SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

                QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                  For the quarterly period ended July 31, 2009

                         Commission file number 0-11254


                                 COPYTELE, INC.
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

                Delaware                                11-2622630
    ---------------------------------              ---------------------
     (State or other jurisdiction of                  (I.R.S. Employer
      incorporation or organization)                 Identification no.)



         900 Walt Whitman Road
              Melville, NY                                11747
--------------------------------------------------------------------------------
(Address of principal executive offices)                (Zip Code)

                                 (631) 549-5900
--------------------------------------------------------------------------------
              (Registrant's telephone number, including area code)


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

Indicate by check mark whether the registrant has submitted  electronically  and
posted on its corporate Web site, if any, every  Interactive  Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of
this chapter)  during the  preceding 12 months (or for such shorter  period that
the registrant was required to submit and post such files).
                                      Yes   X           No
                                          -----            -----

Indicate by check mark whether the registrant is a large  accelerated  filer, an
accelerated filer, a non-accelerated  filer, or a smaller reporting company. See
the definitions of "large accelerated  filer,"  "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.

 Large accelerated filer [  ]                     Accelerated filer [ X ]
 Non-accelerated filer  [  ] (Do not check if a   Smaller Reporting Company [  ]
                             smaller reporting
                             company)

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

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of the latest practicable date.

On September 3, 2009,  the  registrant  had  outstanding  142,976,137  shares of
Common Stock, par value $.01 per share,  which is the registrant's only class of
common stock.

<PAGE>

<TABLE>
<CAPTION>

                                TABLE OF CONTENTS
                                -----------------

<S>      <C>                                                                             <C>
PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements.

         Condensed Consolidated Balance Sheets as of July 31, 2009 (Unaudited)
             and October 31, 2008                                                         3

         Condensed Consolidated Statements of Operations (Unaudited) for the nine
             months ended July 31, 2009 and 2008                                          4

         Condensed Consolidated Statements of Operations (Unaudited) for the three
             months ended July 31, 2009 and 2008                                          5

         Condensed Consolidated Statement of Shareholders' Equity (Unaudited)
             for the nine months ended July 31, 2009                                      6

         Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine
             months ended July 31, 2009 and 2008                                          7

         Notes to Condensed Consolidated Financial Statements (Unaudited)                 8 - 26

Item 2.  Management's Discussion and Analysis of Financial Condition and
             Results of Operations.                                                       27 - 42

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.                      42

Item 4.  Controls and Procedures.                                                         42


PART II. OTHER INFORMATION

Item 1A. Risk Factors.                                                                    43

Item 6.  Exhibits.                                                                        43

         SIGNATURES                                                                       43
</TABLE>


                                       2
<PAGE>

                          PART I. FINANCIAL INFORMATION
                          -----------------------------

Item 1.  Financial Statements.
         ---------------------
<TABLE>
<CAPTION>

                                          COPYTELE, INC. AND SUBSIDIARIES
                                          -------------------------------
                                       CONDENSED CONSOLIDATED BALANCE SHEETS
                                       -------------------------------------

                                                                                     (Unaudited)
                                                                                   ----------------
                                                                                       July 31,         October 31,
                                      ASSETS                                             2009               2008
                                      ------                                       ----------------   ----------------
 <S>                                                                                      <C>                <C>
CURRENT ASSETS:
   Cash and cash equivalents                                                         $     320,832      $     478,599
   Short-term investments in certificates of deposit and U.S. government securities      1,649,751          1,442,484
   Accounts receivable, net of allowance for doubtful accounts of $206,000 and
       $223,000, respectively                                                               12,090            103,000
   Inventories                                                                             138,477            178,144
   Prepaid expenses and other current assets                                                58,196             54,348
                                                                                   ----------------   ----------------
                    Total current assets                                                 2,179,346          2,256,575

INVESTMENT in U. S. government securities, noncurrent, at amortized cost                         -            749,711

INVESTMENT in Videocon Industries Limited global depository receipts,
  at fair value                                                                          5,654,294          3,619,945

INVESTMENT in Digital Info Security Co. Inc. common stock, at fair value                   220,000            841,800

PROPERTY AND EQUIPMENT, net                                                                 23,679             29,838

                                                                                   ----------------   ----------------
                                                                                     $   8,077,319      $   7,497,869
                                                                                   ================   ================

                       LIABILITIES AND SHAREHOLDERS' EQUITY
                       ------------------------------------
CURRENT LIABILITIES:
   Accounts payable                                                                  $     103,551      $     384,896
   Accrued liabilities                                                                     108,461             69,364
   Deferred revenue, non-refundable license fee                                                  -            313,332
                                                                                   ----------------   ----------------
                    Total current liabilities                                              212,012            767,592

LOAN PAYABLE TO RELATED PARTY                                                            5,000,000          5,000,000

SHAREHOLDERS' EQUITY:
   Preferred stock, par value $100 per share; 500,000 shares authorized; no
      shares issued or outstanding                                                               -                  -
   Common stock, par value $.01 per share; 240,000,000 shares authorized;
        141,817,996 and 132,497,881 shares issued and outstanding, respectively          1,418,180          1,324,979
   Additional paid-in capital                                                          112,841,759        109,348,894
   Loan receivable from related party                                                   (5,000,000)        (5,000,000)
   Accumulated deficit                                                                 (95,692,966)       (91,788,341)
   Accumulated other comprehensive loss                                                (10,701,666)       (12,155,255)
                                                                                   ----------------   ----------------
                                                                                         2,865,307          1,730,277
                                                                                   ----------------   ----------------
                                                                                     $   8,077,319      $   7,497,869
                                                                                   ================   ================




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

                                       3
<PAGE>

<TABLE>
<CAPTION>

                                 COPYTELE, INC. AND SUBSIDIARIES
                                 -------------------------------
                   CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
                   -----------------------------------------------------------


                                                                          For the Nine Months Ended
                                                                                  July 31,
                                                                      ---------------------------------
                                                                           2009              2008
                                                                      ---------------   ---------------
<S>      <C>                                                                <C>                <C>
NET REVENUE
         Revenue from sales of encryption products, net                 $     71,305      $    329,710
         Revenue from display engineering services, net                       52,000                 -
         Display technology license fee                                      813,332           770,000
                                                                      ---------------   ---------------
                  Total net revenue                                          936,637         1,099,710
                                                                      ---------------   ---------------

COST AND OPERATING EXPENSES
         Cost of encryption products sold                                     40,384            84,881
         Cost of display engineering services                                 18,200                 -
         Research and development expenses                                 2,532,922         3,374,270
         Selling, general and administrative expenses                      2,295,653         3,052,585
                                                                      ---------------   ---------------
                  Total cost and operating expenses                        4,887,159         6,511,736
                                                                      ---------------   ---------------

LOSS FROM OPERATIONS                                                      (3,950,522)       (5,412,026)

DIVIDEND INCOME                                                               29,468           130,887

INTEREST INCOME                                                               16,429            25,297
                                                                      ---------------   ---------------

 NET LOSS                                                               $ (3,904,625)     $ (5,255,842)
                                                                      ===============   ===============


PER SHARE INFORMATION:
Net loss per share:
         Basic and Diluted                                              $      (0.03)     $      (0.04)
                                                                      ===============   ===============

Weighted average shares used in computing net loss per share:
         Basic and Diluted                                               137,191,065       128,798,027
                                                                      ===============   ===============


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

                                       4
<PAGE>

<TABLE>
<CAPTION>

                                 COPYTELE, INC. AND SUBSIDIARIES
                                 -------------------------------
                   CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
                   -----------------------------------------------------------

                                                                          For the Three Months Ended
                                                                                   July 31,
                                                                      ----------------------------------
                                                                           2009               2008
                                                                      ---------------   ----------------
 <S>     <C>                                                                <C>                <C>
NET REVENUE
         Revenue from sales of encryption products, net                 $     49,765       $    112,130
         Revenue from display engineering services, net                            -                  -
         Display technology license fee                                      250,000            770,000
                                                                      ---------------   ----------------
                  Total net revenue                                          299,765            882,130
                                                                      ---------------   ----------------

COST AND OPERATING EXPENSES
         Cost of encryption products sold                                     34,866             34,711
         Cost of display engineering services                                      -                  -
         Research and development expenses                                   649,092            930,266
         Selling, general and administrative expenses                        806,108            658,535
                                                                      ---------------   ----------------
                  Total cost and operating expenses                        1,490,066          1,623,512
                                                                      ---------------   ----------------

LOSS FROM OPERATIONS                                                      (1,190,301)          (741,382)

DIVIDEND INCOME                                                                    -                  -

INTEREST INCOME                                                                4,537             12,216
                                                                      ---------------   ----------------

 NET LOSS                                                               $ (1,185,764)      $   (729,166)
                                                                      ===============   ================


PER SHARE INFORMATION:
Net loss per share:
         Basic and Diluted                                              $      (0.01)      $      (0.01)
                                                                      ===============   ================

Weighted average shares used in computing net loss per share:
         Basic and Diluted                                               140,425,848        130,406,487
                                                                      ===============   ================

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

                                       5
<PAGE>

<TABLE>
<CAPTION>
                                                COPYTELE, INC. AND SUBSIDIARIES
                                                -------------------------------
                                   CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                                   --------------------------------------------------------
                                         FOR THE NINE MONTHS JULY 31, 2009 (UNAUDITED)
                                         ---------------------------------------------


                                                                                  Loan                    Accumulated
                                               Common Stock       Additional   Receivable                    Other         Total
                                         ----------------------    Paid-in        From       Accumulated Comprehensive Shareholders'
                                            Shares    Par Value    Capital    Related Party    Deficit        Loss        Equity
                                         ----------- ---------- ------------ ------------- ------------- ------------- -------------
<S>                                          <C>         <C>         <C>           <C>           <C>           <C>           <C>
BALANCE, October 31, 2008                132,497,881 $1,324,979 $109,348,894  $(5,000,000) $(91,788,341) $(12,155,255)  $ 1,730,277

  Stock option compensation to employees           -          -      660,152            -             -             -       660,152
  Stock option compensation to consultants         -          -        9,918            -             -             -         9,918
  Common stock issued upon exercise of
   stock options under stock option plans  4,150,000     41,500    1,206,600            -             -             -     1,248,100
  Common stock issued to employees
   pursuant to stock incentive plans       5,017,790     50,178    1,570,745            -             -             -     1,620,923
  Common stock issued to consultants
   pursuant to stock incentive plans         152,325      1,523       45,450            -             -             -        46,973
  Unrealized gain on investment in
   Videocon Industries Limited
   global depository receipts                      -          -            -            -             -     2,034,349     2,034,349
  Unrealized (loss) on investment in
    Digital Info Security Co., Inc.                -          -            -            -             -      (580,760)     (580,760)
  Net loss                                         -          -            -            -    (3,904,625)            -    (3,904,625)
                                         ----------- ---------- ------------ ------------- ------------- ------------- -------------

BALANCE, July 31, 2009                   141,817,996 $1,418,180 $112,841,759  $(5,000,000) $(95,692,966) $(10,701,666)  $ 2,865,307
                                         =========== ========== ============ ============= ============= ============= =============


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

                                       6
<PAGE>

<TABLE>
<CAPTION>

                                     COPYTELE, INC. AND SUBSIDIARIES
                                     --------------------------------
                        CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
                        -----------------------------------------------------------

                                                                                   For the Nine Months Ended
                                                                                           July 31,
                                                                              -----------------------------------
                                                                                    2009                2008
                                                                              ---------------   -----------------
<S>                                                                                  <C>                 <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Payments to suppliers, employees and consultants                             $ (2,387,870)      $  (2,545,210)
   Cash received from encryption and display products and services                   111,835             122,310
   Cash received from display technology license fees                                250,000           2,000,000
   Dividend received                                                                  29,468             130,887
   Interest received                                                                  17,663              25,297
                                                                              ---------------   -----------------
           Net cash used in operating activities                                  (1,978,904)           (266,716)
                                                                              ---------------   -----------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Disbursements to acquire Videocon Industries Limited global depository
     receipts                                                                              -         (16,200,000)
   Disbursements to acquire long-term investments (U.S. government securities)             -            (999,538)
   Disbursements to acquire short-term investments (certificates of deposit
     And U.S. government securities)                                                (899,866)         (1,881,321)
   Proceeds from maturities of short-term investments (certificates of deposit
     And U.S. government securities)                                               1,443,000             841,000
   Proceeds from sale of Digital Info Security Co., Inc. common stock                 31,838                   -
   Payments for purchases of property and equipment                                   (1,935)            (12,354)
                                                                              ---------------   -----------------
           Net cash provided by (used in) investing activities                       573,037         (18,252,213)
                                                                              ---------------   -----------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from sale of common stock to Videocon Industries Limited                       -          16,200,000
   Issuance of loan receivable from related party                                          -          (5,000,000)
   Proceeds from issuance of loan payable to related party                                 -           5,000,000
   Proceeds from exercise of stock options                                         1,248,100           2,107,305
                                                                              ---------------   -----------------
           Net cash provided by financing activities                               1,248,100          18,307,305
                                                                              ---------------   -----------------

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                (157,767)           (211,624)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                     478,599             669,141
                                                                              ---------------   -----------------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                                      $    320,832       $     457,517
                                                                              ===============   =================

RECONCILIATION OF NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES:
   Net loss                                                                     $ (3,904,625)      $  (5,255,842)
   Stock option compensation to employees                                            660,152           2,388,387
   Stock option compensation to consultants                                            9,918             213,588
   Stock awards granted to employees pursuant to stock incentive plans             1,620,923           1,437,284
   Stock awards granted to consultants pursuant to stock incentive plans              46,973              92,363
   Provision for doubtful accounts                                                   103,000             120,000
   Provision for (recovery of) slow moving inventory reserve                          14,482             (16,440)
   Depreciation and amortization                                                       8,094               7,809
   Amortized discount on investments (U.S. government securities)                       (690)                  -
   Loss on sale of Digital Info Security Co., Inc. common stock                        9,202                   -
   Change in operating assets and liabilities:
      Accounts receivable                                                            (12,090)           (207,400)
      Inventories                                                                     25,185              23,062
      Prepaid expenses and other current assets                                       (3,848)             14,936
      Accounts payable and accrued liabilities                                      (242,248)           (314,463)
      Deferred revenue                                                              (313,332)          1,230,000
                                                                              ---------------   -----------------
           Net cash used in operating activities                                $ (1,978,904)     $     (266,716)
                                                                              ===============   =================


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

                                       7
<PAGE>


                         COPYTELE, INC. AND SUBSIDIARIES
                         -------------------------------

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
              ----------------------------------------------------

                                   (UNAUDITED)
                                   -----------

1.       BUSINESS AND FUNDING
         --------------------

Description of Business and Basis of Presentation
-------------------------------------------------

         Our principal operations are the development,  production and marketing
of thin, flat, low-voltage phosphor display technology, the development of thin,
flat,  low-power passive display technology and the development,  production and
marketing of  multi-functional  encryption  products  that  provide  information
security  for   domestic   and   international   users  over   virtually   every
communications media.

