light  coupling  and, if  successful,  could lead to lower cost,  higher
efficiency, and improved uniformity.

                  Fluid
                  -----

For fluid  production  being  supplied  to SCE,  an  environmentally  controlled
chamber has been  installed  at the  Company's  facilities.  Using the  chamber,
environmental  parameters have been set to optimize  desirable fluid properties.
Additional  equipment is being used to allow large  batches of specially  coated
yellow  particles  and fluid to be  produced.  Equipment  is also  being used to
characterize  sample batches and to assure fluid  consistency.  Results of these
tests have led to  improved  processing  methods  and  increased  fluid  quality
control.   Quantities  of  fluid  necessary  for  the  production  of  assembled
MAGICOM(R) 2000 units are being supplied to SCE by the Company.

                                       12

<PAGE>

Fluid development  work,  particularly the processing of coated yellow particles
in the  suspension, has been expanded  through the addition of equipment and the
expansion of the Company's  facilities.  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.

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 Panel
--------------------------

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

During 1997, the Company  concentrated  a significant  portion of its efforts on
the continuing development of digital video and color capability for its overall
flat panel display  technology.  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 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 (optical  electromechanical  systems)  wafer
processing. MEMS technology is the process by which precise optomechanical parts
can be made by micromachining - a  batch-fabrication  technology  similar to the
process for making very large integrated (VLSI) circuits. For this display, MEMS
technology is being used to make the static  ultra-high  resolution pixel array.
This flat  panel  display  design  uses a series of thin films to form a display
matrix with the final film.  The Company's goal is to develop a final film which
would provide the ability to reflect the proper light from each pixel to form an
image.  The solid state and optical  flat panel  display  under  development  is
initially being designed to include the following features:

          Ultra-high resolution of 240 by 240 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.

                                       13

<PAGE>

          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
          planned in future.

          Production  fabrication  requires  standard  2 micron  semiconductor  
          wafer fabrication  facilities  which  includes  thin  film, CMOS and 
          MEMS  wafer processing.

In an effort to achieve its design  goals for the  fabrication  of a solid state
and optical flat panel  display,  during 1997 the Company  further  expanded its
technical  staff with  leading  scientists  in this field,  leased a new optical
facility, acquired new equipment, and entered into development arrangements with
a network of U.S.  companies and U.S.  universities  (the "U.S.  organizations")
which, in the Company's opinion,  have the technical know-how and the facilities
necessary to fabricate the display.  These U.S.  organizations are utilizing the
Company's design and coating know-how to develop the specified  requirements for
the  display.  The Company  will either own or have the right to license all the
know-how, if any, that is developed pursuant to these arrangements.

In order to determine the  feasibility of the solid state and optical flat panel
display,  the  Company  and the U.S.  organizations  focused  on the  design and
performance  requirements  needed to produce  prototypes.  This effort  included
consideration  of display  power,  structural  stress  reduction  techniques for
fabricating  pixels,  CMOS-MEMS  compatible overall process flow and lithography
pixel  design.  Each  of  these  areas  was  tested,  including  the use of both
numerical and analytical simulation.  The design includes an unconventional chip
architecture to minimize the number of drivers. The design also uses a method to
obtain 16 levels of gray scale,  a MEMS pixel design which  relieves  mechanical
stress,  and  use of a CMOS  and  MEMS  process  that  is  compatible  with  the
capabilities of the U.S. organizations.  After having determined that the design
and performance  requirements  for the display are feasible,  the Company is now
proceeding with the U.S. organizations in an effort to implement the design plan
to  fabricate  the solid state and optical  flat panel  display.  If the project
proceeds as planned,  prototype  models could be  available  within the next two
years.

In addition to the solid state and optical flat panel  display,  during 1997 the
Company also began developing  software and hardware which, using a PC operating
evaluation control system,  would plug into the display to generate  television,
fax, and computer  images on the display.  The Company,  in  conjunction  with a
Russian  company,  has developed  and is testing a prototype for the  evaluation
control  system  and is  adding  additional  capabilities  to meet  the  display
requirements.  The program to develop the evaluation control system is currently
being funded by the Company which will own all the know-how,  if any,  generated
by this program.

                                       14

<PAGE>

                  Thin Film Video Color Display
                  -----------------------------

During 1997,  the Company also entered into a Joint  Cooperation  Agreement (the
"Joint  Cooperation  Agreement") with a Russian display company 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 funding the project,  while the Russian company 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 the Russian company. 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
the Russian  company,  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 the
Russian company. 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 the  Company  would have a  royalty-free,  nonexclusive,  worldwide
license  with respect to the  preexisting  know-how  contributed  by the Russian
company.

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 emissive 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 240 vertical by 150 horizontal lines per inch.

          T.V. video frame rate.

          640 x 480 RGB.

          Contrast ratio approximately 100:1.

          Brightness 100 cd/m2 .

          Viewing angle approximately 160 degrees.

          Power consumption less than 2 watts.

          Capable of incorporating 640 x 480 building blocks to make larger size
          displays.

If the program  proceeds as planned,  prototype models could be available within
the next two years.

                                       15

<PAGE>

The Company believes that if ultra-high  resolution video and color capabilities
for solid state  and/or thin film video 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,  video conferencing,  multi-media devices,  personal
telecommunication  devices 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.  There can be no  assurance,
however,  that the Company will be able to develop  solid state and/or thin film
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.

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

The Company  announced  on December  18, 1997 that it is engaged in  preliminary
discussions with SIEC. The present  intention of the companies as set forth in a
non-binding letter of intent is to mutually cooperate to develop,  produce,  and
market  high  technology  products,   under  mutually  acceptable  terms,  using
CopyTele's overall flat panel and associated technology. The parties also intend
to cooperate to mutually  market certain of SIEC's  products,  to be enhanced by
CopyTele's  technology,  outside of China. In order to share in their respective
efforts,  the companies are attempting to devise and agree upon a means to share
an interest in each other's company. It is presently  contemplated that CopyTele
would issue common stock in an amount representing slightly less than 20% of its
currently outstanding shares in exchange for an interest in SIEC's holdings.

CopyTele  believes  that the proposed  arrangement  with SIEC would  represent a
unique  relationship in China between a large Chinese  government-owned holding
company and a foreign company.  The companies are in discussions  concerning the
details of this possible  arrangement,  although it is expected to take a number
of months before the parties could enter into a final, binding agreement.  There
can be no  assurance  that  the  parties  will  be able to  arrive  at  mutually
acceptable agreements or obtain the requisite governmental approvals.  Among the
issues to be finalized are those concerning the valuation of CopyTele's  shares,
the form,  structure and valuation of the interest in SIEC's holdings that would
be exchanged for CopyTele's shares, the nature and structure of the venture, the
specific  products  to be  developed  for  sale  and the  likely  timetable  for
implementing the venture.

SIEC has advised  CopyTele 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.  Through  these
enterprises,  there are a total of approximately  293 enterprises  including 150
foreign joint ventures, 12 research and design institutes and 5 training centers
in which SIEC has a direct investment or an investment through its subsidiaries.
SIEC  and  its  subsidiaries  manage  these  enterprises  which  currently  have
approximately 80,000 employees,  occupy space of approximately 22 million square
feet  and  produce   approximately   5,900   products,   including   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.

                                       16

<PAGE>

As previously disclosed, the Company entered into a letter of intent in 1996 for
the  formation of a second joint  venture with SECC.  In light of the  Company's
current  discussions with SIEC,  however,  the Company has determined that it is
unlikely that it will pursue this second joint venture if a definitive agreement
is ultimately reached with SIEC.