         The condensed consolidated financial statements are unaudited, and have
been prepared in accordance with accounting principles generally accepted in the
United States of America ("US GAAP") for interim financial  reporting,  and with
the rules and  regulations of the Securities and Exchange  Commission  regarding
interim  financial  reporting.  Accordingly,  they  do  not  include  all of the
information and footnotes required by US GAAP for complete financial statements.
The information  contained herein is for the nine-month and three-month  periods
ended  July  31,  2009  and  2008.  In  management's  opinion,  all  adjustments
(consisting only of normal recurring adjustments considered necessary for a fair
presentation  of the results of operations  for such periods) have been included
herein.  Certain  prior year  amounts  have been  reclassified  to conform  with
current year presentation.

         The condensed consolidated financial statements include the accounts of
CopyTele,  Inc. and its wholly owned subsidiaries,  CopyTele  International Ltd.
("CopyTele  International") and CopyTele Marketing Inc. ("CopyTele  Marketing").
CopyTele  International and CopyTele  Marketing were incorporated in the British
Virgin  Islands  in  July  2007  and  September  2007,  respectively.   CopyTele
International  was formed for the  purpose  of holding an  investment  in global
depository   receipts  of  Videocon   Industries   Limited,  an  Indian  company
("Videocon").  As of  July  31,  2009,  CopyTele  Marketing  was  inactive.  All
significant intercompany transactions have been eliminated in consolidation.  In
preparing these condensed consolidated  financial statements,  we have evaluated
events  and  transactions  for  potential   recognition  or  disclosure  through
September 9, 2009, the date the condensed consolidated financial statements were
issued.

         The  results  of  operations  for  interim  periods  presented  are not
necessarily  indicative  of the results  that may be expected for a full year or
any interim  period.  Reference  is made to the audited  consolidated  financial
statements and notes thereto  included in our Annual Report on Form 10-K for the
fiscal  year  ended  October  31,  2008,  for more  extensive  disclosures  than
contained in these condensed consolidated financial statements.

         On  November  1, 2008,  we adopted  Statement  of  Financial  Standards
("SFAS") No. 157,  "Fair Value  Measurement"  ("SFAS No.  157"),  except for non
financial  assets and  liabilities  measured  at fair  value on a  non-recurring

                                       8
<PAGE>

basis,  which will be  effective  for us November 1, 2009.  SFAS No. 157 defines
fair value,  establishes a framework for  measuring  fair value under  generally
accepted  accounting  principles,  and  expands  disclosures  about  fair  value
measurements. In accordance with SFAS No. 157, we have categorized our financial
assets, based on the priority of the inputs to the valuation  technique,  into a
three-level  fair  value  hierarchy  as set  forth  below.  We do not  have  any
financial  liabilities  that are  required  to be  measured  at fair  value on a
recurring  basis. If the inputs used to measure the financial  instruments  fall
within different  levels of the hierarchy,  the  categorization  is based on the
lowest  level input that is  significant  to the fair value  measurement  of the
instrument.

         Financial  assets recorded in the accompanying  condensed  consolidated
balance sheets are categorized  based on the inputs to the valuation  techniques
as follows:

         Level 1 - Financial assets whose values are based on unadjusted  quoted
         prices for identical assets or liabilities in an active market which we
         have the ability to access at the  measurement  date (examples  include
         active  exchange-traded  equity securities and most U.S. Government and
         agency securities).

         Level 2 -  Financial  assets  whose  values are based on quoted  market
         prices in markets where trading occurs infrequently or whose values are
         based on quoted prices of instruments with similar attributes in active
         markets. We do not currently have any Level 2 financial assets.

         Level 3 -  Financial  assets  whose  values  are  based  on  prices  or
         valuation techniques that require inputs that are both unobservable and
         significant to the overall fair value measurement. These inputs reflect
         management's own assumptions about the assumptions a market participant
         would use in pricing the asset.  We do not  currently  have any Level 3
         financial assets.

         As of July 31,  2009,  our  Level 1  financial  assets  consist  of the
         following:

                                                                     Fair Value
                                                                       as of
                                                                   July 31, 2009
                                                                  --------------
           Money market funds - Cash and cash equivalents         $     45,934
           U.S. government securities - Short-term investments       1,649,751
           Videocon Industries Limited global depository receipts    5,654,294
           Digital Info Security Co. Inc. common stock                 220,000

         The  adoption  of SFAS No.  157 did not have a  material  effect on our
condensed consolidated  financial statements.  In February 2007, The FASB issued
SFAS No.  159,  "The Fair  Value  Option  for  Financial  Assets  and  Financial
Liabilities"  (SFAS No.  159"),  to permit all  entities to choose to elect,  at
specified  election dates,  to measure  eligible  financial  instruments at fair
value. An entity shall report unrealized gains and losses on items for which the
fair value  option has been  elected in  earnings at each  subsequent  reporting
date,  and  recognize  upfront  costs  and fees to those  items in  earnings  as

                                       9
<PAGE>

incurred and not deferred.  SFAS No. 159 became  effective for us as of November
1,  2008.  As we  did  not  elect  the  fair  value  option  for  our  financial
instruments,  the  adoption  of this  standard  did not  have an  impact  on our
condensed consolidated financial statements.

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

         From our inception,  we have met our liquidity and capital  expenditure
needs  primarily  through the proceeds from sales of common stock in our initial
public  offering,  in private  placements,  upon exercise of warrants  issued in
connection with the private placements and initial public offering, and upon the
exercise of stock  options.  In addition,  commencing  in the fourth  quarter of
fiscal 1999, we have generated cash flows from sales of our encryption  products
and services  and in May 2008  commenced  receiving  license fees related to our
display  technology from Videocon  pursuant to the License Agreement (as defined
below).

         During the nine months ended July 31, 2009,  our cash used in operating
activities  was  approximately  $1,979,000.   This  resulted  from  payments  to
suppliers,  employees and  consultants of  approximately  $2,388,000,  which was
offset by cash of approximately  $112,000  received from collections of accounts
receivable  related  to sales of  encryption  products  and  display  technology
engineering  services,  $250,000 received from display technology licensing fee,
approximately  $18,000 of interest income and approximately  $29,000 of dividend
income  received.  Our cash  provided by  investing  activities  during the nine
months  ended July 31, 2009 was  approximately  $573,000,  which  resulted  from
$1,443,000  received upon  maturities of  short-term  investments  consisting of
certificates of deposit and U.S. government securities and approximately $32,000
received upon the sale of Digital Info Security Co. Inc. common stock, offset by
a purchase of short-term U.S.  government  securities of approximately  $900,000
and  purchases  of  approximately  $2,000 of  equipment.  Our cash  provided  by
financing   activities   during  the  nine  months   ended  July  31,  2009  was
approximately $1,248,000, which resulted from cash received upon the exercise of
stock options. Accordingly, during the nine-months ended July 31, 2009, our cash
and cash equivalents decreased by approximately  $158,000 and our short-term and
non-current   investments  in  certificates  of  deposit  and  U.S.   government
securities  decreased by  approximately  $542,000.  As a result,  our cash, cash
equivalents,  and  investments in  certificates  of deposit and U.S.  government
securities  at  July  31,  2009  decreased  to  approximately   $1,971,000  from
approximately  $2,671,000 at the end of fiscal 2008. Our operating cash accounts
are maintained at  FDIC-insured  banks.  Our bank accounts and  certificates  of
deposit are maintained within FDIC coverage limits.

         Total employee  compensation  expense for the nine-month  periods ended
July  31,  2009  and  2008  was   approximately   $2,811,000   and   $4,340,000,
respectively,  and for the three-month  periods ended July 31, 2009 and 2008 was
approximately $889,000 and $1,053,000, respectively. During the nine-month ended
July 31, 2009 and 2008, a significant portion of employee compensation consisted
of the  issuance  of  stock  and  stock  options  to  employees  in lieu of cash
compensation.  We recorded  stock-based  compensation expense for the nine-month
periods ended July 31, 2009 and 2008 of approximately $1,621,000 and $1,437,000,
respectively,  and for the  three-month  periods ended July 31, 2009 and 2008 of
approximately  $449,000 and $396,000,  respectively,  for shares of common stock
issued to  employees.  We  recorded  stock-based  compensation  expense  for the
nine-month  periods ended July 31, 2009 and 2008 of  approximately  $660,000 and
$2,388,000,  respectively,  and for the three-month  periods ended July 31, 2009

                                       10
<PAGE>

and 2008 of approximately $259,000 and $479,000, respectively,  related to stock
options  granted to employees and  directors.  It is  managements'  intention to
continue to compensate employees by issuing stock or stock options.

         We believe that our existing  cash,  cash  equivalents,  investments in
certificates of deposit,  investments in U.S. government securities and accounts
receivable,  together  with cash flows  from  expected  sales of our  encryption
products and revenue  relating to our thin, flat,  low-voltage  phosphor display
technology,  including  license  fees and  royalties  from  Videocon,  and other
potential sources of cash flows, will be sufficient to enable us to continue our
marketing,  production,  and research and development  activities.  However, our
projections of future cash needs and cash flows may differ from actual  results.
If current cash and cash that may be generated from operations are  insufficient
to  satisfy  our  liquidity  requirements,  we may seek to sell  debt or  equity
securities  or to  obtain  a line  of  credit.  The  sale of  additional  equity
securities or convertible debt could result in dilution to our stockholders.  It
is also  management's  intention to continue to compensate  employees by issuing
stock or stock  options.  We  currently  have no  arrangements  with  respect to
additional financing. There can be no assurance that we will generate sufficient
revenues in the future (through sales, license fees and royalties, or otherwise)
to satisfy our liquidity  requirements  or sustain future  operations,  that our
production  capabilities  will be  adequate,  that  other  products  will not be
produced by other  companies  that will render our  products  obsolete,  or that
other sources of funding would be available, if needed, on favorable terms or at
all. If we cannot obtain such funds if needed, we would need to curtail or cease
some or all of our operations.

Related Party Transactions with Videocon Industries Limited
-----------------------------------------------------------

         In November  2007, we entered into a Technology  License  Agreement (as
amended in May 2008, the "License  Agreement") with Videocon.  Under the License
Agreement, we provide Videocon with a non-transferable, worldwide license of our
technology  for  thin,  flat,  low  voltage  phosphor  displays  (the  "Licensed
Technology"),  for Videocon (or a Videocon  Group company) to produce and market
products,   including  TVs,   incorporating   displays  utilizing  the  Licensed
Technology.  Under the License Agreement,  we expect to receive a license fee of
$11 million from Videocon, payable in installments over a 27 month period, which
commenced in May 2008, and an agreed upon royalty from Videocon based on display
sales by Videocon.  In April 2008,  the government of India approved the License
Agreement.  As of July 31, 2009, we have received aggregate license fee payments
of $2,500,000.

         Under the  License  Agreement,  Videocon,  with our  assistance,  is to
provide the design and process engineering  required to produce display modules,
and also is to provide all  tooling and  fixtures  required  for the  production
process.  As part of our assistance to Videocon to produce such display modules,
we have been  exchanging  information  with Videocon  employees so that they may
understand the CopyTele technology.  We are currently  cooperating with Videocon
to jointly  implement the CopyTele  technology  prior to production,  to produce
prototypes  of such  modules.  Videocon  is  utilizing  its  display  processing
technology and facilities to continue to produce various  configurations  of our
display matrix to optimize its performance.  The matrix is the main component of
our  display,  since it contains  the  structure  to  accommodate  our  electron
emission  technology  and the color  phosphors  that are used to illuminate  our
display.  CopyTele and Videocon are also  working  together to  incorporate  two
other versions of our display technology.  Improvements to the technology,  when
and if available, are to be jointly owned by CopyTele and Videocon.  Significant

                                       11
<PAGE>

improvements,  as defined in the  License  Agreement,  may result in  additional
compensation to CopyTele.  CopyTele has determined that any  improvements  which
are not significant in nature are inconsequential.

         The arrangement  with Videocon also provides for each of the parties to
designate an advisor to the other party's Board of Directors. The purpose of the
advisor to the Board of  Directors  is to provide  knowledge to the Board of the
display market and to apprise the Board of developments in this market. CopyTele
believes this to be inconsequential to the operation of the License Agreement.