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

The  telecommunications  industry has a substantial  number of competitors which
are significantly larger and possess financial resources  significantly  greater
than those of the Company or SCE. Certain competitive  products contain displays
which primarily include LCDs. These products,  however, have fewer features than
the Company's  product and the displays have  significantly  less resolution and
information  content  capability  than  the  Company's  E-Paper(TM)  Flat  Panel
Display. The Company's  E-Paper(TM) Flat Panel Display is being utilized for the
first time in the  marketplace  in MAGICOM(R)  2000.  The Company  believes that
telecommunications  products  incorporating the Company's E-Paper(TM) Flat Panel
Display  could  have  many  commercial   applications  and  could  combine  many
characteristics  which the Company  believes  would be  desirable  to  potential
customers.

MAGICOM(R) 2000, the only  telecommunications  product developed by the Company,
is a  unique  product  that  incorporates  certain  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. 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.

If the Company is  successful  in its efforts to develop its advanced flat panel
displays for color and video,  the panels would be of a higher  resolution  than
competing products that currently exist in the marketplace.  However,  there can
be no  assurance  that other  competitive  products  will not be produced in the
future by other  companies  which will offer  similar or enhanced  resolution or
other features.

                                       17

<PAGE>

Patents
-------

The Company has received  approximately  146 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-Paper(TM) Flat Panel Display,  methods of operating the E-Paper(TM) Flat Panel
Display,  particle  generation,  applications  using the E-Paper(TM)  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.  The Company has been  advised by its patent  counsel that in their
opinion  the  subject  matter of the pending  applications  contains  patentable
material.

The Company has  licensed a number of its patents  covering the E-Paper(TM) 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 $3,642,000,  $3,858,000,  $2,353,000, and $24,385,000 for the
fiscal  years  ended  October  31,  1997,  1996 and 1995 and for the period from
November  5, 1982  (inception)  through  October  31,  1997,  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-six  full-time  employees and fourteen  consultants as of
December 31, 1997.  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. Thirteen 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, 1997, SCE had  approximately  seventy two (72) employees,  of
which sixty (60) were  engaged in  production  and twelve  (12) were  engaged in
administrative and other functions.

                                       18

<PAGE>

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

The Company  leases  approximately  10,000 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, 1998, for a base rent of approximately  $166,000 per annum, as well
as escalation clauses for increases in certain operating costs, for a total cost
aggregating  approximately  $173,000  per annum.  The  Company  has the right to
cancel a portion  of the lease as of  February  28,  1998.  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 8 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.

SCE  operates from a 30,000  square  foot,  one-story  office,  warehouse  and
production  facility owned by SCE 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 two
short-term loans from a Chinese bank aggregating  U.S.$500,000 which are secured
by the land-use  contract and equipment.  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, 1997,
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.


                                      19




<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,  adjusted for the
two-for-one  stock split declared in May 1996, during the Company's fiscal years
ended October 31, 1996 and 1997 have been as follows:

================================================================================
    Fiscal Period                  High                   Low
================================================================================
   1st quarter 1996               $5.56                  $4.06
   2nd quarter 1996                6.06                   4.63
   3rd quarter 1996                9.88                   5.25
   4th quarter 1996                7.63                   5.25
--------------------------------------------------------------------------------
   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
--------------------------------------------------------------------------------

As of January 21, 1998 the approximate  number of record holders of common stock
of the Company was 1,200.

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.

In fiscal  1997,  Peri D.  Krusos,  Denis Z. Krusos and Daniel A.  DiSanto  each
exercised  warrants to purchase  32,940 shares of common  stock,  at an exercise
price of $5.10 per share of the  Company's  common  stock.  The  exercise  price
represented the fair market value of such stock on the date of issuance of these
warrants, subsequently adjusted for the two-for-one stock splits declared by the
Company in February  1991 and May 1996 and the  anti-dilution  provisions of the
warrants.  Peri D.  Krusos  and  Denis  Z.  Krusos  are the  daughter  and  son,
respectively,  of Denis A.  Krusos and Daniel A.  DiSanto is the son of Frank J.
DiSanto.  The exemption from registration relied upon for the sale of the common
stock was Section 4(2) of the Securities Act of 1933, as amended.

Pursuant to the terms and conditions of a certain Equipment Purchase  Agreement,
on July 1, 1997 (the  "Issue  Date"),  the  Company  issued  15,000  shares (the
"Shares") of its common stock to Master Print Holography, Inc. (the "Seller") in
exchange  for  certain  labratory  equipment  valued at $75,000.  The  Equipment
Agreement provides that if as of one year from the Issue Date (the "Market Value
Date")  the  Market  Value  (as  defined  below) of the  Shares on the  National
Association of Securities  Dealers,  Inc.  Automated  Quotation  National Market
System  (NASDAQ - NMS) is less than $75,000,  the Company will pay to the Seller
the difference in cash as of the Market Value Date. For purposes hereof,  Market
Value of the Shares as of the Market Value Date will be the closing quotation at
which the  Company's  common  stock is traded on NASDAQ - NMS on such date.  The
exemption from registration relied upon for the issuance of the common stock was
Section 4(2) of the Securities Act of 1933, as amended.

                                       20


<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
                                       As of and for the year ended October 31,                  from November 5, 1982
                                                                                                  (inception) through
                                                                                                   October 31, 1997
                        ========================================================================
                                 1997           1996          1995           1994          1993
========================================================================================================================
<S>                           <C>           <C>          <C>           <C>            <C>              <C>

Sales                           $    -        $    -         $    -        $    -        $    -           $    -
-------------------------------------------------------------------------------------------------------------------------
Selling General and 
Administrative Expenses, and    6,713,759      6,166,210     3,350,125     3,651,334      2,925,627       38,860,411
Loss from SCE
-------------------------------------------------------------------------------------------------------------------------
Interest Income                   913,184        722,800      356,226       223,817        162,778         4,301,456                
------------------------------------------------------------------------------------------------------------------------
Net (Loss)                     (5,800,575)    (5,443,410)   (2,993,899)   (3,427,517)    (2,762,849)     (34,558,955)
-------------------------------------------------------------------------------------------------------------------------
Net (Loss) Per Share
of  Common Stock (a)               ($0.10)        ($0.10)       ($0.06)       ($0.07)        ($0.06)          ($0.75)
-------------------------------------------------------------------------------------------------------------------------
Total Assets                   19,988,207     24,710,420     9,695,398     6,614,332      8,686,241
-------------------------------------------------------------------------------------------------------------------------
Long Term Obligations          $    -         $   -          $    -        $    -       $    -
-------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity           18,779,142     22,750,273     9,436,708     6,415,233      8,244,925
-------------------------------------------------------------------------------------------------------------------------
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>

Item 7.  Management's Discussion and Analysis of Financial
         -------------------------------------------------
              Condition and Results of Operations.
              ------------------------------------

The Company,  which is a  development  stage  enterprise,  was  incorporated  on
November  5,  1982  and  has had no  revenues,  other  than  limited  sales  the
recognition  of which  has been  deferred  (see  Notes 1 and 2 to the  Company's
Financial  Statements),  to support  its  operations  since its  inception.  The
Company's principal activities include the development, production and marketing
of a telephone based multi-functional  telecommunications  product incorporating
the Company's  ultra-high  resolution  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  marketing  a  small  portable  printer  called  MAGIC  PRINTER  and is  also
continuing its research and  development  activities  for ultra-high  resolution
video and color flat panel  displays.  See  "Business -  MAGICOM(R)  2000 - 1997
Developments",  "Business - Flat Panel Display Technology - Color and Video Flat
Panel" and Notes 2 and 3 to the Company's Financial Statements.


                                       21
<PAGE>

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 - MAGICOM(R) 2000 - General Risks and Uncertainties".

Recently,  the Company  announced that it is engaged in preliminary  discussions
with SIEC. The present intentions of the companies as set forth in a non-binding
letter of intent is to mutually  cooperate  to develop,  produce and market high
technology  products,  under  mutually  acceptable  terms,  using the  Company's
overall  flat  panel and  associated  technology.  The  parties  also  intend to
cooperate to mutually market certain of SIEC's  products,  to be enhanced by the
Company's  technology,  outside of China. In order to share in their  respective
efforts,  the companies are attempting to devise and agree upon a means to share
an interest in each  other's  company.  It is  presently  contemplated  that the
Company would issue common stock in an amount  representing less than 20% of its
currently outstanding shares in exchange for an interest in SIEC's holdings. See
"Business - Other Developments".  As previously  disclosed,  the Company entered
into a letter of intent in 1996 for the formation of a second joint venture with
SECC. In light of the Company's  current  discussions  with SIEC,  however,  the
Company has determined that it is unlikely that it will pursue this second joint
venture if a definitive agreement is ultimately reached with SIEC.

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 sale of these  products will be
recognized by the Company upon acceptance by the end-users.

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.

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.  See  "Business"  and Note 1 to the Company's
Financial  Statement  contained herein for discussions  regarding  uncertainties
that may  significantly  affect the results of operations,  future liquidity and
capital resources.

Results of Operations
---------------------

Selling, general and administrative  expenses,  including the loss from SCE, for
the fiscal years ended  October 31, 1997,  1996 and 1995 and for the period from
November  5, 1982  (inception)  through  October  31,  1997  were  approximately
$6,714,000, $6,166,000, $3,350,000 and $38,860,000,  respectively. These amounts
include  research,  development and tooling costs of  approximately  $3,642,000,
$3,858,000,  $2,353,000  and  $24,385,000,   respectively,  as  well  as  normal
operating expenses.

                                       22
<PAGE>

Selling,  general  and  administrative  expenses,  including  the loss from SCE,
increased  approximately  $548,000 during fiscal 1997 as compared to fiscal 1996
resulting primarily from increases in expenditures for salaries, loss from joint
venture  operations,  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.  The
Company's  portion of SCE's loss  increased over the prior year from $335,000 in
fiscal 1997  compared  to  $149,000 in fiscal 1996 as a result of  manufacturing
costs being  absorbed  over a limited  quantity of product  produced.  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.

Selling,  general  and  administrative  expenses,  including  the loss from SCE,
increased  $2,816,000  during  fiscal 1996 as compared to fiscal 1995  resulting
primarily from increases in expenditures  for engineering  supplies and services
necessitated by the Company's  development program and related activities at the
time.  Professional  fees  increased  during the fiscal 1996 period,  especially
patent application  preparation and filing fees. Other increases in professional
fees, including accounting and shareholder services, were offset by a decline in
other legal fees which were not patent  related.  Initial  marketing  costs were
incurred  during the fiscal 1996 period as a result of the opening and  staffing
of a marketing  office,  retention of public relations and advertising firms and
the  production  of  advertising  and  promotional   materials.   Other  expense
categories  also increased in 1996,  including  compensation  and related costs,
rent and travel  expenditures,  as a result of adding personnel in marketing and
engineering,   the  rental  of  additional  space  and  facilities,  and  travel
associated  with  marketing  and  supporting  the joint  venture  in China.  The
Company's  portion of SCE's loss in fiscal  1996 of  approximately  $149,000  as
compared to the loss in fiscal 1995 of approximately  $18,000 was as a result of
SCE expensing start up costs prior to production.

                                       23
<PAGE>

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.
Since  February 1993,  one  additional  employee is also currently  waiving such
salary and benefit  rights for an  undetermined  period of time.  See "Executive
Compensation"  and  Note 11 to the  Company's  Financial  Statements  for a more
complete discussion regarding salary and related pension benefit waivers.

The  increase  in  interest  income  during  fiscal  1997 as compared to 1996 of
$190,384  resulted  primarily  from an increase in average  funds  available for
investment  aided  slightly by an increase in interest  rates.  The  increase in
interest  income  during  fiscal  1996 as  compared  to fiscal  1995 of $366,574
resulted from a significant  increase in average funds available for investment,
offset slightly be a decrease in interest rates.  Funds available for investment
during  1997,  1996  and  1995,  on  a  monthly  weighted  average  basis,  were
approximately  $17,394,000,   $16,011,000  and  $7,175,000,   respectively.  The
investment  instruments  selected by the Company are  principally  money  market
accounts and commercial paper.

During October 1995, the Financial  Accounting  Standards Board issued Statement
of Financial  Accounting  Standard ("SFAS") No. 123,  Accounting for Stock Based
Compensation.  This  statement  establishes  financial  accounting and reporting
standards for stock-based  employee  compensation plans. SFAS No. 123 encourages
entities to adopt a fair value based method of accounting for stock compensation
plans.  However,  SFAS No. 123 also  permits  the Company to continue to measure
compensation  costs under  preexisting  accounting  pronouncements.  If the fair
market value based method of  accounting  is not adopted,  SFAS No. 123 requires
pro forma  disclosures  of net income and  earnings  per share.  The Company has
chosen to disclose  pro forma net income and  earnings per share in the notes to
financial statements and continue to account for stock-based  compensation using
the intrinsic  value method  prescribed in Accounting  Principles  Board Opinion
("APB")  No.  25,  "Accounting  for Stock  Issued  to  Employees",  and  related
interpretations.  This statement was first disclosed by the Company in the first
quarter of fiscal  1997.  The  Company has  adopted  all other  recently  issued
accounting standards which have an impact on its financial statements.

The Company does not anticipate any material  costs,  problems or  uncertainties
associated  with the Year 2000 computer  issue at this time but will continue to
monitor the issue as the Year 2000 approaches.

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

                                       24
<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, 1997, 1996 and 1995, the Company received
proceeds  aggregating  approximately  $1,754,000,  $18,757,000  and  $6,015,000,
respectively, from the exercise of stock options and warrants to purchase shares
of its common stock pursuant to the 1987 Plan, the 1993 Plan and the exercise of
warrants by members of the  immediate  families of its Chairman of the Board and
its President.  See "Certain  Relationships and Related  Transactions" below and
the Company's  Financial  Statements  for a more complete  discussion  regarding
sales of common stock.  Working capital  decreased by  approximately  $3,600,000
from approximately  $20,600,000 at October 31, 1996 to approximately $17,000,000
at  October  31,  1997 as a  result  of the loss  incurred  for the year and the
purchase of property and equipment.

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  investment  which may be  borrowed  from  banks of which
$500,000 has been borrowed to date.  The Company has  contributed  $1,225,000 in
cash,  and technology  valued for the purposes of SCE at $700,000,  and SECC and
SIT have  contributed  $1,575,000  in cash to SCE.  See  Notes 1, 2 and 3 to the
Company's Financial Statements.  SCE may require additional capitalization of up
to a total of $25 million,  depending upon the nature and extent of its business
activities.  The  Company  currently  has no plans with  respect  to  additional
financing.  There can be no assurance  that adequate  funds will be available to
the Company or SCE,  including any future capital  contribution,  if any, beyond
the Company's  initial capital  contributions  of $1,225,000 to SCE, or that, if
available,  the Company  and SCE will be able to obtain such funds on  favorable
terms and conditions.

The Company believes that without taking into  consideration  potential revenues
from  sales of  MAGICOM(R)  2000 it will have  sufficient  funds  into the first
quarter of fiscal 2000 to maintain  its present  level of  development  efforts.
This includes,  among other things,  the collection of the amounts due from SCE,
but  excludes  cash  expenditures  that  may  be  required  with  the  potential
transaction  with SIEC. The amounts due from SCE are primarily  costs related to
the  purchase  of  components  for SCE's use in  MAGICOM(R)  2000  units.  It is
expected that SCE will pay the Company during the current year through the sales
of units and financing from banks.

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 in order to participate
in SCE following its initial capital  contributions and to continue its research
and development activities.

See "Business" and Note 1 to the Company's Financial  Statements for discussions
regarding  uncertainties  that may  significantly  affect  future  liquidity and
capital resources.

                                       25

<PAGE>

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

See accompanying "Index to Financial Statements".


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

Not applicable.