         Under the  License  Agreement  we continue to have the right to produce
and market products utilizing our technology. We also continue to have the right
to utilize Volga Svet Ltd., a Russian  display company that we have been working
with for more than eleven years  ("Volga"),  and an Asian  company that CopyTele
has been working with for more than five years, to produce and market,  products
utilizing  the  Licensed   Technology.   Additional  licenses  of  the  Licensed
Technology  to third  parties  require  the  joint  agreement  of  CopyTele  and
Videocon.

         In November 2007, we also entered into a Share  Subscription  Agreement
(the  "Subscription  Agreement")  with Mars  Overseas  Limited,  an affiliate of
Videocon ("Mars  Overseas").  Under the  Subscription  Agreement,  Mars Overseas
purchased  20,000,000 shares of our common stock (the "CopyTele Shares") from us
for an  aggregate  purchase  price  of  $16,200,000,  which  was  determined  by
management to approximate fair market value. The purchase of the CopyTele Shares
pursuant to the Subscription Agreement closed in November 2007.

         Also  in  November  2007,  our  wholly-owned   British  Virgin  Islands
subsidiary,  CopyTele International,  entered into a GDR Purchase Agreement (the
"Purchase Agreement") with Global EPC Ventures Limited ("Global"),  for CopyTele
International to purchase from Global 1,495,845  global  depository  receipts of
Videocon  (the  "Videocon  GDRs"),  acquired by Global on the open market for an
aggregate  purchase price of $16,200,000,  which was determined by management to
approximate fair market value.  Videocon's global depository receipts are listed
on the Luxembourg Stock Exchange.  The purchase of the Videocon GDRs pursuant to
the Purchase Agreement closed in December 2007.

         For the  purpose  of  effecting  a lock  up of the  Videocon  GDRs  and
CopyTele Shares  (collectively,  the  "Securities") for a period of seven years,
and  therefore  restricting  both  parties  from  selling  or  transferring  the
Securities during such period,  CopyTele International and Mars Overseas entered
into two Loan and Pledge  Agreements in November  2007. The Videocon GDRs are to
be held as  security  for a loan in  principal  amount of  $5,000,000  from Mars
Overseas to CopyTele  International,  and the CopyTele Shares are similarly held
as  security  for a  loan  in  principal  amount  of  $5,000,000  from  CopyTele
International  to Mars Overseas.  The loans are for a term of seven years and do
not bear interest.  Prepayment of each loan requires payment of a premium by the
borrower and, in any event, the lien on the Securities securing the prepaid loan
will not be released  until the seventh  anniversary of the closing of the loans
and the  prepaid  amount  would be held in  escrow  until  such  date.  The loan
agreements  required the parties to enter into an escrow  agreement  under which
the parties  deposited the  Securities  with an escrow agent for the term of the
loans.  The loan agreements  also provide for customary  events of default which

                                       12
<PAGE>

may result in forfeiture of the Securities by the defaulting party. The loan and
escrow agreements also provide for the transfer to the respective parties,  free
and  clear  of  any   encumbrances   under  the   agreements,   any   dividends,
distributions, rights or other proceeds or benefits received by the escrow agent
in respect of the  Securities.  The  closing of the loans took place in December
2007.

         Revenue Recognition
         -------------------

         Revenues are recorded when all four of the following  criteria are met:
(i) persuasive evidence of an arrangement exists; (ii) delivery has occurred and
title has  transferred  or services have been  rendered;  (iii) our price to the
buyer is fixed or determinable; and (iv) collectibility is reasonably assured.

         We have  assessed the guidance of Emerging  Issues Task Force No. 00-21
"Revenue  Arrangements with Multiple  Deliverables"  ("EITF 00-21") to determine
whether  multiple  deliverables  in  our  arrangement  with  Videocon  represent
separate units of accounting. Under the License Agreement,  CopyTele is required
to: (a)  disclose to Videocon  the Licensed  Technology  and provide  reasonable
training of Videocon  personnel;  (b) jointly cooperate with Videocon to produce
prototypes  prior to  production;  and (c)  assist  Videocon  in  preparing  for
production.  CopyTele has determined that these  performance  obligations do not
have value to  Videocon on a  standalone  basis,  as defined in EITF 00-21,  and
accordingly they do not represent separate units of accounting.

         We have established objective and reasonable evidence of fair value for
the royalty to be earned during the  production  period based on analysis of the
pricing for similar agreements. Accordingly, we have determined that the license
fee of $11 million to be paid during the pre-production  period and royalties on
product sales reflects the  established  fair value for these  deliverables.  We
will  recognize the $11 million  license fee over the  estimated  period that we
expect to provide  cooperation and assistance during the pre-production  period,
limiting the revenue  recognized on a cumulative basis to the aggregate  license
fee payments received from Videocon. We will assess at each reporting period the
progress and assistance provided and will continue to evaluate the period during
which this fee will be recognized.  License fee payments  received from Videocon
which are in excess of the amounts  recognized  as revenue  ($-0- as of July 31,
2009 and  approximately  $313,000  as of  October  31,  2008)  are  recorded  as
non-refundable  deferred  revenue  on the  accompanying  condensed  consolidated
balance sheets.

         During  the  quarter  ended  April 30,  2009,  we  agreed to  reimburse
Videocon  $250,000 for  engineering  services  related to another version of our
display  technology  and we modified the payment terms from Videocon  during the
quarter.  The license fee revenue recognized during the three months ended April
30, 2009 of $250,000  represented an offset against  amounts due to Videocon for
the aforementioned engineering services, in lieu of a cash payment. In addition,
in June 2009, we received a license fee payment from Videocon of $250,000, which
was due during the quarter ended April 30, 2009 pursuant to the modified payment
terms, which was recognized as license fee revenue during the three months ended
July 31, 2009.  In August 2009,  we received an  additional  license fee payment
from Videocon of $100,000,  which was due during the quarter ended July 31, 2009
pursuant to the modified  payment terms.  However,  the total license fee of $11
million remains  payable over the 27 month period,  which commenced in May 2008,

                                       13
<PAGE>

and  Videocon's   obligations   with  respect  to  production,   and  CopyTele's
assistance, under the License Agreement remain unaffected.

Subsequent Events
-----------------

         In August 2009,  we entered into a  development  agreement  with a U.S.
company to provide engineering and implementation support for the development of
our patented  extremely low power passive monochrome or color display for use in
portable devices. This company has experience in the field involving portions of
our display technology.  Our proprietary extremely low power display that we are
developing,   in  conjunction  with  the  U.S.   company,   incorporates  a  new
micro-matrix substrate. The display is designed to have bi-stability capability,
and uses low power  when an image is being  created.  Once an image is  created,
power consumption is negligible. The display is expected to have both monochrome
and or color  capability,  and operate over wide  temperature and  environmental
conditions.  The display utilizes a single substrate so that it can be extremely
thin,  rugged and low weight.  This display can be made any size, is expected to
be low cost,  and is  especially  suitable for portable  devices,  such as, cell
phones, I-phones, and e-books, and other potential portable devices.

         With the arrival of the rapidly  expanding  digital book and news media
applications,  in August 2009 we entered into an Engagement  Agreement  with ZQX
Advisors,  LLC  ("ZQX")  to  assist us in  seeking  business  opportunities  and
licenses for our  electrophoretic  display technology  (E-Paper(R)).  ZQX has an
experienced business and legal team to assist us in this area. Concurrently with
entering into the Engagement  Agreement,  we acquired a 19.5% interest in ZQX in
exchange  for 800,000  unregistered  shares of our common  stock and warrants to
purchase  an  additional  500,000  unregistered  shares,  of which  warrants  to
purchase  250,000  shares are  exercisable  at $0.37 per share and  warrants  to
purchase 250,000 shares are exercisable at $0.555 per share. The warrants expire
in August 2019.

2.       STOCK BASED COMPENSATION
         ------------------------

         We  maintain  stock  equity  incentive  plans  under which we may grant
non-qualified stock options, incentive stock options, stock appreciation rights,
stock  awards,  performance  and  performance-based  awards,  or stock  units to
employees, non-employee directors and consultants.

Stock Option Compensation Expense
---------------------------------

         We account for stock options  granted to employees and directors  using
SFAS  No.  123  (revised  2004),  "Share-Based  Payment"  ("SFAS  No.123R").  We
recognize  compensation expense for stock option awards on a straight-line basis
over  the  requisite  service  period  of the  grant.  We  recorded  stock-based
compensation  expense,  related  to  stock  options  granted  to  employees  and
non-employee  directors,  of approximately  $660,000,  and $2,388,000 during the
nine-month  periods  ended  July  31,  2009  and  2008,  respectively,   and  of
approximately  $259,000 and $479,000 during the  three-month  periods ended July
31,  2009 and  2008,  respectively,  in  accordance  with  SFAS No.  123R.  Such
compensation  expense is included  in the  accompanying  condensed  consolidated
statements of operations in either research and development expenses or selling,
general  and  administrative  expenses,  as  applicable  based on the  functions
performed by such employees and directors. Such stock-based compensation expense

                                       14
<PAGE>

increased both basic and diluted net loss per share for the  nine-month  periods
ended  July  31,  2009 and 2008 by $0.00  and  $0.02,  respectively  and for the
three-month   periods  ended  July  31,  2009  and  2008  by  $0.00  and  $0.00,
respectively.

         Included in the stock-based  compensation cost related to stock options
granted to employees and directors recorded during the nine-months periods ended
July 31, 2009 and 2008 was approximately  $32,000, and $-0-,  respectively,  and
during the  three-month  periods ended July 31, 2009 and 2008 was  approximately
$7,000  and $-0-,  respectively,  of  expense  related  to the  amortization  of
compensation cost for stock options granted in prior periods but not yet vested.
As of July 31, 2009, there was approximately $2,000 of unrecognized compensation
cost  related to  non-vested  share-based  compensation  arrangements  for stock
options  granted to employees and  directors,  which is expected to be amortized
during the current fiscal year.

         We also account for stock options granted to consultants using SFAS No.
123R. We recognized consulting expense for stock options granted to non-employee
consultants,  during the  nine-months  periods ended July 31, 2009, and 2008, of
approximately  $10,000, and $214,000,  respectively,  and during the three-month
periods  ended July 31,  2009 and 2008,  of  approximately  $3,000  and  $3,000,
respectively.  Such consulting expense is included in the accompanying condensed
consolidated  statements  of  operations  in  either  research  and  development
expenses or selling, general and administrative expenses, as applicable based on
the  functions  performed by such  consultants.  As of July 31, 2009,  there was
approximately  $3,000 of unrecognized  consulting  expense related to non-vested
share-based compensation  arrangements for stock options granted to consultants,
which is expected to be amortized during the current fiscal year.

Fair Value Determination
------------------------

         In  accordance  with SFAS No. 123R, we estimate the fair value of stock
options granted to employees, non-employee directors and consultants on the date
of grant using the  Black-Scholes  pricing model. We separate the individuals we
grant  stock  options  to into  three  relatively  homogenous  groups,  based on
exercise and post-vesting  employment  termination  behaviors.  To determine the
weighted  average  fair value of stock  options on the date of grant,  we take a
weighted average of the assumptions used for each of these groups. Stock options
we granted  during the nine months  ended July 31, 2009  consisted  of awards of
stock options with 10-year terms which vested immediately. Stock options granted
during the nine months ended July 31, 2008  consisted of awards of stock options
with 10-year terms which vested  either  immediately  or over future  periods of
from three months to three years.

              We  estimated  the fair  value of stock  option  awards  using the
following assumptions:
<TABLE>
<CAPTION>
                                                 For the Nine Months               For the Three Months
                                                    Ended July 31,                     Ended July 31,
                                           ------------------------------    -------------------------------
                                               2009              2008              2009             2008
                                           -------------    -------------    -------------     -------------
<S>                                             <C>              <C>               <C>               <C>
Expected term (in years)                        2.0              3.5               1.9               2.4
Volatility                                     103%              91%               110%              86%
Risk-free interest rate                        .87%             3.25%              .94%             2.58%
Dividend yield                                   0                0                 0                 0
Weighted average fair value at grant date      $0.15            $0.56             $0.17             $0.34
</TABLE>

                                       15
<PAGE>

         The expected  term of stock  options  represents  the weighted  average
period the stock options are expected to remain  outstanding.  Because our stock
options are "plain  vanilla",  we estimated  the expected  term using a modified
version  of the  simplified  method  of  calculation,  as  prescribed  by  Staff
Accounting  Bulletin No. 107,  "Share-Based  Payment" ("SAB 107"). This modified
calculation uses the actual life for stock options that have been settled, and a
uniform distribution  assumption for the stock options still outstanding.  Under
SAB 107,  stock options are  considered  to be "plain  vanilla" if they have the
following  basic  characteristics:  granted  "at-the-money";  exercisability  is
conditioned upon service through the vesting date;  termination of service prior
to vesting results in forfeiture;  limited exercise period following termination
of  service;  and stock  options  are  non-transferable  and  non-hedgeable.  In
December 2007, the Securities and Exchange Commission ("SEC") staff issued Staff
Accounting Bulletin No. 110,  "Share-Based Payment" ("SAB 110"). SAB 110 permits
the use of the  simplified  method in SAB 107 for employee  stock option  grants
after  December  31,  2007 for  companies  whose  historical  data  about  their
employees'  exercise behavior does not provide a reasonable basis for estimating
the expected term of the stock options. We have adopted SAB 110 and continued to
use a modified  version of the  simplified  method to estimate the expected term
for stock options granted after December 2007, as adequate historical experience
is not  available to provide a reasonable  estimate of the expected term for the
stock  options  still  outstanding.  We intend to  continue  applying a modified
version of the simplified method until enough  historical  experience is readily
available  to provide a reasonable  estimate of the  expected  term for employee
stock option grants.

         We  estimated  the  expected  volatility  of our shares of common stock
based upon the  historical  volatility  of our share price over a period of time
equal to the expected life of the stock options.

         We estimated  the  risk-free  interest  rate based on the implied yield
available on the applicable grant date of a U.S. Treasury note with a term equal
to the expected term of the underlying grants.

         We made the  dividend  yield  assumption  based on our  history  of not
paying dividends and our expectation not to pay dividends in the future.

         Under SFAS No. 123R,  the amount of  stock-based  compensation  expense
recognized is based on the portion of the awards that are ultimately expected to
vest.  Accordingly,  we reduce  the fair  value of the stock  option  awards for
expected forfeitures.  We estimated expected forfeitures based on our historical
experience.

         We will reconsider use of the Black-Scholes pricing model if additional
information  becomes  available in the future that indicates another model would
be more appropriate,  or if grants issued in future periods have characteristics
that cannot be reasonably  estimated  using this model. If factors change and we
employ  different  assumptions  in the  application  of SFAS No.  123R in future
periods,  the compensation expense that we record under SFAS No. 123R may differ
significantly from what we have recorded in the current period.

Stock Option Activity
---------------------

         During the nine-month  periods ended July 31, 2009 and 2008, we granted
stock options to purchase  4,160,000 shares and 5,005,000 shares,  respectively,

                                       16
<PAGE>

to employees, non-employee directors and consultants of common stock at weighted
average exercise prices of $.30 and $0.92 per share,  respectively,  pursuant to
the CopyTele, Inc. 2003 Share Incentive Plan (the "2003 Share Plan"). During the
nine-month  periods  ended July 31,  2009 and 2008,  stock  options to  purchase
4,150,000  shares  and  2,679,200  shares,  respectively,  of common  stock were
exercised with aggregate  proceeds of  approximately  $1,248,000 and $2,107,000,
respectively.

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

         As of July 31, 2009,  we have three stock option  plans:  the CopyTele,
Inc.  1993 Stock Option Plan (the "1993 Plan"),  the  CopyTele,  Inc. 2000 Share
Incentive  Plan ("2000 Share Plan") and the 2003 Share Plan,  which were adopted
by our Board of  Directors  on April 28,  1993,  May 8, 2000 and April 21, 2003,
respectively.

         Upon approval of the 2000 Share Plan by our  shareholders in July 2000,
the 1993 Plan was terminated  with respect to the grant of future stock options.
Information  regarding  the 1993 Plan for the nine months ended July 31, 2009 is
as follows:
<TABLE>
<CAPTION>
                                                             Current Weighted     Aggregate
                                                             Average Exercise     Intrinsic
                                                  Shares      Price Per Share       Value
                                              -------------- ----------------- ---------------
<S>                                                 <C>             <C>              <C>
Shares Under Option at October 31, 2008             779,000        $1.10
  Cancelled                                         (43,000)       $1.31
  Expired                                           (50,000)       $1.31
                                              --------------
Shares Under Option and Exercisable at
  July 31, 2009                                     686,000        $1.07            $-0-
                                              --------------
</TABLE>

         The  following  table  summarizes   information   about  stock  options
outstanding under the 1993 Plan as of July 31, 2009:


                    Stock Options Outstanding and Exercisable
  -----------------------------------------------------------------------------
                                                 Weighted
                                                  Average
                                                 Remaining         Weighted
          Range of               Number      Contractual Life      Average
       Exercise Prices        Outstanding       (in years)      Exercise Price
  -----------------------------------------------------------------------------

       $0.84 to $1.00           575,000            0.30              $0.99
       $1.13 to $1.56           111,000            0.80              $1.49

         The  exercise  price with respect to all of the stock  options  granted
under the 1993 Plan, since its inception,  was equal to the fair market value of
the underlying common stock at the grant date.

         On July 25, 2000,  our  shareholders  approved the 2000 Share Plan. The
maximum  number of shares of common  stock  that may be  granted  was  5,000,000
shares.  On July 6, 2001 and July 16,  2002,  the 2000 Share Plan was amended by
our Board of Directors to increase the maximum  number of shares of common stock
that may be granted to 10,000,000  shares and 15,000,000  shares,  respectively.

                                       17
<PAGE>

These  amendments  were  approved  by our  shareholders  on August 16,  2001 and
September 12, 2002, respectively.  The 2000 Share Plan provides for the grant of
incentive stock options,  nonqualified stock options, stock appreciation rights,
stock  awards,   performance  awards  and  stock  units  to  key  employees  and
consultants of the Company.

         The 2000  Share Plan was  administered  by the Stock  Option  Committee
through  June 2004 and since  that  date has been  administered  by the Board of
Directors,  which determines the option price, term and provisions of each stock
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 at the date of grant and incentive  stock options will not be exercisable
for more than 10 years.

         Information  regarding  the 2000 Share Plan for the nine  months  ended
July 31, 2009 is as follows:
<TABLE>
<CAPTION>
                                                             Current Weighted     Aggregate
                                                             Average Exercise     Intrinsic
                                                 Shares       Price Per Share       Value
                                             -------------- ------------------- --------------
<S>                                               <C>                <C>             <C>
Shares Under Option at October 31, 2008           1,772,466        $0.79
  Exercised                                               -        $-0-
                                             --------------
Shares Under Option and Exercisable at
  July 31, 2009                                   1,772,466        $0.79             $-0-
                                             --------------
</TABLE>

         The  following  table  summarizes   information   about  stock  options
outstanding under the 2000 Share Plan as of July 31, 2009:

                   Stock Options Outstanding and Exercisable
  ----------------------------------------------------------------------------
                                                 Weighted
                                                 Average
                                                Remaining         Weighted
          Range of              Number         Contractual        Average
      Exercise Prices         Outstanding    Life (in years)   Exercise Price
  ----------------------------------------------------------------------------

           $0.40                445,000            2.14             $0.40
           $0.69                505,466            1.42             $0.69
       $0.94 - $1.09            822,000            1.17             $1.06

         The  exercise  price with respect to all of the stock  options  granted
under the 2000 Share Plan since its inception was equal to the fair market value
of the  underlying  common stock at the grant date. As of July 31, 2009,  21,508
shares were available for future grants under the 2000 Share Plan.

         The 2003  Share  Plan  provides  for the  grant of  nonqualified  stock
options,  stock appreciation rights, stock awards,  performance awards and stock
units to key employees and  consultants  of the Company.  The maximum  number of
shares of  common  stock  available  for  issuance  under  the 2003  Share  Plan
initially was 15,000,000  shares.  On October 8, 2004,  February 9, 2006, August
22,  2007 and  December  3,  2008,  the 2003  Plan was  amended  by our Board of
Directors to increase  the maximum  number of shares of common stock that may be
granted  to  30,000,000  shares,   45,000,000  shares,  55,000,000  shares,  and
70,000,000 shares,  respectively.  Current and future non-employee directors are

                                       18
<PAGE>

automatically  granted  nonqualified  stock options to purchase 60,000 shares of
common stock upon their  initial  election to the Board of Directors  and at the
time of each  subsequent  annual meeting of our  shareholders  at which they are
elected to the Board of Directors.  The 2003 Share Plan was  administered by the
Stock  Option  Committee  through  June  2004  and  since  that  date  has  been
administered by the Board of Directors,  which determines the option price, term
and provisions of each stock option.

         Information  regarding  the 2003 Share Plan for the nine  months  ended
July 31, 2009 is as follows:
<TABLE>
<CAPTION>
                                                              Current Weighted     Aggregate
                                                              Average Exercise      Intrinsic
                                                  Shares       Price Per Share       Value
                                             --------------- ------------------- --------------
<S>                                                <C>               <C>              <C>
Shares Under Option at October 31, 2008          17,217,045         $0.79
  Granted                                         4,160,000         $0.30
  Exercised                                      (4,150,000)        $0.30
  Cancelled                                      (1,200,000)        $0.91
                                             ---------------
Shares Under Option at July 31, 2009             16,027,045         $0.78           $62,400
                                             ---------------
Options Exercisable at July 31, 2009             15,917,045         $0.78           $62,400
                                             ---------------
</TABLE>

              The following  table  summarizes  information  about stock options
outstanding under the 2003 Share Plan as of July 31, 2009:
<TABLE>
<CAPTION>

                                Stock Options Outstanding                       Stock Options Exercisable
                      ---------------------------------------------  -----------------------------------------------
                                          Weighted                                       Weighted
                                          Average        Weighted                         Average         Weighted
                                         Remaining        Average                        Remaining         Average
     Range of            Number         Contractual      Exercise        Number      Contractual Life     Exercise
 Exercise Prices      Outstanding     Life (in years)      Price      Exercisable       (in years)          Price
----------------------------------------------------------------------------------------------------------------------
       <S>                 <C>               <C>            <C>            <C>             <C>                <C>
  $0.25 - $0.65         5,005,970           5.40             $0.54       5,005,970         5.40              $0.54
  $0.70 - $0.84         5,251,075           7.13             $0.79       5,141,075         7.16              $0.79
  $0.86 - $1.46         5,770,000           6.46             $0.99       5,770,000         6.46              $0.99
</TABLE>

         The  exercise  price with respect to all of the stock  options  granted
under the 2003 Share Plan since its inception was equal to the fair market value
of the underlying common stock at the grant date. As of July 31, 2009, 9,302,606
shares were available for future grants under the 2003 Share Plan.

Stock Grants
------------

         We account for stock grants to employees and consultants based on their
grant date fair value.  During the  nine-month  periods  ended July 31, 2009 and
2008, we issued 5,017,790 shares and 1,453,060 shares,  respectively,  of common
stock to certain  employees for services  rendered,  principally in lieu of cash
compensation,  pursuant to the 2003 Share Plan. We recorded compensation expense

                                       19
<PAGE>

for the  nine-month  periods  ended  July 31,  2009 and 2008,  of  approximately
$1,621,000 and $1,437,000,  respectively,  and for the three-month periods ended
July 31, 2009 and 2008, of  approximately  $449,000 and $396,000,  respectively,
for the shares of common stock  issued to  employees.  In  addition,  during the
nine-month  periods ended July 31, 2009 and 2008, we issued  152,325  shares and
85,171  shares,  respectively,  of  common  stock to  consultants  for  services
rendered pursuant to the 2003 Share Plan. We recorded consulting expense for the
nine-month  periods  ended July 31, 2009 and 2008 of  approximately  $47,000 and
$92,000,  respectively,  and for the three-month periods ended July 31, 2009 and
2008 of  approximately  $12,000  and  $17,000,  respectively,  for the shares of
common stock issued to consultants.


3.       CONCENTRATION OF CREDIT RISK
         ----------------------------

         Financial  instruments that potentially subject us to concentrations of
credit  risk  consist  principally  of  accounts  receivable  from  sales in the
ordinary  course of business.  Management  reviews our accounts  receivable  for
potential   doubtful   accounts  and   maintains  an  allowance   for  estimated
uncollectible amounts.  Generally,  no collateral is received from customers for
our  accounts  receivable.  During  the nine  months  ended July 31,  2009,  one
customer in the Display Technology Segment represented 87% of total net revenue.
During  the nine  months  ended  July 31,  2008,  one  customer  in the  Display
Technology Segment  represented 70% of total net revenue and one customer in the
Encryption  Products and Services Segment  represented 19% of total net revenue.
At July 31, 2009, one customer in the Encryption  Products and Services  Segment
represented  100% of net  accounts  receivable  and at  October  31,  2008,  one
customer in the Encryption Products and Services Segment represented 100% of net
accounts receivable.

4.       RELATED PARTY TRANSACTIONS WITH DIGITAL INFO SECURITY CO., INC.
         ---------------------------------------------------------------

         In February 2006, we entered into a Software  License and  Distribution
Agreement (the "DISC License Agreement") to license to Digital Info Security Co.
Inc.  ("DISC"),  an encryption system that integrates our encryption  technology
into DISC's  e-mail  services.  The DISC License  Agreement  expired in February
2009.  Concurrently  with entering into the DISC License Agreement with DISC, we
acquired a minority interest in DISC by exchanging 100,000  unregistered  shares
of our common stock for 5,000,000 shares of DISC's common stock. In May and July
2006,  we  purchased  an  additional  1,000,000  shares  and  1,200,000  shares,
respectively,   of  DISC's  common  stock  for  $50,000  and  $60,000  in  cash,
respectively.  In November 2006, we acquired an additional  5,000,000  shares of
DISC's  common stock in exchange for 300,000  unregistered  shares of our common
stock.

          During the nine months ended July 31, 2009, we sold  1,200,000  shares
of DISC's  common  stock for  approximately  $32,000 and recorded a loss on such
sale of approximately  $9,000. As of July 31, 2009, we held 11,000,000 shares of
DISC's common stock.  DISC's common stock is not registered under the Securities
Exchange Act of 1934,  but is quoted on the Pink Sheets.  Based on the number of
DISC  shares  outstanding  as set  forth in DISC's  September  30,  2008  public
financial  report,  the  most  recent  available,  as of July  31,  2009 we held
approximately 10% of the outstanding common stock of DISC.