                                                 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            70             1982
                                        Executive Officer
---------------------------------------------------------------------------------------------------------------------------
Frank J. DiSanto                        Director and President                               73             1982
---------------------------------------------------------------------------------------------------------------------------
Gerald J. Bentivegna                    Director, Vice President - Finance and Chief         48             1994
                                        Financial Officer
---------------------------------------------------------------------------------------------------------------------------
John R. Shonnard                        Director                                             82             1988
---------------------------------------------------------------------------------------------------------------------------
George P. Larounis                      Director                                             69             1997
---------------------------------------------------------------------------------------------------------------------------
Frank W. Trischetta                     Senior Vice President - Marketing and                57             1996
                                        Sales
---------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       26

<PAGE>

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.

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, 1997. The following
is  compensation  information  regarding Mr. Krusos and Mr.  Trischetta  for the
fiscal years ended October 31, 1997, 1996 and 1995:

                                       27

<PAGE>
<TABLE>
<CAPTION>

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

                           SUMMARY COMPENSATION TABLE
----------------------------------------------------------------------------------------------------------------------------

                                                                     Annual                       Long-Term
                                                                  Compensation                Compensation Awards
                                                  Fiscal         --------------               -------------------
                  Name and                         Year
             Principal Position                   Ended
             ------------------                   -----
                                                                                              Securities Underlying
                                                                                                   Options (#)
----------------------------------------------------------------------------------------------------------------------------
<S>                                          <C>                  <C>                             <C>   

Denis A. Krusos,                                 10/31/97                -                          575,000
Chairman of the Board,                           10/31/96                -                          575,000
Chief Executive Officer and Director             10/31/95                -                          900,000
----------------------------------------------------------------------------------------------------------------------------
Frank W. Trischetta                              10/31/97            $152,500                        30,000
Senior Vice President -                          10/31/96            $117,600                       155,000
Marketing and Sales
----------------------------------------------------------------------------------------------------------------------------
</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, 1997:
<TABLE>
<CAPTION>

----------------------------------------------------------------------------------------------------------------------------
                        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        Granted to          Exercise
            Options Granted     Employees in           Price           Expiration
   Name         (#) (1)          Fiscal Year          ($/Sh)              Date              5% ($)            10% ($)
===========================================================================================================================
<S>            <C>                <C>            <C>                <C>                 <C>            <C>

Denis A.        325,000            11.19%            $4.500  (2)        12/16/06           $ 919,758        $ 2,330,848
Krusos
----------------------------------------------------------------------------------------------------------------------------
                250,000             8.60%            $4.375  (2)         4/20/07            $687,853        $ 1,743,156

             ------------------------------------------------------------------------------------------------------------
Frank W.         30,000             1.03%            $4.500  (2)        12/16/06            $ 84,901          $ 215,155
Trischetta
----------------------------------------------------------------------------------------------------------------------------

<FN>
-------------------
                                       28

<PAGE>

(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.
</FN>
</TABLE>

The following is information regarding stock option exercises during fiscal 1997
by Mr. Krusos and Mr.  Trischetta  and the values of their options as of October
31, 1997:
<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------------------------------------
               AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
                              FY-END OPTION/VALUES
=======================================================================================================================
                                                          Number of Securities        Value of Unexercised In-the-
                                                    Underlying Unexercised Options    Money Options at Fiscal Year 
                                                         at Fiscal Year End (#)               End ($) (2)
                Shares Acquired   Value Realized
     Name       on Exercise (#)      ($) (1)
                                                  ----------------------------------------------------------------------
                                                     Exercisable    Unexercisable     Exercisable     Unexercisable
------------------------------------------------------------------------------------------------------------------------
<S>               <C>               <C>           <C>                 <C>            <C>              <C>

Denis A. Krusos        -                -             2,347,180           -            $175,000             -
------------------------------------------------------------------------------------------------------------------------
Frank W.               -                -               363,000         30,000         $283,375          $7,500
Trischetta
------------------------------------------------------------------------------------------------------------------------
<FN>

(1)      Such value is  determined  by applying the net  difference  between the
         selling  price of the stock sold on day of  exercise  and the  exercise
         price for the options to the number of options exercised.

(2)      Such value was  determined by applying the net  difference  between the
         last sales price of the Company's  common stock on October 31, 1997 and
         the  exercise  price  for the  options  to the  number  of  unexercised
         in-the-money  options held.  The exercise price of these options was at
         least equal to the fair market value of the underlying  common stock as
         defined in the 1993 Plan.
</FN>
</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.

                                       29

<PAGE>

Item 12.  Security Ownership of Certain Beneficial Owner
          ----------------------------------------------
              and Management.
              --------------

The following table sets forth certain information with respect to the Company's
common stock beneficially owned as of January 21, 1998 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 
             Name and Address of Beneficial Owner                                Ownership(1)(2)         Percent of 
                                                                                                            Class
-------------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>                    <C>    

Denis A. Krusos                                                                      6,930,940              11.51%
900 Walt Whitman Road
Huntington Station, NY  11746
-------------------------------------------------------------------------------------------------------------------
Frank J. DiSanto                                                                   6,572,960(3)             10.95%
900 Walt Whitman Road
Huntington Station, NY  11746
-------------------------------------------------------------------------------------------------------------------
Gerald J. Bentivegna                                                                   211,000                .36%
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                                                                     287,200(4)               .50%
12521 Rios Road
San Diego, CA  92128
-------------------------------------------------------------------------------------------------------------------
Frank W. Trischetta                                                                    393,000                .67%
900 Walt Whitman Road
Huntington Station, NY  11746
-------------------------------------------------------------------------------------------------------------------
All Directors and Executive Officers as a Group                                14,637,600(3)(4)              23.09%
(6 persons)
-------------------------------------------------------------------------------------------------------------------
--------------------
<FN>

(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.

                                       30

<PAGE>

(2)      Includes 2,347,180 shares,  2,177,180 shares,  209,000 shares, 242,500
         shares,  157,600  shares,  393,000  shares and 5,526,460  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 1987 Plan and/or the 1993 Plan.

(3)      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.

(4)      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.
</FN>
</TABLE>

Item 13.  Certain Relationships and Related Transactions.
          ----------------------------------------------

In fiscal  1997,  Peri D.  Krusos,  Denis Z. Krusos and Daniel A.  DiSanto  each
exercised  warrants to purchase  32,940 shares of common  stock,  at an exercise
price of $5.10 per share of the  Company's  common  stock.  The  exercise  price
represented the fair market value of such stock on the date of issuance of these
warrants, subsequently adjusted for the two-for-one stock splits declared by the
Company in February  1991 and May 1996 and the  anti-dilution  provisions of the
warrants.  The warrants were issued in fiscal 1992 in conjunction  with sales of
common  stock by the Company to the  foregoing  individuals.  Peri D. Krusos and
Denis Z. Krusos are the daughter and son,  respectively,  of Denis A. Krusos and
Daniel A. DiSanto is the son of Frank J. DiSanto.

As of January  21,  1998,  after  adjustments  for the  two-for-one  stock split
declared in May 1996, Peri D. Krusos, Denis Z. Krusos and Daniel A. DiSanto each
held  warrants  to  purchase  32,000  shares of common  stock,  all of which are
exercisable.

                                       31


<PAGE>

                                     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, 1997.

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

                  (a)      3.1      Certificate of Incorporation, as amended.

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

                  (c)     10.1      Stock Option Plan, adopted on April 1, 1987 
                                    and approved byshareholders 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.

                                       32

<PAGE>
     
                  (e)     10.3      Stock Purchase Warrant, dated October 27,
                                    1992, between the Registrant and Denis Z. 
                                    Krusos.
                  
                  (e)     10.4      Stock Purchase Warrant, dated October 27, 
                                    1992, between the Registrant and Daniel A. 
                                    DiSanto.
                  
                  (e)     10.5      Stock Purchase Warrant, dated October 27,  
                                    1992, between the Registrant and Peri D. 
                                    Krusos.
                 