                                       20
<PAGE>

5.       FINANCIAL INSTRUMENTS
         ---------------------

Short-term Investments and Investments in U.S. Government Securities
--------------------------------------------------------------------

         At July 31, 2009 and October 31,  2008,  we had  marketable  securities
that were  classified  as  "held-to-maturity  securities"  and were  carried  at
amortized costs. Held-to-maturity securities consist of the following:

                                                        July 31,     October 31,
                                                          2009          2008
                                                    --------------  ------------
       Current:
         U.S. Government securities                 $  1,649,751   $   999,484
         Certificates of deposit                            -           443,000
                                                    --------------  ------------
       Total current held-to-maturity securities    $  1,649,751    $ 1,442,484
                                                    ==============  ============

       Noncurrent:
         U.S. Government securities                 $       -       $   749,711
                                                    --------------  ------------
       Total noncurrent held-to-maturity securities $       -       $   749,711
                                                    ==============  ============

       Total held-to-maturity securities            $  1,649,751    $ 2,192,195
                                                    ==============  ============

         At July 31,  2009 and  October  31,  2008,  the  length  of time  until
maturity of current held-to-maturity  securities was less than twelve months. At
October  31,   2008,   the  length  of  time  until   maturity   of   noncurrent
held-to-maturity  securities was fifteen  months.  At July 31, 2009, and October
31, 2008, the estimated fair value of each investment approximated its amortized
cost, and, therefore,  there were no significant  unrecognized  holding gains or
losses.

Investment in Videocon
----------------------

         Our  investment  in Videocon is  classified  as an  "available-for-sale
security" and reported at fair value,  with unrealized gains and losses excluded
from operations and reported as a component of accumulated  other  comprehensive
loss,  net  of the  related  tax  effects,  in  shareholders'  equity.  Cost  is
determined  using the  specific  identification  method.  The fair  value of the
Videocon  GDRs is based on the price on the  Luxembourg  Stock  Exchange,  which
price is based on the  underlying  price of  Videocon's  equity shares which are
traded on stock  exchanges  in India with  prices  quoted in  rupees.  The cost,
unrealized loss and fair value of our investment in Videocon as of July 31, 2009
and October 31, 2008, are as follows:

                                         July 31,            October 31,
                                           2009                 2008
                                    ------------------    ------------------
                 Cost                  $16,200,000           $16,200,000
                 Unrealized loss       (10,545,706)          (12,580,055)
                                    ------------------    ------------------
                 Fair Value            $ 5,654,294           $ 3,619,945
                                    ==================    ==================

                                       21
<PAGE>

         SFAS No. 115,  "Accounting  for Certain  Investments  in Debt or Equity
Securities", requires an evaluation to determine if the decline in fair value of
an  investment  is either  temporary or other than  temporary.  Unless  evidence
exists to support a  realizable  value equal to or greater  than the cost of the
investment, a write-down accounted for as a realized loss should be recorded. We
assess at each  reporting  period our  investment  in Videocon to determine if a
decline that is other than temporary has occurred.  In evaluating the realizable
value of the  investment in Videocon,  we considered  the  requirement  that the
Videocon  GDRs must be held in escrow for seven years from the purchase  closing
date of December  2007 as security  for the loan from Mars  Overseas to CopyTele
International.  Videocon's  financial condition and its future potential in both
its Consumer  Electronics & Home Appliances  segment and its Crude Oil & Natural
Gas segment are also evaluated. Based on our evaluation, we have determined that
the decline in our investment in Videocon is due to the current economic climate
and that  such  decline  is  temporary.  Accordingly,  a  realized  loss was not
recognized  during the  nine-months  ended July 31, 2009.  The  unrealized  loss
recognized   during  the  nine-months  ended  July  31,  2009  is  reflected  in
accumulated other comprehensive loss in the accompanying  condensed consolidated
statement of shareholders' equity.

Investment in DISC
------------------

          Our  investment  in  DISC  is  classified  as  an  "available-for-sale
security" and reported at fair value,  with unrealized gains and losses excluded
from operations and reported as a component of accumulated  other  comprehensive
loss,  net  of the  related  tax  effects,  in  shareholders'  equity.  Cost  is
determined using the specific  identification  method.  The fair value of DISC's
common  stock is based on the  closing  price  on the  Pink  Sheets.  The  cost,
unrealized  (loss) gain and fair value of our  investment in DISC as of July 31,
2009 and October 31, 2008, are as follows:

                                             July 31,            October 31,
                                               2009                 2008
                                        ------------------    ------------------
                 Cost                      $ 375,960             $ 417,000
                 Unrealized (loss) gain     (155,960)              424,800
                                        ------------------    ------------------
                 Fair Value                $ 220,000             $ 841,800
                                        ==================    ==================


6.       INVENTORIES
         -----------

         Inventories consist of the following as of:

                                             July 31,            October 31,
                                               2009                 2008
                                        ------------------    ------------------
                 Component parts           $  46,793             $  67,853
                 Work-in-process               5,207                 5,079
                 Finished products            86,477               105,212
                                        ------------------    ------------------
                                           $ 138,477             $ 178,144
                                        ==================    ==================


7.       NET LOSS PER SHARE OF COMMON STOCK
         ----------------------------------

         In accordance with SFAS No. 128, "Earnings Per Share" ("SFAS No. 128"),
basic net loss per common share  ("Basic  EPS") is computed by dividing net loss

                                       22
<PAGE>

by the weighted  average number of common shares  outstanding.  Diluted net loss
per  common  share  ("Diluted  EPS") is  computed  by  dividing  net loss by the
weighted  average number of common shares and dilutive common share  equivalents
and  convertible  securities  then  outstanding.  Diluted  EPS for  all  periods
presented  is the same as Basic EPS,  as the  inclusion  of the effect of common
share  equivalents then  outstanding  would be  anti-dilutive.  For this reason,
excluded from the calculation of Diluted EPS for the nine- month and three-month
periods ended July 31, 2009 and 2008, were stock options to purchase  18,485,511
shares and 19,708,511 shares, respectively.


8.       EFFECT OF RECENTLY ISSUED PRONOUNCEMENTS
         ----------------------------------------

         In  December  2007,  the FASB  issued  SFAS  No.  141  (revised  2007),
"Business  Combinations" ("SFAS No. 141R"), which changes how an entity accounts
for the acquisition of a business.  When  effective,  SFAS No. 141R will replace
existing  SFAS  No.  141,  "Business  Combinations"  ("SFAS  No.  141"),  in its
entirety. SFAS No. 141R carries forward the existing requirements to account for
all business  combinations  using the acquisition  method  (formerly  called the
purchase method). In general,  SFAS No. 141R will require  acquisition-date fair
value  measurement of identifiable  assets acquired,  liabilities  assumed,  and
noncontrolling interest in the acquired entity. SFAS No. 141R will eliminate the
current  cost-based  purchase  method  under  SFAS No.  141.  SFAS  No.  141R is
effective  for fiscal  years and  interim  periods  within  those  fiscal  years
beginning on or after  December  15, 2008.  The adoption of SFAS No. 141R is not
expected to have a material effect on our consolidated financial statements.

         In  December  2007,  the  FASB  issued  SFAS No.  160,  "Noncontrolling
Interests  in  Consolidated  Financial  Statements,  an amendment of ARB No. 51"
("SFAS No. 160").  SFAS No. 160 establishes  accounting and reporting  standards
for the noncontrolling  interests in a subsidiary and for the deconsolidation of
a  subsidiary.  SFAS No. 160 is effective  for fiscal years and interim  periods
within those fiscal years  beginning on or after December 15, 2008. The adoption
of SFAS No. 160 is not  expected to have a material  effect on our  consolidated
financial statements.

         In  September   2006,  the  FASB  issued  SFAS  No.  157,  "Fair  Value
Measurements"  ("SFAS  No.  157"),  to clarify  the  definition  of fair  value,
establish a framework for measuring fair value and expand the disclosures  about
fair value measurements. SFAS No. 157 defines fair value as the price that would
be  received  to sell an asset or paid to  transfer  a  liability  in an orderly
transaction  between  market  participants  at the  measurement  date (an  exact
price). SFAS No. 157 also stipulates that, as a market-based  measurement,  fair
value  measurement  should be determined  based on the  assumptions  that market
participants would use in pricing the asset or liability, and establishes a fair
value hierarchy that distinguishes  between (a) market  participant  assumptions
developed  based  on  market  data  obtained  from  sources  independent  of the
reporting  entity  (observable  inputs)  and  (b)  the  reporting  entity's  own
assumptions  about market  participant  assumptions  developed based on the best
information available in the circumstances  (unobservable  inputs). SFAS No. 157
is effective for fiscal years beginning after November 15, 2007. The adoption of
SFAS No.  157 did not  have a  material  effect  on our  consolidated  financial
statements.

          In February 2008, the FASB issued FASB Staff Position  ("FSP") No. FAS
157-2, "Effective Date of FASB Statement No. 157" ("FSP No. FAS 157-2") This FSP
permits a one-year  deferral of  application  of SFAS No. 157 for non  financial
assets and  liabilities  measured at fair value on a  non-recurring  basis.  The

                                       23
<PAGE>

adoption of FSP No. FAS 157-2 is not  expected to have a material  effect on our
consolidated financial statements.

         In April  2009,  the FASB issued FSP No. FAS 157-4,  "Determining  Fair
Value When the  Volume and Level of  Activity  for the Asset or  Liability  Have
Significant  Decreased and Identifying  Transactions That Are Not Orderly" ("FSP
No. FAS 157-4"). This FSP provides additional guidance for estimating fair value
in accordance  with SFAS No. 157 when there has been a  significant  decrease in
market  activity  for a  financial  asset.  An  entity is  required  to base its
conclusion  about  whether a  transaction  was  distressed  on the weight of the
evidence  presented.  This FSP also re-affirms that the objective of fair value,
when the market for an asset is not active,  is the price that would be received
to sell the asset in an orderly  market (as  opposed to a  distressed  or forced
transaction).  Additional  enhanced  disclosures are also required in accordance
with this FSP. FSP No. FAS 157-4 must be applied  prospectively and is effective
for interim and annual  periods  ending after June 15, 2009. The adoption of FSP
No.  FAS 157-4 did not have a  material  effect  on our  consolidated  financial
statements.

         In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, "Interim
Disclosures about Fair Value of Financial  Instruments"  ("FSP No. FAS 107-1 and
APB  28-1"),  principally  to  require  publicly  traded  companies  to  provide
disclosures  about  fair value of  financial  instruments  in interim  financial
information.  This guidance is effective for interim and annual  periods  ending
after June 15, 2009. The adoption of FSP No. FAS 107-1 and APB 28-1 did not have
a material effect on our consolidated financial statements.

         In April  2009,  the FASB  issued  FSP No.  FAS  115-2  and FAS  124-2,
"Recognition  and  Presentation of  Other-Than-Temporary  Investments"  (FSP No.
115-2  and  FSP   124-2").   FSP  No.  FAS  115-23  and  FSP  124-2  amends  the
other-than-temporary  impairment guidance for debt securities. Under FSP No. FAS
115-2 and FAS 124-2, the pre-existing  "intent and ability" trigger was modified
such that an other-than-temporary impairment is now trigged when there is intent
to sell the  security,  it is more  likely  than not that the  security  will be
required to be sold before recovery in value, or the security is not expected to
recover the entire amortized cost basis of the security ("credit related loss").
Credit   related   losses   on   debt   securities   will   be   considered   an
other-than-temporary impairment recognized in earnings, and any other losses due
to a decline in fair  value  relative  to the  amortized  cost  deemed not to be
other-than-temporary will be recorded in other comprehensive income. FSP No. FAS
115-2 and 124-2 is effective  for interim and annual  periods  ending after June
15,  2009.  The  adoption of FSP No. FAS 115-2 and 124-2 did not have a material
effect on our consolidated financial statements.

         In May 2009, the FASB issued SFAS No. 165,  "Subsequent  Events" ("SFAS
No. 165").  SFAS No. 165  establishes  accounting  and  reporting  standards for
events that occur after the balance sheet date but before  financial  statements
are issued or are  available to be issued.  SFAS No. 165 is effective for fiscal
years and interim  periods  ending after June 15, 2009. The adoption of SFAS No.
165 did not have a material effect on our consolidated financial statements.

         In June 2009, the FASB issued SFAS No. 168, "FASB Accounting  Standards
Codification  and the Hierarchy of Generally  Accepted  Accounting  Principles."
This  standard  replaces  SFAS No. 162,  "The  Hierarchy of  Generally  Accepted
Accounting  Principles,"  and  establishes  only two  levels  of U.S.  generally

                                       24
<PAGE>

accepted accounting principles (GAAP): authoritative and non-authoritative.  The
FASB Accounting Standards Codification (the Codification) will become the source
of authoritative,  nongovernmental  GAAP for Securities and Exchange  Commission
("SEC") registrants. All other non-grandfathered,  non-SEC accounting literature
not included in the Codification will become non-authoritative. This Standard is
effective for financial  statements for interim or annual reporting ending after
September  15,  2009.  As the  Codification  was not intended to change or alter
existing  GAAP,  it will not  have  any  effect  on our  consolidated  financial
statements.

9.       INCOME TAXES
         ------------

         We file  Federal  and New York  State  income tax  returns.  Due to net
operating losses, the statute of limitations  remains open since the fiscal year
ended October 31, 1994. We account for interest and penalties  related to income
tax matters in selling, general and administrative expenses.

         On November 1, 2007, we adopted FIN 48. FIN 48 clarifies the accounting
for  uncertainties  in income  taxes  recognized  in an  enterprise's  financial
statements.  There  were no  unrecognized  tax  benefits  as of the  date of our
adoption  of FIN 48 and its  adoption  did not  have a  material  effect  on our
condensed consolidated financial statements.


10.      SEGMENT INFORMATION
         -------------------

         We follow the provisions of SFAS No. 131,  "Disclosures  about Segments
of an Enterprise and Related Information" ("SFAS No. 131"). Reportable operating
segments are determined based on management's approach. The management approach,
as  defined  by SFAS No.  131,  is based  on the way  that the  chief  operating
decision-maker  organizes the segments within an enterprise for making operating
decisions  and  assessing  performance.  While our  results  of  operations  are
primarily reviewed on a consolidated  basis, the chief operating  decision-maker
also manages the  enterprise in two segments:  (i) Display  Technology  and (ii)
Encryption  Products and Services.  The following  represents selected financial
information  for our segments for the nine-month and  three-month  periods ended
July 31, 2009 and 2008:
<TABLE>
<CAPTION>
                                        Display           Encryption
            Segment Data               Technology         Products and            Total
                                                            Services
-----------------------------------------------------   -----------------   -----------------
            <S>                           <C>                  <C>                 <C>
Nine Months Ended July 31, 2009:
   Net revenue                          $    865,332        $     71,305        $    936,637
   Net loss                               (1,476,301)         (2,428,324)         (3,904,625)

Nine Months Ended July 31, 2008:
   Net revenue                          $    770,000        $    329,710        $  1,099,710
   Net loss                               (2,620,384)         (2,635,458)         (5,255,842)
</TABLE>

                                       25
<PAGE>

<TABLE>
<CAPTION>

                                        Display           Encryption
            Segment Data               Technology         Products and            Total
                                                            Services
-----------------------------------------------------   -----------------   -----------------
            <S>                           <C>                  <C>                 <C>

Three Months Ended July 31, 2009:
   Net revenue                            $  250,000          $   49,765        $    299,765
   Net loss                                 (472,659)           (713,105)         (1,185,764)

Three Months Ended July 31, 2008:
   Net revenue                            $  770,000          $  112,130        $    882,130
   Net loss                                  (69,161)           (660,005)           (729,166)
</TABLE>




                                       26
<PAGE>

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

GENERAL
-------

         Our principal operations are the development,  production and marketing
of thin, flat, low-voltage phosphor display technology, the development of thin,
flat,  low-power passive display technology and the development,  production and
marketing of  multi-functional  encryption  products  that  provide  information
security  for   domestic   and   international   users  over   virtually   every
communications media.

         We have  pioneered the basic  development  of an innovative new type of
flat panel  display  technology,  which is  brighter,  has higher  contrast  and
consumes  less power than our prior  display  technology.  This new  proprietary
display is a color phosphor based display having a unique lower voltage electron
emission  system  to  excite  the color  phosphors.  As with our  prior  display
technology,  the new  technology  emits light to display color  images,  such as
movies from DVD players. In addition,  we are also developing another version of
our new type low  voltage  and low  power  display  having  a  different  matrix
configuration  and phosphor  excitation  system.  These new type of displays are
expected to be lower in cost than our prior displays.

         In November  2007, we entered into a Technology  License  Agreement (as
amended,  the "License  Agreement") with Videocon  Industries Limited, an Indian
company  ("Videocon").  Under the License Agreement,  we provide Videocon with a
non-transferable,  worldwide  license  of our  technology  for thin,  flat,  low
voltage  phosphor  displays  (the  "Licensed  Technology"),  for  Videocon (or a
Videocon  Group  company)  to  produce  and  market  products,   including  TVs,
incorporating  displays  utilizing  the Licensed  Technology.  Under the License
Agreement,  we expect to receive a license  fee of $11  million  from  Videocon,
payable in installments over a 27 month period, which commenced in May 2008, and
an agreed upon  royalty from  Videocon  based on display  sales by Videocon.  In
April 2008, the government of India approved the License  Agreement.  As of July
31, 2009, we have received aggregate license fee payments of $2,500,000.

         Videocon  Industries  Limited is the  flagship  company of the Videocon
Group,  one of  India's  leading  business  houses.  Videocon  Group  is a fully
integrated  consumer  electronics and home  appliances  enterprise with backward
integration  in plasma  panel,  CRT  glass,  color  picture  tubes and other key
components  for  the  consumer  electronics,   home  appliances  and  components
industries.  The company  also  operates in the oil & gas sector.  The  Videocon
Group has sales and service networks throughout India and operates facilities in
Europe and elsewhere in the world.

         CopyTele and Videocon are working  together to implement our technology
into production display modules.  The display modules consist of our low voltage
phosphor  displays,  the attached  associated  driver  circuits,  and controller
circuits. Under the License Agreement,  Videocon, with assistance from CopyTele,
is to provide  the design  and  process  engineering  required  to produce  such
display  modules,  and also is to provide all tooling and fixtures  required for
the  production  process.  Videocon  has a group of  qualified  and  experienced
personnel  assigned to this  program.  As part of our  assistance to Videocon to
produce such display modules,  we are providing  technical support to Videocon's
technical team. We are also cooperating  with Videocon to jointly  implement the

                                       27
<PAGE>

CopyTele  technology prior to production to produce  prototypes of such modules.
Videocon is  utilizing  its display  processing  technology  and  facilities  to
continue to produce various configurations of our display matrix to optimize its
performance.  The matrix is the main component of our display, since it contains
the structure to  accommodate  our electron  emission  technology  and the color
phosphors  that are used to  illuminate  our display.  CopyTele and Videocon are
also  working  together  to  incorporate  two  other  versions  of  our  display
technology.  Improvements  to the technology are to be jointly owned by CopyTele
and Videocon.

         Under the  License  Agreement  we continue to have the right to produce
and market products utilizing the Licensed Technology.  We also continue to have
the right to utilize  Volga Svet Ltd.,  a Russian  display  company that we have
been  working with for more than twelve years  ("Volga"),  and an Asian  company
that  CopyTele  has been  working  with for more than six years,  to produce and
market,  products utilizing the Licensed Technology.  Additional licenses of the
Licensed Technology to third parties require the joint agreement of CopyTele and
Videocon.

         In connection  with the License  Agreement,  Videocon and CopyTele have
each  appointed  one senior  advisor to the other's board of directors to advise
with respect to strategic planning and technology in the display field.

         At the same time as we entered into the License  Agreement,  we entered
into a  Share  Subscription  Agreement  with an  affiliate  of  Videocon  ("Mars
Overseas") for Mars Overseas to purchase  20,000,000 shares of our common stock,
and   a   subsidiary   of   ours,   CopyTele   International   Ltd.   ("CopyTele
International"),  entered  into a GDR Purchase  Agreement to purchase  1,495,845
global  depository  receipts  ("GDRs")  of  Videocon.   Both  transactions  were
completed  in our  first  fiscal  quarter  of  fiscal  2008.  See  Note 1 to the
Condensed Consolidated Financial Statements.

         Our display  technology  includes a  proprietary  mixture of  specially
coated carbon  nanotubes and nano materials in combination  with our proprietary
low voltage color phosphors.  The specially coated carbon  nanotubes,  which are
supplied to us by a U.S. company, and nano materials,  require a low voltage for
electron  emission and are extremely small - approximately  10,000 times thinner
than the width of a human hair. The 5.5 inch (diagonal) display we developed has
960 x 234  pixels  and  utilizes  a new  memory-based  active  matrix  thin film
technology  with  each  pixel  phosphor  activated  by  electrons  emitted  by a
proprietary carbon nanotube network located extremely close from the pixels. The
matrix also has a high pixel field factor to obtain high  contrast and low power
consumption.  As a result,  each pixel phosphor  brightness is controlled  using
less than 40 volts.  The carbon  nanotubes and  proprietary  color phosphors are
precisely placed and separated  utilizing our proprietary  nanotube and phosphor
deposition technology. We have developed a process of maintaining uniform carbon
nanotube deposition independent of phosphor deposition. We have also developed a
method of enhancing  nanotube  electron  emission to increase the  brightness of
this type of display.

         Some other characteristics of our display technology are as follows:

         o     We  have  developed  a  proprietary  system  which  allows  us to
               evacuate  our  display;  to  rapidly  vacuum  seal  it  at a  low
               temperature to accommodate the matrix; and to create lithographic
               type spacers to assemble our display  utilizing only 0.7mm glass.

                                       28
<PAGE>

               We thus obtain a display thickness of approximately  1/16th of an
               inch,   thinner  than  LCD  (liquid  crystal)  and  PDP  (plasma)
               displays.
         o     The display matrix,  phosphor  excitation system, and drivers are
               all on one substrate.
         o     Our display is able to select and change the  brightness  of each
               individual  pixel,  requiring  less  than 40 volts on each  pixel
               phosphor  to change  the  brightness  from  black to white.  This
               compares to thousands of volts  required for other video phosphor
               based  displays,  which  leads to inherent  breakdowns  and short
               life.
         o     Our display has no backlight. Because power is only consumed when
               a pixel is turned on, low power is needed to  activate  the whole
               display.  The display requires less power than an LCD. This lower
               power  consumption  could  potentially  allow use of rechargeable
               batteries to operate TV products for  wireless  applications  and
               extend the battery operation time for portable devices.
         o     The same basic display  technology could  potentially be utilized
               in various size applications, from hand-held to TV size displays.
         o     Our  proprietary  matrix  structures  can be produced by existing
               mass production TFT (thin film  technology)  LCD  facilities,  or
               portions of these facilities.
         o     Our display eliminates display flicker.
         o     Our  display  has  an  approximately  1,000  times  faster  video
               response  time than an LCD,  and matches the  response  time of a
               cathode ray tube (CRT).
         o     Our display can be viewed with high contrast over approximately a
               180 degree  viewing  angle,  in both the  horizontal and vertical
               directions, which exceeds the viewing angle of LCDs.
         o     Also like  CRTs,  our  display is  capable  of  operating  over a
               temperature range (-40(degree)C to 85(degree)C) which exceeds the
               range  over  which  LCDs  can  operate,   especially  under  cold
               temperature conditions.

         We believe our displays could  potentially have a cost similar to a CRT
and thus less than current LCD or PDP  displays  (our display does not contain a
backlight,  or color filter or polarizer,  which represent a substantial portion
of the cost of an LCD).

         In August 2009,  we entered into a  development  agreement  with a U.S.
company to provide engineering and implementation support for the development of
our patented  extremely low power passive monochrome or color display for use in
portable devices. This company has experience in the field involving portions of
our display technology.  Our proprietary extremely low power display that we are
developing,   in  conjunction  with  the  U.S.   company,   incorporates  a  new
micro-matrix substrate. The display is designed to have bi-stability capability,
and uses low power  when an image is being  created.  Once an image is  created,
power consumption is negligible. The display is expected to have both monochrome
and or color  capability,  and operate over wide  temperature and  environmental
conditions.  The display utilizes a single substrate so that it can be extremely
thin,  rugged and low weight.  This display can be made any size, is expected to
be low cost,  and is  especially  suitable for portable  devices,  such as, cell
phones, I-phones, and e-books, and other potential portable devices.

         With the arrival of the rapidly  expanding  digital book and news media
applications,  in August 2009 we entered into an Engagement  Agreement  with ZQX
Advisors,  LLC  ("ZQX")  to  assist us in  seeking  business  opportunities  and
licenses for our  electrophoretic  display technology  (E-Paper(R)).  ZQX has an

                                       29
<PAGE>

experienced business and legal team to assist us in this area. Concurrently with
entering into the Engagement  Agreement,  we acquired a 19.5% interest in ZQX in
exchange  for 800,000  unregistered  shares of our common  stock and warrants to
purchase  an  additional  500,000  unregistered  shares,  of which  warrants  to
purchase  250,000  shares are  exercisable  at $0.37 per share and  warrants  to
purchase 250,000 shares are exercisable at $0.555 per share. The warrants expire
in August 2019.

         We are  continuing to pursue voice,  fax and data  encryption  business
over  landline  and  wireless  telephone  systems and  networks.  We have sought
encryption opportunities in both the commercial and government security markets.

         Our government  market is still being  primarily  handled by The Boeing
Company  ("Boeing") and its large  distributors of the Thuraya  satellite phones
and services.  The Thuraya  Satellite  Network provides blanket coverage to more
than 110 countries in Europe,  North, Central Africa and large parts of Southern
Africa,   the  Middle  East,   Central  and  South  Asia;  it  has  grown  as  a
communications  provider due to its geographic coverage,  quality of service and
cost effective usage.

         Our three year agreement with Boeing has continued into fiscal 2009 and
expires  in May 2010.  Boeing  distributes  13 of our  products,  including  our
DCS-1400D (docker voice encryption  device),  USS-900T (satellite fax encryption
device),  USS-900TL  (landline to satellite fax  encryption  device),  USS-900WF
(satellite  and  cellular  fax  encryption  device),   USS-900WFL  (landline  to
satellite  and cellular fax  encryption  device) and  USS-900TC  (satellite  fax
encryption  to  computer)  products,  which were  specifically  designed for the
Thuraya network. Boeing sells these products under the brand name of Thuraya.

         We are continuing to promote our Thuraya  encryption  solutions through
other Thuraya  developers  and resellers in addition to Boeing.  We offer a full
line  of  voice,   fax  and  data   encryption   products   that  secure   these
communications,  and  our  products  are  being  used  by  government  agencies,
military, as well as domestic and international  non-governmental  organizations
(NGOs) in the Middle East, Europe, Far East and Africa.

         Asia Pacific Satellite Industries ("APSI") has manufactured new Thuraya
handsets and docking units that allow satellite communications both outdoors and
indoors.  CopyTele has created devices  allowing  customers to easily set up and
engage  in  secure  communications  over the  Thuraya  network  compatible  with
landline telephone  systems.  APSI's FDU-3500 docking unit for its SO-2510 phone
allows for outdoor and indoor  operation of the  satellite  phone on the Thuraya
network.  Our PA-3500 and  PA-3500T  products  allow  compatibility  between our
DCS-1200, DCS-1400 and USS-900T encryption devices and the APSI FDU-3500 docking
unit and SO-2510  phone.  Together with APSI,  we have  continued to develop the
DCS-2500  integrated  encryption  system,  which is  designed  for  convenience,
portability and easy of use with the Thuraya phone.