                  (f)     10.6      CopyTele, Inc. 1993 Stock Option Plan,  
                                    adopted on April 28, 1993 and approved by 
                                    shareholders on July 14, 1993.
                 
                  (g)     10.7      Joint Venture Contract, dated as of March 
                                    28,1995, by and between Shanghai Electronic 
                                    Components Corp. and CopyTele, Inc.
                
                  (g)     10.8      Technology License Agreement, dated as of 
                                    March 28, 1995, by and between Shanghai 
                                    CopyTele Electronics Co., Ltd. and CopyTele,
                                    Inc.
               
                  (h)     10.9      Amendment No. 1 to the CopyTele,  Inc. 1993 
                                    Stock Option Plan, adopted on May 3, 1995 
                                    and approved by shareholders on July 19,
                                    1995.

                 (i)      10.10     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.
              
                 (j)      10.11     Amendment No. 2 to the CopyTele, Inc. 1993 
                                    Stock Option Plan, adopted on May 10, 1996 
                                    and approved by shareholders on July 24,
                                    1996.

                 (k)      10.12     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.

                  -----------

                                       33

<PAGE>

                 (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 Form 10-K for the fiscal
                           year ended October 31, 1992.
                
                 (f)       Incorporated by reference to Proxy Statement dated 
                           June 10, 1993.
                 
                 (g)       Incorporated by reference to Form 8-K dated March 28,
                           1995.
                 
                 (h)       Incorporated  by reference to Form S-8 (Registration 
                           No. 33-62381) dated September 6,1995.

                 (i)       Incorporated by reference to Form 10-K for the fiscal
                           year ended October 31, 1995.
                  
                 (j)       Incorporated by reference to Form 10-Q for the fiscal
                           quarter ended April 30, 1996.
                      
                 (k)       Incorporated by reference to Form 10-Q for the fiscal
                           quarter ended January 31, 1997.

                                       34

<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 28, 1998                       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 28, 1998                       Officer)

                                       By:/s/ Frank J. DiSanto
                                          ----------------------
                                       Frank J. DiSanto
January 28, 1998                       President and Director

                                       By:/s/ Gerald J. Bentivegna
                                          ------------------------- 
                                       Gerald J. Bentivegna
                                       Vice President - Finance,
                                       Chief Financial Officer and
                                       Director (Principal Financial
January 28, 1998                       and Accounting Officer)

                                       By:/s/ John R. Shonnard
                                          ---------------------
                                       John R. Shonnard
January 28, 1998                       Director

                                       By:/s/ George P. Larounis
                                          -----------------------
                                       George P. Larounis
January 28, 1998                       Director


                                       35


<PAGE>

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

(a)      3.1             Certificate of Incorporation, as amended.

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

(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             Stock Purchase  Warrant, dated October 27, 1992,  
                         between the Registrant and Denis Z. Krusos.

(e)     10.4             Stock Purchase Warrant, dated October 27, 1992, 
                         between the Registrant and Daniel A. DiSanto.

(e)     10.5             Stock Purchase Warrant, dated October 27, 1992, 
                         between the Registrant and Peri D. Krusos.

(f)     10.6             CopyTele,  Inc. 1993 Stock Option Plan, adopted on 
                         April 28, 1993 and approved by shareholders on July 14,
                         1993.

(g)     10.7             Joint Venture Contract, dated as of March 28, 1995, by 
                         and between Shanghai Electronic Components Corp. and 
                         CopyTele, Inc.

(g)     10.8             Technology License Agreement, dated as of March 28, 
                         1995, by and between Shanghai CopyTele Electronics Co.,
                         Ltd. and CopyTele, Inc.

(h)     10.9             Amendment No. 1 to the CopyTele, Inc. 1993 Stock Option
                         Plan, adopted on May 3, 1995 and approved by 
                         shareholders on July 19, 1995.

(i)     10.10            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.

(j)     10.11            Amendment No. 2 to the CopyTele, Inc. 1993 Stock Option
                         Plan, adopted on May 10, 1996 and approved by 
                         shareholders on July 24, 1996.

                                       36

<PAGE>

(k)     10.12            Contract Granting Land-Use Rights, dated October 11,  
                         1995, between the Land Administration Bureau Songjiang 
                         County and Shanghai CopyTele Electronics Co., Ltd.
        
        21               Lists of Significant Subsidiaries.
        
        23.1             Consent of Arthur Andersen LLP.
       
        27               Financial Data Schedule.
        
        



(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 Form 10-K for the fiscal year ended 
         October 31, 1992.
(f)      Incorporated by reference to Proxy Statement dated June 10, 1993.
(g)      Incorporated by reference to Form 8-K dated March 28, 1995.
(h)      Incorporated by reference to Form S-8 (Registration No. 33-62381) dated
         September 6, 1995.
(i)      Incorporated by reference to Form 10-K for the fiscal year ended 
         October 31, 1995.
(j)      Incorporated by reference to Form 10-Q for the fiscal quarter ended 
         April 30, 1996.
(k)      Incorporated by reference to Form 10-Q for the fiscal quarter ended
         January 31, 1997. 
   
                                       37



<PAGE>


                           COPYTELE, INC.
                           --------------

                    (Development Stage Enterprise)
                    ------------------------------

                     INDEX TO FINANCIAL STATEMENTS
                     -----------------------------


                         OCTOBER 31, 1997
                         ----------------

<TABLE>
<CAPTION>
                                                                                                                 Page
<S>                                                                                                         <C>    

Report of Independent Public Accountants                                                                          F-1

Balance Sheets as of October 31, 1997 and 1996                                                                    F-2

Statements of Operations for the three years ended October 31, 1997 and for the period
   from November 5, 1982 (inception) through October 31, 1997                                                     F-3

Statements of Shareholders' Equity for the period from November 5, 1982 (inception)
   through October 31, 1983 and for the fourteen years ended October 31, 1997                                  F-4 - F-7

Statements of Cash Flows for the three years ended October 31, 1997 and for the
   period from November 5, 1982 (inception) through October 31, 1997                                              F-8

Notes to Financial Statements                                                                                 F-9 - F-20


</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, 1997 and 1996,
and the related  statements of  operations  and cash flows for each of the three
years in the period ended  October 31, 1997 and for the period from  November 5,
1982 (inception) to October 31, 1997 and the statements of shareholders'  equity
for the period from November 5, 1982  (inception)  through  October 31, 1983 and
for each of the  fourteen  years in the period  ended  October 31,  1997.  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.

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, 1997 and 1996, and the results of its operations and its cash flows for each
of the three years in the period ended  October 31, 1997 and for the period from
November  5, 1982  (inception)  to  October  31,  1997,  and the  changes in its
shareholders'  equity for the period from November 5, 1982  (inception)  through
October 31, 1983 and for each of the fourteen  years in the period ended October
31, 1997 in conformity with generally accepted accounting principles.