         Our  products  provide  secure   communications   with  many  different
satellite  phones,  including the Thuraya  7100/7101/SO-2510  handheld  terminal
("HHT"),   Globalstar   GSP-1600  HHT,   Telit   SAT-550/600   HHT,   Globalstar
GSP-2800/2900 fixed phone, Iridium 9500/9505/9505A HHT, Inmarsat M4 and Mini "M"
HHT units  from  Thrane & Thrane  and  Nera.  Through  the use of our  products,
encrypted satellite communications are available for many Thuraya docking units,

                                       30
<PAGE>

including  Teknobil's  Next Thuraya  Docker,  Thuraya's  Fixed Docking  Adapter,
APSI's  FDU-2500 and FDU-3500  Fixed Docking Units,  and  Sattrans's  SAT-OFFICE
Fixed Docking Unit and SAT-VDA Hands-Free Car Kit.

         We are continuing our  consultations  with  specialists of the Inmarsat
BGAN system and the new Iridium satellite phone developing  compliant encryption
solutions that offer new opportunity and an increased customer base. We continue
to seek  opportunities to market our products for securing landline and wireless
voice and fax communications.  Our specific Thuraya products are being evaluated
for use by a Middle Eastern government. Also, a Far Eastern government is in the
process  of  determining  the system  requirements  necessary  to encrypt  voice
communications utilizing our USS-900, DCS-1200 and DCS-1400 products.

         Our  operations  and the  achievement  of our  objectives in marketing,
production,  and research and  development  are dependent  upon an adequate cash
flow.  Accordingly,   in  monitoring  our  financial  position  and  results  of
operations,  particular  attention  is  given to cash  and  accounts  receivable
balances and cash flows from operations.  Since our initial public offering, our
cash flows have been  primarily  generated  through the sales of common stock in
private  placements and upon exercise of stock options.  Since 1999 we have also
generated cash flows from sales of our encryption products and services.  We are
continuing to direct our encryption  marketing  efforts to opportunities in both
the commercial and government  security markets and have recently  uncovered new
opportunities  to market products to Middle Eastern and Far Eastern  governments
to secure voice and fax communications.  In addition, in fiscal 2008, we entered
into the License Agreement with Videocon and in May 2008, we commenced receiving
from Videocon license fees related to our display technology.

CRITICAL ACCOUNTING POLICES
---------------------------

         Our  condensed   consolidated  financial  statements  are  prepared  in
conformity with accounting principles generally accepted in the United States of
America.  As such,  we are required to make  certain  estimates,  judgments  and
assumptions  that management  believes are reasonable based upon the information
available. These estimates and assumptions affect the reported amounts of assets
and liabilities  and the disclosure of contingent  assets and liabilities at the
dates  of the  condensed  consolidated  financial  statements  and the  reported
amounts of revenue and expenses during the reporting periods.

         We believe the following  critical  accounting  polices affect the more
significant  judgments and estimates  used in the  preparation  of our condensed
consolidated financial statements.  For additional discussion on the application
of these and  other  accounting  polices,  refer to the  consolidated  financial
statements and notes thereto  included in our Annual Report on Form 10-K for the
year ended October 31, 2008.

Revenue Recognition
-------------------

         Revenues are recorded when all four of the following  criteria are met:
(i) persuasive evidence of an arrangement exists; (ii) delivery has occurred and

                                       31
<PAGE>

title has  transferred  or services have been  rendered;  (iii) our price to the
buyer is fixed or determinable; and (iv) collectibility is reasonably assured.

         We have  assessed the guidance of Emerging  Issues Task Force No. 00-21
"Revenue  Arrangements with Multiple  Deliverables"  ("EITF 00-21") to determine
whether  multiple  deliverables  in  our  arrangement  with  Videocon  represent
separate units of accounting. Under the License Agreement,  CopyTele is required
to: (a)  disclose to Videocon  the Licensed  Technology  and provide  reasonable
training of Videocon  personnel;  (b) jointly cooperate with Videocon to produce
prototypes  prior to  production;  and (c)  assist  Videocon  in  preparing  for
production.  CopyTele has determined that these  performance  obligations do not
have value to  Videocon on a  standalone  basis,  as defined in EITF 00-21,  and
accordingly they do not represent separate units of accounting.

         We have established objective and reasonable evidence of fair value for
the royalty to be earned during the  production  period based on analysis of the
pricing for similar agreements. Accordingly, we have determined that the license
fee of $11 million to be paid during the pre-production  period and royalties on
product sales reflects the  established  fair value for these  deliverables.  We
will  recognize the $11 million  license fee over the  estimated  period that we
expect to provide  cooperation and assistance during the pre-production  period,
limiting the revenue  recognized on a cumulative basis to the aggregate  license
fee payments received from Videocon. We will assess at each reporting period the
progress and assistance provided and will continue to evaluate the period during
which this fee will be recognized.  License fee payments  received from Videocon
which are in excess of the amounts  recognized  as revenue  ($-0- as of July 31,
2009 and  approximately  $313,000  as of  October  31,  2008)  are  recorded  as
non-refundable  deferred  revenue  on the  accompanying  condensed  consolidated
balance sheets.

         During  the  quarter  ended  April 30,  2009,  we  agreed to  reimburse
Videocon  $250,000 for  engineering  services  related to another version of our
display  technology  and we modified the payment terms from Videocon  during the
quarter.  The license fee revenue recognized during the three months ended April
30, 2009 of $250,000  represented an offset against  amounts due to Videocon for
the aforementioned engineering services, in lieu of a cash payment. In addition,
in June 2009, we received a license fee payment from Videocon of $250,000, which
was due during the quarter ended April 30, 2009 pursuant to the modified payment
terms, which was recognized as license fee revenue during the three months ended
July 31, 2009.  In August 2009,  we received an  additional  license fee payment
from Videocon of $100,000,  which was due during the quarter ended July 31, 2009
pursuant to the modified  payment terms.  However,  the total license fee of $11
million remains  payable over the 27 month period,  which commenced in May 2008,
and  Videocon's   obligations   with  respect  to  production,   and  CopyTele's
assistance, under the License Agreement remain unaffected.

Investment Securities
---------------------

         We  classify  our  investment  securities  in one  of  two  categories:
available-for-sale  or  held-to-maturity.   Available-for-sale   securities  are
recorded at fair  value.  Unrealized  gains and  losses,  net of the related tax
effect,  on  available-for-sale  securities  are excluded  from earnings and are
reported as a component of accumulated other  comprehensive  income (loss) until
realized.  Realized  gains  and  losses  from  the  sale  of  available-for-sale
securities are determined on a specific  identification basis.  Held-to-maturity

                                       32
<PAGE>

securities,  which are investment securities that the company has the intent and
ability to hold to maturity,  are carried at amortized cost. The amortization of
premiums and accretion of discounts  are recorded on the level yield  (interest)
method,  over the period from the date of purchase  to  maturity.  When sales do
occur, gains and losses are recognized at the time of sale and the determination
of cost of  securities  sold is based upon the specific  identification  method.
Dividend and interest income are recognized when earned.

         We monitor the value of our  investments  for indicators of impairment,
including  changes  in  market  conditions  and  the  operating  results  of the
underlying  investment  that may result in the inability to recover the carrying
value of the  investment.  We will  record an  impairment  charge if and when we
believe  any such  investment  has  experienced  a  decline  that is other  than
temporary.

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

         Inventories are stated at the lower of cost, including material,  labor
and  overhead,  determined  on a first-in,  first-out  basis,  or market,  which
represents  our best estimate of market  value.  We regularly  review  inventory
quantities  on hand,  particularly  finished  goods,  and record a provision for
excess and obsolete  inventory  based  primarily on forecasts of future  product
demand.  Our net loss is  directly  affected  by  management's  estimate  of the
realizability of inventories.  To date, sales of our products have been limited.
Accordingly,  there can be no  assurance  that we will not be required to reduce
the  selling  price of our  inventory  below our current  carrying  value in the
future.

Stock Based Compensation
------------------------

         We account  for stock  options  granted  to  employees,  directors  and
consultants  using Financial  Accounting  Standards Board Statement of Financial
Accounting  Standards No. 123 (revised 2004),  "Share-Based  Payment" ("SFAS No.
123R").  We  recognize  compensation  expense  for  stock  option  awards  on  a
straight-line  basis over the requisite service period of the grant. We recorded
stock-based  compensation expense, related to stock options granted to employees
and non-employee  directors, of approximately $660,000 and $2,338,000 during the
nine-month  periods  ended  July  31,  2009  and  2008,  respectively,   and  of
approximately  $259,000 and $479,000 during the  three-month  periods ended July
31, 2009 and 2008,  respectively,  in  accordance  with SFAS 123R. We recognized
consulting expense for stock options granted to non-employee consultants, during
the nine-months periods ended July 31, 2009, and 2008, of approximately $10,000,
and $214,000,  respectively,  and during the three-month  periods ended July 31,
2009 and 2008, of approximately $3,000 and $3,000,  respectively.  See Note 2 to
the Condensed Consolidated Financial Statements for additional information.

         Determining the  appropriate  fair value model and calculating the fair
value of stock-based awards requires judgment,  including estimating stock price
volatility,  forfeiture rates and expected life. If factors change and we employ
different assumptions in the application of SFAS No. 123R in future periods, the
compensation expense that we record under SFAS No. 123R may differ significantly
from what we have recorded in the current period.


                                       33
<PAGE>

RESULTS OF OPERATIONS
---------------------

Nine months ended July 31, 2009 compared with nine months ended July 31, 2008
-----------------------------------------------------------------------------

         Net Revenue

          Net revenue  decreased  by  approximately  $163,000 in the nine months
ended July 31, 2009, to  approximately  $937,000,  as compared to  approximately
$1,100,000 in the comparable prior-year period.  Revenue from display technology
license  fees  related to the  License  Agreement  with  Videocon  increased  by
approximately $43,000, to approximately $813,000, as compared to $770,000 in the
comparable prior-year period. Revenue during the current period included revenue
from display technology  engineering services of $52,000, as compared to none in
the  comparable   prior-year   period.   The  revenue  from  display  technology
engineering services resulted from engineering services billed to Volga. Revenue
from sales of encryption  products  decreased by  approximately  $259,000 in the
nine  months  ended July 31,  2009,  to  approximately  $71,000,  as compared to
approximately  $330,000 in the  comparable  prior-year  period.  Our  encryption
revenue has been limited and is sensitive to individual large transactions.

         Cost of Encryption Products Sold

         The cost of encryption products sold decreased by approximately $45,000
in the nine months ended July 31, 2009, to approximately $40,000, as compared to
approximately   $85,000  in  the  comparable  prior-year  period.  The  cost  of
encryption  products  sold in the nine  months  ended July 31,  2009  includes a
provision for excess inventory of approximately  $20,000. The cost of encryption
products shipped in the current period decreased to  approximately  $20,000,  as
compared to approximately  $85,000 in the comparable prior-year period, due to a
decrease in unit shipments of encryption products.

         Cost of Display Engineering Services

         The cost of display  engineering  services  increased to  approximately
$18,000 in the nine  months  ended July 31,  2009,  as  compared  to none in the
comparable prior year period,  as there was no revenue from display  engineering
services in the prior year period.

         Research and Development Expenses

         Research and development  expenses decreased by approximately  $841,000
in the nine  months  ended July 31,  2009,  to  approximately  $2,533,000,  from
approximately  $3,374,000 in the comparable  prior-year  period. The decrease in
research and development  expenses was principally due to a decrease in employee
stock option compensation  expense of approximately  $1,076,000,  which resulted
from a decrease  in the number of stock  options  granted  and a decrease in the
weighed average fair value at grant dates, a decrease in patent-related expenses
of  approximately  $90,000,  a decrease in  consultant  stock option  expense of
approximately $45,000, offset by an increase in outside research and development
expense of  approximately  $213,000,  which primarily  resulted from engineering
services  performed  by  Videocon  related  to another  version  of our  display
technology,  an increase in employee  compensation and related costs, other than
stock  option  expense,  of  approximately  $119,000,  and an increase in travel
expense of approximately $56,000.

                                       34
<PAGE>

         Selling, General and Administrative Expenses

         Selling, general and administrative expenses decreased by approximately
$757,000 to  approximately  $2,296,000  in the nine months  ended July 31, 2009,
from approximately  $3,053,000 in the comparable prior-year period. The decrease
in  selling,  general  and  administrative  expenses  was  principally  due to a
decrease  in  employee  stock  option  compensation   expense  of  approximately
$652,000,  which resulted from a decrease in the number of stock options granted
and a decrease in the weighed  average fair value at grant dates,  a decrease in
consultant stock option expense of approximately  $159,000, a decrease in travel
expense of approximately  $70,000, a decrease in consultant expense,  other than
stock  option  expense,  of  approximately  $49,000,  offset by an  increase  in
employee  compensation  and related costs,  other than stock option expense,  of
approximately  $80,000,  and an increase in professional  fees of  approximately
$78,000.

         Dividend Income

         Dividend  income,  which was received in  connection  with the Videocon
GDRs we  acquired in  December  2007,  decreased  by  approximately  $102,000 to
approximately  $29,000 in the nine  months  ended  July 31,  2009,  compared  to
approximately  $131,000 in the  comparable  prior-year  period.  The decrease in
dividend income was due to a reduction by Videocon of dividends paid.

         Interest Income

         Interest income was approximately $16,000 in the nine months ended July
31, 2009, compared to approximately $25,000 in the comparable prior-year period.
The decrease in interest income was primarily the result of a reduction in short
term interest rates.