                                                       ARTHUR ANDERSEN LLP     



New York, New York
January 21, 1998

                                      F-1


<PAGE>
<TABLE>
<CAPTION>


                         COPYTELE, INC.
                         --------------

                  (Development Stage Enterprise)
                  ------------------------------

                         BALANCE SHEETS
                         --------------


                                                                                                                   
                                                                                              October 31,         October 31,
                                         ASSETS                                                   1997               1996
                                         ------                                                   ----               ----
<S>                                                                                     <C>                 <C>   

CURRENT ASSETS:
  Cash (including cash equivalents and interest bearing accounts of
    $11,977,526 and $21,921,133, respectively)                                              $   12,329,171     $   22,165,892
  Marketable securities, at amortized cost (Note 2)                                                997,173             -
  Accrued interest receivable                                                                       18,429             49,306
  Prepaid expenses and other current assets (including amounts due from
    Joint Venture of approximately $4,304,000 and $241,000, respectively)                        4,853,459            378,417
                                                                                              ------------       ------------
                                                                                                18,198,232         22,593,615

PROPERTY AND EQUIPMENT (net of accumulated depreciation
  and amortization of $1,062,949 and $816,651, respectively)                                       947,643            830,606

INVESTMENT IN JOINT VENTURE (Notes 1, 2 and 3)                                                     723,166          1,058,557

OTHER ASSETS                                                                                       119,166            227,642

DEFERRED TAX BENEFITS (net of valuation allowance of $28,295,000
  and $25,308,000, respectively)                                                                    -                   -
                                                                                            --------------     --------------
                                                                                            $   19,988,207     $   24,710,420
                                                                                            ==============     ==============

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

CURRENT LIABILITIES:
  Accounts payable and accrued liabilities                                                  $    1,209,065     $    1,960,147
                                                                                            --------------     --------------

COMMITMENTS AND CONTINGENCIES (Note 8)

SHAREHOLDERS' EQUITY (Notes 4, 5, 6 and 7):
  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 57,861,176 and 57,404,656 shares, respectively                                     578,612            574,047
  Additional paid-in capital                                                                    52,759,485         50,934,606
  Accumulated (deficit) during development stage                                               (34,558,955)       (28,758,380)
                                                                                           ---------------    ---------------
                                                                                                18,779,142         22,750,273
                                                                                           ---------------    ---------------
                                                                                            $   19,988,207     $   24,710,420
                                                                                            ==============     ==============

</TABLE>


      The accompanying notes are an integral part of these balance sheets.

                                      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
                                                        1997              1996               1995                 October 31, 1997
                                                        ----              ----               ----                 ----------------
<S>                                               <C>               <C>             <C>                          <C>   
SALES                                            $          -         $      -         $        -                   $        -
                                                   -------------    -------------     ---------------               --------------

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
  (including research and development 
  expenses of approximately                                                              
  $3,642,000, $3,858,000, $2,353,000 and                                         
  $24,385,000, respectively)                          6,378,368          6,017,580           3,332,312                  38,358,577
                                                  --------------    ---------------     ---------------               -------------

LOSS FROM JOINT VENTURE (Notes 1, 2 and 3)              335,391            148,630              17,813                     501,834
                                                  --------------    ---------------     ---------------               -------------

INTEREST INCOME                                         913,184            722,800             356,226                   4,301,456
                                                  --------------    ---------------     ---------------               -------------

NET (LOSS)                                       $   (5,800,575)    $   (5,443,410)     $   (2,993,899)            $   (34,558,955)
                                                 ===============    ================    ================           ================

NET (LOSS) PER SHARE OF COMMON STOCK             $         (.10)    $         (.10)     $         (.06)            $          (.75)
                                                  ==============     ==============      ==============            ================

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING        57,667,787         54,771,891          50,514,568                  45,899,506
                                                  ==============     ===============     ==============            ================


</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 FOURTEEN YEARS ENDED OCTOBER 31, 1997
                  ---------------------------------------------


                                                                                                                       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)



                                                                   Continued

                                      F-4

<PAGE>
<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 FOURTEEN YEARS ENDED OCTOBER 31, 1997
                  ---------------------------------------------

                                    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


                                      F-5
<PAGE>
<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 FOURTEEN YEARS ENDED OCTOBER 31, 1997
                  ---------------------------------------------

                                    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
                      
                                       F-6

<PAGE>
<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 FOURTEEN YEARS ENDED OCTOBER 31, 1997
                  ---------------------------------------------

                                    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)
                                                                    ============    ============    ============    ==============

<FN>

(A) Reflects  cumulative  effect on all share data prior to splits  described in Note 5.
    
</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
                                                                     1997            1996             1995        October 31, 1997
                                                                     ----            ----             ----        ----------------
<S>                                                          <C>              <C>             <C>               <C>  
CASH FLOWS FROM OPERATING ACTIVITIES:
  Payments to suppliers, employees and consultants              $(11,089,765)   $ (4,888,843)    $ (3,274,894)     $ (41,197,498)
  Interest received                                                  917,696         709,700          337,061          4,256,663
                                                                ---------------  ------------     ------------      ---------------
         Net cash (used in) operating activities                 (10,172,069)     (4,179,143)      (2,937,833)       (36,940,835)
                                                                --------------   ------------     ------------      ---------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Payments for purchases of property and equipment                  (448,288)       (418,733)         (90,549)        (1,797,283)
  Disbursements to acquire certificates of deposit and
    marketable securities                                           (970,808)         -                -             (13,045,999)
  Proceeds from maturities of investments                             -               -                -              12,075,191
  Investment made in Joint Venture                                    -             (857,500)        (367,500)        (1,225,000)
                                                                ------------    ------------     ------------       ---------------
         Net cash (used in) investing activities                  (1,419,096)     (1,276,233)        (458,049)        (3,993,091)
                                                                ------------    ------------     ------------       ---------------

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                              1,754,444      18,756,975        6,015,374         35,680,358
  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                 1,754,444      18,756,975        6,015,374         53,263,097
                                                                ------------    ------------     ------------       ---------------

NET (DECREASE) INCREASE IN CASH AND CASH
  EQUIVALENTS                                                     (9,836,721)     13,301,599        2,619,492         12,329,171

CASH AND CASH EQUIVALENTS AT BEGINNING
  OF PERIOD                                                       22,165,892       8,864,293        6,244,801             -
                                                                ------------    ------------     ------------        --------------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                      $ 12,329,171    $ 22,165,892     $  8,864,293      $  12,329,171
                                                                ============    ============     ============       ===============

RECONCILIATION OF NET (LOSS) TO NET CASH
  (USED IN) OPERATING ACTIVITIES:
    Net (loss)                                                  $ (5,800,575)   $ (5,443,410)    $ (2,993,899)     $ (34,558,955)
    Loss from Joint Venture                                          335,391         148,630           17,813            501,834
    Depreciation and amortization                                    257,315         126,231           62,518          1,078,607
    Amortization of discount on marketable securities                (26,365)         -                -
    Decrease (increase) in accrued interest receivable                30,877         (13,100)         (19,165)           (18,429)
   (Increase) in prepaid expenses and other
      current assets                                              (4,475,042)       (325,966)          (6,457)        (4,853,459)
    Decrease (increase) in other assets                              108,476         (70,082)         (58,842)          (119,166)
   (Decrease) increase in accounts payable and accrued
      liabilities related to operating activities                   (602,146)      1,398,554           60,199          1,055,098
                                                                ------------    ------------     ------------      ---------------
         Net cash (used in) operating activities                $(10,172,069)   $ (4,179,143)    $ (2,937,833)     $ (36,940,835)
                                                                 ============    ============     ============      ===============

</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, 1997
                                ----------------


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

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  ultra-high  resolution
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 Electronic Components Corp.
("SECC") and Shanghai  International  Trade and Developing  Corp.  ("SIT").  The
Company  also  is  continuing  its  research  and  development   activities  for
ultra-high  resolution video and color flat panel displays.  Recently,  SECC has
agreed  to  assign  its 35%  interest  in SCE to  Shanghai  Instrumentation  and
Electronics Holding Group Company ("SIEC") and SIT. After the assignments,  SIEC
will own 30%, SIT will own 15% and  CopyTele's  ownership  will remain at 55% of
SCE.  The  assignment  has been  approved by the Company as well as the board of
directors  of  SCE;  however,   final  approval  is  pending  with  the  Chinese
government.

Since its inception,  the Company has had no revenues. The Company has generated
limited sales to certain  distributors  as further  discussed in Note 2. Revenue
and gross profit recognition on these initial sales have been deferred. 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 Chairman of the Board,  the  President  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  technology,  and are important to the future
business and financial arrangements of the Company and SCE.

The Company has received  approximately  one hundred  forty-six patents from the
United States Patent and Trademark  Office and certain  foreign patent  offices,
expiring  at  various  dates  between  2005 and  2015,  related  to the  design,
structure and methods of  construction  of the flat panel,  methods of operating
the flat panel,  particle generation,  applications using the flat panel and new
applications for SCE's planned products.  At the present time, additional patent
applications  are  pending  with the United  States and certain  foreign  patent
offices.  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 also no  assurance  that,  if the  Company or SCE
successfully  develops other products,  such products will not infringe upon the
patents of others,  or that the Company and SCE will not have to obtain licenses
under patents of others.  The Company believes that the  aforementioned  patents
are  significant to the future  operations of the Company.  The Company has also
filed or is  planning to file  patent  applications  for its solid state and and
thin  film  video  color  flat  panel  display   technologies   currently  under
development.

                                      F-9

<PAGE>


During 1995,  the Company  signed a joint venture  contract (the "Joint  Venture
Contract")  with SECC 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.  SIEC will own 30% of SCE and SIT will own 15% as a result of
an assignment agreed to by the Company,  SECC and SIT. 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.  The parties to SCE have agreed in  principle  to increase the
investment to a maximum of $25 million,  depending upon the nature and extent of
business activities. It is contemplated that this 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.

The Company has produced a telephone based  multi-functional  telecommunications
product incorporating the Company's flat panel display, called E-Paper(TM),  and
associated proprietary hardware and software technology,  called MAGICOM(R)2000.
The product offers many features,  including  simultaneous  voice and electronic
handwriting  and  editing of  documents  over a single  public  telephone  line,
digital  voice mail  system,  full  duplex  digital  speakerphone,  sending  and
receiving  fax (full page  transmission  and  paperless  reception),  electronic
handwriting,  e-mail  communication,  data  transmission,  storage and  computer
interface, a scanner, as well as personal copying capabilities with the use of a
printer  developed by the  Company,  called  Magic  Printer,  and the ability to
transmit to a pager using a touch sensitive  keyboard  screen,  all in a compact
desktop  unit.  The inventory  levels at SCE at October 31, 1997 have  increased
significantly   over  1996  levels  in  order  to  prepare  for  the  production
requirements necessary to fulfill anticipated orders in fiscal 1998. The Company
believes that the inventory on hand, consisting primarily of component parts, at
SCE at  October  31,  1997  is  realizable  and  will be  used  in  fiscal  1998
production.  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.

                                      F-10

<PAGE>

The Company believes that without taking into consideration anticipated revenues
from sales of  MAGICOM(R)2000  and Magic Printer,  it will have sufficient funds
into  the  first  quarter  of  fiscal  2000 to  maintain  its  present  level of
development  efforts.  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 11 for a more complete  discussion  regarding
such waivers.

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

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

The Company plans to sell its products 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 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  are  recorded at cost,  which  approximates  fair  market  value at
October 31, 1997 and 1996, respectively.

         Marketable securities-
         ----------------------

Marketable  securities  at  October  31,  1997,  consist  of  an  investment  in
commercial paper. 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,  has been
classified as held-to-maturity as the Company has the ability and intent to hold
these  securities  until they mature.  As such, in accordance with SFAS No. 115,
the  investment is presented in the 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.  This  investment in commercial  paper will
mature within one year.

         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.

                                      F-11


<PAGE>


         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 an
unanimous or two-thirds vote of the Joint Venture board of directors.  Since the
Company has significant influence over the Joint Venture 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-
         -------------------------------------

Net(loss)  per share of common  stock has been  computed  based on the  weighted
average number of shares outstanding during the periods. Such amounts and shares
have been  restated for stock splits  declared  since  inception,  as more fully
described in Note 5. There are no common stock  equivalents that have a dilutive
effect.

         Recently issued accounting standards-
         -------------------------------------

In March 1997,  the Financial  Accounting  Standards  Board issued  Statement of
Financial  Accounting  Standards  ("SFAS") No. 128,  "Earnings Per Share".  This
statement  establishes standards for computing and presenting earnings per share
("EPS"),  replacing the  presentation of currently  required  primary EPS with a
presentation  of Basic EPS. For entities with complex  capital  structures,  the
statement  requires the dual  presentation  of both Basic EPS and Diluted EPS on
the face of the statement of operations.  Under this new standard,  Basic EPS is
computed  based on the  weighted  average  shares  outstanding  and excludes any
potential dilution; Diluted EPS reflects potential dilution from the exercise or
conversion  of  securities  into  common  stock and is similar to the  currently
required  fully diluted EPS. SFAS No. 128 is effective for financial  statements
issued for periods ending after December 15, 1997,  including  interim  periods,
and earlier  application  is not  permitted.  When adopted,  the Company will be
required to restate its EPS data for all prior  periods  presented.  The Company
does not expect the impact of the adoption of this  pronouncement to be material
to previously reported EPS amounts.

The Company has adopted all other recently issued accounting standards which are
applicable,  none of which were material to the financial position or results of
operations of the Company's financial statements.

                                      F-12


<PAGE>

         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.

(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, 1997 and 1996 and for the
three years ended October 31, 1997, is as follows:

<TABLE>
<CAPTION>

                            Condensed Balance Sheets                            1997              1996
                            ------------------------                            ----              ----
<S>                                                                    <C>                <C>             <C>
        Cash                                                              $     135,890     $     726,640
        Inventories                                                           4,830,461           240,823
        Other current assets                                                     31,988            25,586
        Land occupancy rights, net of amortization, fixed assets,
          net of depreciation and other non-current assets                    2,197,169         1,792,538
                                                                          -------------     -------------
                 Total Assets                                             $   7,195,508     $   2,785,587
                                                                          =============     =============

        Short term loans                                                  $     500,012     $      -
        Accounts payable and accrued liabilities                                504,269            47,387
        Due to CopyTele, Inc.                                                 4,303,652           240,823
        Capital                                                               1,887,575         2,497,377
                                                                          -------------     -------------
                 Total Liabilities and Capital                            $   7,195,508     $   2,785,587
                                                                          =============     =============

                       Condensed Statements of Operations                       1997             1996              1995
                       ----------------------------------                       ----             ----              ----

        Net Sales                                                         $      -          $      -         $      -
        Operating (Loss)                                                       (599,299)         (289,447)        (35,234)
        Interest Income (Expense)                                               (10,503)           19,211           2,847
                                                                          --------------    -------------    -------------
                 Net (Loss)                                               $    (609,802)    $    (270,236)   $    (32,387)
                                                                          ==============    ==============   =============
<FN>

The short term loans from a Chinese bank bear interest at a floating rate which
is currently approximately 7.4% per annum adjustable quarterly. These loans were
extended in December 1997 and will mature in May 1998 through August 1998. These
loans are secured by a land-use contract and equipment owned by SCE.

Included in accounts  payable and accrued  liabilities  at October 31, 1997,  is
approximately  $372,000 of advances paid by CopyTele,  Inc. towards the purchase
of products from SCE.

                                      F-13

<PAGE>

The cumulative net (loss)  incurred by SCE since its inception on April 10, 1995
is $(912,425).

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

</FN>
</TABLE>
    

         Second Joint Venture-
         ---------------------

The  Company  entered  into a letter of intent  in 1996 for the  formation  of a
second joint venture with SECC. In light of the  Company's  current  discussions
with SIEC regarding a possible  venture for the production and marketing of high
technology products, the Company has determined that it is unlikely that it will
pursue this second joint venture if a definative  agreement is ultimatly reached
with SIEC.

(4) Issuance of warrants:
    ---------------------

The Company in  conjunction  with sales of its common stock  issued  warrants to
members  of  the  immediate  families  of its  Chairman  of the  Board  and  its
President.  In addition,  the Company also issued warrants to an unrelated party
(which expired in May, 1994) who purchased  shares of the Company's common stock
and to its former Vice President - Finance. Information regarding these warrants
for the three years ended October 31, 1997, after  adjustments for anti-dilutive
provisions and applicable stock splits, is as follows:

<TABLE>
<CAPTION>
                                                                                                        Current Weighted
                                                                                                        Average Exercise
                                                                                      Shares            Price per Share
                                                                                      ------            ----------------
<S>                                                                             <C>                      <C>   
          Shares covered by warrants at October 31, 1994                             1,338,666              $  3.58
          Warrants exercised                                                          (274,600)             $  2.76
          Warrants expired                                                            (211,400)             $  2.91
                                                                                    ----------
          Shares covered by warrants at October 31, 1995                               852,666              $  3.90
          Warrants exercised                                                          (384,350)             $  2.83
          Warrants expired                                                             (53,200)             $  1.88
                                                                                   -----------
          Shares covered by warrants at October 31, 1996                               415,116              $  5.11
          Warrants exercised                                                           (98,820)             $  5.10
          Warrants expired                                                            (220,296)             $  5.09
                                                                                    ----------
          Shares covered by warrants at October 31, 1997                                96,000              $  5.10
                                                                                   ===========
</TABLE>

The exercise price of all of the  aforementioned  warrants  represented the fair
market value of the  underlying  common stock on the day  preceding  issuance of
such warrants.  These warrants are exercisable for five years commencing  ninety
days from the date of issuance.  As of October 31, 1997,  all of the warrants to
purchase shares of common stock issued and outstanding were exercisable.

                                      F-14

<PAGE>

(5) 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.

(6) 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. The Board of Directors currently has no definitive plan
or agreements for issuance of any of the preferred stock.

(7) 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  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.

Had compensation  cost for these plans been determined  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, 1997                October 31, 1996
                                                             ----------------                ----------------
<S>                                                          <C>                               <C>   
          Net Loss:       As Reported                            $(5,800,575)                    $(5,443,410)
                          Pro Forma                             $(15,706,850)                   $(12,755,762)

          Net Loss
          Per Share:      As Reported                                 $(0.10)                         $(0.10)
                          Pro Forma                                   $(0.27)                         $(0.23)


</TABLE>

                                      F-15

<PAGE>

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,  1997 and 1996,
respectively:  risk free interest  rates of 5.50% and 5.67%;  expected  dividend
yields of 0%; expected lives of 2.86 years;  and expected stock price volatility
of 73% and 66%. The weighted  average fair value of options  granted  under SFAS
No.  123 for the years  ended  October  31,  1997 and 1996 are $2.34 and  $2.43,
respectively.

In May 1987 the Company's  shareholders  approved a stock option plan (the "1987
Plan")  which,   after  giving   consideration  to  the  five-for-four  and  two
two-for-one stock splits described in Note 5 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  CopyTele,  Inc. 1993 Stock Option Plan (the "1993 Plan") by the
Company's  shareholders  in July 1993, the 1987 Plan was terminated with respect
to the grant of future options.

Information  regarding  the 1987 Plan for the three years ended October 31, 1997
is as follows:

<TABLE>
<CAPTION>
                                                                                                 Current Weighted
                                                                                                 Average Exercise
                                                                               Shares            Price Per Share
                                                                               ------            ---------------
           <S>                                                             <C>                       <C>    
            Shares Under Option at October 31, 1994                           3,375,720                 $3.48
            Exercised                                                        (1,262,000)                $2.67
            Canceled                                                           (345,600)                $3.78
                                                                           ------------
            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 and Exercisable at October 31, 1997             686,160                 $4.93
                                                                           ============                 =====
</TABLE>
<TABLE>
<CAPTION>

The following table summarizes  information  about stock options  outstanding at
October 31, 1997:
          

                                              Options Outstanding                                   Options  Exercisable
                         --------------------------------------------------------------     ----------------------------------

                                 Number          Weighted Average                                Number
             Range of         Outstanding           remaining           Weighted Average       Exercisable       Weighted Average
         Exercise Prices      at 10/31/97        Contractual Life        Exercise Price        at 10/31/97        Exercise Price
         ---------------      -----------        ----------------        ----------------      ------------      ----------------
<S>                           <C>                    <C>                     <C>                <C>                 <C>   
        $2.47 to $3.09            157,600               1.73                    $2.94             157,600              $2.94

        $4.19 to $5.63            508,560               4.92                    $5.47             508,560              $5.47

        $6.94                      20,000               4.21                    $6.94              20,000              $6.94


</TABLE>

                                      F-16

<PAGE>

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, 1997, 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.

Information  regarding  the 1993 Plan for the three years ended October 31, 1997
is as follows:

<TABLE>
<CAPTION>
                                                                                                   Current Weighted
                                                                                                   Average Exercise
                                                                                   Shares           Price Per Share
                                                                                   ------          ----------------
          <S>                                                                  <C>                    <C>    
              Shares Under Option at October 31, 1994                            4,462,000               $5.68
              Granted                                                            5,250,000               $3.30
              Exercised                                                           (698,800)              $2.74
              Canceled                                                            (120,000)              $4.28
                                                                                ------------
              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
                                                                                ============             =====
              Options Exercisable at October 31, 1997                            9,497,360               $5.30
                                                                                ============             =====

</TABLE>
                                      F-17


<PAGE>
<TABLE>
<CAPTION>
 
The following table summarizes  information  about stock options  outstanding at
October 31, 1997:
      

                                             Options Outstanding                                       Options Exercisable
                          -------------------------------------------------------------   -----------------------------------

                              Number          Weighted Average                                  Number
           Range of         Outstanding          remaining            Weighted Average        Exercisable        Weighted Average
       Exercise Prices      at 10/31/97       Contractual Life         Exercise Price         at 10/31/97         Exercise Price
       ---------------      -----------       -----------------       ----------------       -------------       ----------------
<S>                       <C>                     <C>                     <C>                 <C>                   <C>    
      $2.81 to $3.94         1,334,000               7.36                    $3.27               1,334,000              $3.27

      $4.38 to $6.38         8,086,360               8.22                    $5.06               6,043,360              $5.18

      $6.88 to $8.50         2,120,000               5.70                    $6.93               2,120,000              $6.93

</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,  1997,  3,390,000
options were available for future grants under the 1993 Plan.

In  November  1997,  the  Company  granted  1,360,000  options to  purchase  the
Company's common stock pursuant to the 1993 Plan.

(8) 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 10,000 square feet and expires on November 30, 1998. The lease now
contains base rentals of approximately $166,000 per annum, as well as escalation
clauses for increases in certain  operating  costs, for a total cost aggregating
approximately $173,000 per annum.

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.

Rent expense for the years ended October 31, 1997, 1996, 1995 and for the period
from November 5, 1982  (inception)  through  October 31, 1997 was  approximately
$269,000, $215,000, $130,000 and $1,824,000, 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 $34,000.
                                    
                                      F-18

<PAGE>

(9) 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
$102,000,  $70,000,  $50,000 and $545,000 for the years ended  October 31, 1997,
1996 and 1995 and for the period from the inception of the plan through October
31, 1997, respectively, has been accrued and funded on a current basis.

(10) Income taxes:
     -------------

At October  31,  1997,  the Company  had tax net  operating  loss and tax credit
carryforwards   of  approximately   $61,077,000  and  $1,499,000   respectively,
available,  within  statutory limits (expiring at various dates between 1998 and
2012),  to offset 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, 1997 were  deductions for tax purposes of option  holders' income related to
stock option exercises aggregating  approximately  $900,000. 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  $56,278,000  and  $114,000  respectively,  at October  31,  1997,
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
1998 and 2012 and the tax credit carryforwards expire between 1999 and 2007.

Deferred  tax  benefits at October 31, 1997 and 1996,  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 $28,295,000 and $25,308,000, respectively.

During the period from November 5, 1982  (inception)  through  October 31, 1997,
the Company incurred no Federal and no material State income taxes.

(11) 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.

                                      F-19

<PAGE>

Four other  individuals,  including an officer and senior level personnel,  then
employed at the Company, waived any and all rights to receive salary and related
pension  benefits for the period 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 three senior level
personnel  continued  to waive such  rights  commencing  in January  1993 for an
undetermined  period of time.  Since February  1993, one additional  employee is
also currently waiving such salary and benefit rights for an undetermined period
of time. The aggregate annual expense 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.


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