Three months ended July 31, 2009 compared with three months ended July 31, 2008
-------------------------------------------------------------------------------

         Net Revenue

          Net revenue  decreased by  approximately  $582,000 in the three months
ended July 31, 2009, to  approximately  $300,000,  as compared to  approximately
$882,000 in the comparable  prior-year  period.  Revenue from display technology
license  fees  related to the  License  Agreement  with  Videocon  decreased  by
$520,000,  to  $250,000,  as compared to $770,000 in the  comparable  prior-year
period,  due to the timing of  payments  from  Videocon.  Revenue  from sales of
encryption products decreased by approximately $62,000 in the three months ended
July 31, 2009, to approximately  $50,000, as compared to approximately  $112,000
in the comparable prior-year period. Our encryption revenue has been limited and
is sensitive to individual large transactions.

         Cost of Encryption Products Sold

         The cost of encryption products sold was approximately  $35,000 in both
the three months ended July 31, 2009 and in the  comparable  prior-year  period.
The cost of  encryption  products  sold in the three  months ended July 31, 2009
includes a provision for excess inventory of approximately  $20,000. The cost of

                                       35
<PAGE>

encryption  products  shipped in the current period  decreased to  approximately
$15,000,  as  compared to  approximately  $35,000 in the  comparable  prior-year
period, due to a decrease in unit shipments of encryption products.

         Research and Development Expenses

         Research and development  expenses decreased by approximately  $281,000
in the three  months  ended  July 31,  2009,  to  approximately  $649,000,  from
approximately  $930,000 in the  comparable  prior-year  period.  The decrease in
research and development  expenses was principally due to a decrease in employee
stock option compensation expense of approximately $246,000, which resulted from
a decrease in the weighed  average fair value of stock options at grant dates, a
decrease in  patent-related  expenses  of  approximately  $87,000,  offset by an
increase in outside research and development expense of approximately $38,000.

         Selling, General and Administrative Expenses

         Selling, general and administrative expenses increased by approximately
$147,000 to approximately $806,000 in the three months ended July 31, 2009, from
approximately  $659,000 in the  comparable  prior-year  period.  The increase in
selling,  general and administrative expenses was principally due to an increase
in professional fees of approximately  $64,000, an increase in the provision for
doubtful accounts of $43,000,  an increase in employee  compensation and related
costs, other than stock option expense, of approximately $32,000, an increase in
employee stock option compensation expense of approximately $26,000, offset by a
decrease in consultant expense of approximately $29,000.

         Interest Income

         Interest income was approximately $5,000 in the three months ended July
31, 2009, compared to approximately $12,000 in the comparable prior-year period.
The decrease in interest income was primarily the result of a reduction in short
term interest rates.

LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

         From our inception,  we have met our liquidity and capital  expenditure
needs  primarily  through the proceeds from sales of common stock in our initial
public  offering,  in private  placements,  upon exercise of warrants  issued in
connection with the private placements and initial public offering, and upon the
exercise of stock  options.  In addition,  commencing  in the fourth  quarter of
fiscal 1999, we have generated cash flows from sales of our encryption  products
and in May 2008,  we  commenced  receiving  license  fees related to our display
technology from Videocon pursuant to the License Agreement.

         During the nine months ended July 31, 2009,  our cash used in operating
activities  was  approximately  $1,979,000.   This  resulted  from  payments  to
suppliers,  employees and  consultants of  approximately  $2,388,000,  which was
offset by cash of approximately  $112,000  received from collections of accounts
receivable  related  to sales of  encryption  products  and  display  technology
engineering  services,  $250,000 received from display technology licensing fee,
approximately  $18,000 of interest income and approximately  $29,000 of dividend

                                       36
<PAGE>

income  received.  Our cash  provided by  investing  activities  during the nine
months  ended July 31, 2009 was  approximately  $573,000,  which  resulted  from
$1,443,000  received upon  maturities of  short-term  investments  consisting of
certificates of deposit and U.S. government securities and approximately $32,000
received upon the sale of Digital Info Security Co. Inc. common stock, offset by
a purchase of short-term U.S.  government  securities of approximately  $900,000
and  purchases  of  approximately  $2,000 of  equipment.  Our cash  provided  by
financing   activities   during  the  nine  months   ended  July  31,  2009  was
approximately $1,248,000, which resulted from cash received upon the exercise of
stock options. Accordingly, during the nine-months ended July 31, 2009, our cash
and cash equivalents decreased by approximately  $158,000 and our short-term and
non-current   investments  in  certificates  of  deposit  and  U.S.   government
securities  decreased by  approximately  $542,000.  As a result,  our cash, cash
equivalents,  and  investments in  certificates  of deposit and U.S.  government
securities  at  July  31,  2009  decreased  to  approximately   $1,971,000  from
approximately  $2,671,000 at the end of fiscal 2008. Our operating cash accounts
are maintained at  FDIC-insured  banks.  Our bank accounts and  certificates  of
deposit are maintained within FDIC coverage limits.

         Net  accounts  receivable  decreased  by  approximately   $91,000  from
$103,000 at the end of fiscal 2008 to  approximately  $12,000 at July 31,  2009,
principally  due to a provision for doubtful  accounts of $103,000.  Inventories
decreased by approximately  $40,000 from  approximately  $178,000 at October 31,
2008 to  approximately  $138,000 at July 31, 2009,  primarily as a result of the
timing  of  shipments  and  production  schedules  and a  provision  for  excess
inventory of approximately  $20,000 in the current year.  Investment in Videocon
is recorded at fair value and increased to approximately  $5,654,000 at July 31,
2009 from  $3,620,000  at the end of fiscal  2008,  as a result of a decrease in
unrealized loss of  approximately  $2,034,000  during the nine months ended July
31, 2009. Investment in DISC is recorded at fair value and decreased to $220,000
at July 31,  2009  from  $842,000  at the end of fiscal  2008,  as a result of a
decrease  in the price of the DISC common  stock on the Pink  Sheets  during the
nine months ended July 31, 2009 and the sale of 1,200,000  shares of DISC common
stock  with a cost  of  approximately  $41,000.  Accounts  payable  and  accrued
liabilities decreased by approximately  $242,000 from approximately  $454,000 at
the end of fiscal 2008 to  approximately  $212,000 at July 31, 2009, as a result
the timing of payments and the reversal of certain patent related cost which are
no longer an obligation of the Company.  Deferred  revenue  decreased to $-0- at
July 31,  2009  from  $313,000  at the end of  fiscal  2008,  as a result of the
license fee revenue recognized during the nine months ended July 31, 2009.

         Working capital at July 31, 2009 increased to approximately  $1,967,000
from  approximately  $1,489,000 at the end of fiscal 2008.  Our working  capital
includes  inventory of approximately  $138,000 at July 31, 2009.  Management has
recorded our  inventory at the lower of cost or our current best estimate of net
realizable value. To date, sales of our products have been limited. Accordingly,
there can be no  assurance  that we will not be  required  to reduce the selling
price of our inventory below our current carrying value.

         Total employee  compensation  expense for the nine-month  periods ended
July  31,  2009  and  2008  was   approximately   $2,811,000   and   $4,340,000,
respectively,  and for the three-month  periods ended July 31, 2009 and 2008 was
approximately $889,000 and $1,053,000, respectively. During the nine-month ended
July 31, 2009 and 2008, a significant portion of employee compensation consisted
of the  issuance  of  stock  and  stock  options  to  employees  in lieu of cash
compensation.  During the  nine-month  periods  ended July 31, 2009 and 2008, we
issued 5,017,790 shares and 1,453,060 shares,  respectively,  of common stock to

                                       37
<PAGE>

certain employees for services rendered.  We recorded  stock-based  compensation
expense for the nine-month periods ended July 31, 2009 and 2008 of approximately
$1,621,000 and $1,437,000,  respectively,  and for the three-month periods ended
July 31, 2009 and 2008 of approximately $449,000 and $396,000, respectively, for
shares of common stock issued to employees. We recorded stock-based compensation
expense for the nine-month periods ended July 31, 2009 and 2008 of approximately
$660,000 and $2,388,000,  respectively,  and for the  three-month  periods ended
July 31, 2009 and 2008 of  approximately  $259,000 and  $479,000,  respectively,
related to stock options granted to employees and directors.  It is management's
intention to continue to compensate  employees and directors by issuing stock or
stock options.

         In  addition,  during the  nine-month  periods  ended July 31, 2009 and
2008, we issued 152,325 shares and 85,171 shares, respectively,  of common stock
to  non-employee  consultants  for  services  rendered.  We recorded  consulting
expense for the nine-month periods ended July 31, 2009 and 2008 of approximately
$47,000 and $92,000,  respectively,  and for the three-month  periods ended July
31, 2009 and 2008 of approximately $12,000 and $17,000, respectively, for shares
of common  stock issued to  consultants.  In  addition,  we recorded  consulting
expense  for stock  options  granted  to  non-employee  consultants,  during the
nine-month  periods ended July 31, 2009 and 2008, of  approximately  $10,000 and
$213,000,  respectively,  and during the three-month periods ended July 31, 2009
and  2008,  of  approximately  $3,000  and  $3,000,  respectively.  It  is  also
management's intention to continue to compensate consultants by issuing stock or
stock options.

         During  the  nine-month  periods  ended July 31,  2009 and 2008,  stock
options to purchase  4,150,000  shares and 2,679,200  shares,  respectively,  of
common stock were exercised with aggregate proceeds of approximately  $1,248,000
and $2,107,000, respectively.

         During the nine months ended July 31, 2008, we issued 20,000,000 shares
of our common stock to an affiliate of Videocon for an aggregate  purchase price
of  $16,200,000  and we  purchased  1,495,845  Videocon  GDRs  for an  aggregate
purchase  price of  $16,200,000.  In April  2009 and  April  2008,  we  received
dividends of approximately $29,000 and $131,000,  respectively,  on the Videocon
GDRs we hold.  While the Videocon GDRs are held as security for the loan payable
to Mars Overseas, the agreement governing such loan provides that any dividends,
distributions,  rights or other  proceeds or benefits in respect of the Videocon
GDRs  shall be  promptly  transferred  to us free and clear of any  encumbrances
under the agreements.

         We believe that our existing  cash,  cash  equivalents,  investments in
certificates of deposit,  investments in U.S. government securities and accounts
receivable,  together  with cash flows  from  expected  sales of our  encryption
products and revenue  relating to our thin, flat,  low-voltage  phosphor display
technology,  including  license  fees and  royalties  from  Videocon,  and other
potential sources of cash flows, will be sufficient to enable us to continue our
marketing,  production,  and research and development  activities.  However, our
projections of future cash needs and cash flows may differ from actual  results.
If current cash and cash that may be generated from operations are  insufficient
to  satisfy  our  liquidity  requirements,  we may seek to sell  debt or  equity
securities  or to  obtain  a line  of  credit.  The  sale of  additional  equity
securities or convertible debt could result in dilution to our stockholders.  It
is also  management's  intention to continue to compensate  employees by issuing
stock or stock  options.  We  currently  have no  arrangements  with  respect to

                                       38
<PAGE>

additional financing. There can be no assurance that we will generate sufficient
revenues in the future (through sales, license fees and royalties, or otherwise)
to satisfy our liquidity  requirements  or sustain future  operations,  that our
production  capabilities  will be  adequate,  that  other  products  will not be
produced by other  companies  that will render our  products  obsolete,  or that
other sources of funding would be available, if needed, on favorable terms or at
all. If we cannot obtain such funds if needed, we would need to curtail or cease
some or all of our operations.

         We are  seeking to improve our  liquidity  through  increased  sales or
license of products  and  technology.  In an effort to generate  sales,  we have
marketed  our   encryption   products   directly  to  U.S.   and   international
distributors,  dealers  and  original  equipment  manufacturers  that market our
encryption  products  and to  end-users.  In fiscal  2008,  we entered  into the
License Agreement with Videocon.  Under the License Agreement,  a license fee of
$11 million from Videocon is payable in installments  over a 27 month period and
an agreed  upon  royalty  from  Videocon  is payable  based on display  sales by
Videocon. During the nine months ended July 31, 2009, we have recognized revenue
from sales of encryption products of approximately $71,000, revenue from display
technology  engineering  services of $52,000 and revenue from display technology
license fee of approximately $813,000.

         The  following  table  presents  our  expected  cash  requirements  for
contractual obligations outstanding as of July 31, 2009:
<TABLE>
<CAPTION>
                                                             Payments Due by Period
                             ----------------------------------------------------------------------------------------
                                 Less
  Contractual                    than             1-3              4-5              After
  Obligations                   1 year           years            years            5 years               Total
  -----------------------    -------------    -------------    ------------    ----------------    ------------------
     <S>                          <C>             <C>              <C>               <C>                  <C>
  Noncancelable
  Operating Leases            $ 294,000        $404,000         $   -           $     -             $    698,000

  Loan Payable                     -                -               -              5,000,000        $  5,000,000
                             -------------    -------------    ------------    ----------------    ------------------

  Total Contractual
  Cash Obligations            $ 294,000        $404,000         $   -           $  5,000,000        $  5,698,000
                             =============    =============    ============    ================    ==================
</TABLE>

EFFECT OF RECENTLY ISSUED PRONOUNCEMENTS
----------------------------------------

         In  December  2007,  the FASB  issued  SFAS  No.  141  (revised  2007),
"Business  Combinations" ("SFAS No. 141R"), which changes how an entity accounts
for the acquisition of a business.  When  effective,  SFAS No. 141R will replace
existing  SFAS  No.  141,  "Business  Combinations"  ("SFAS  No.  141"),  in its
entirety. SFAS No. 141R carries forward the existing requirements to account for
all business  combinations  using the acquisition  method  (formerly  called the
purchase method). In general,  SFAS No. 141R will require  acquisition-date fair
value  measurement of identifiable  assets acquired,  liabilities  assumed,  and
noncontrolling interest in the acquired entity. SFAS No. 141R will eliminate the
current  cost-based  purchase  method  under  SFAS No.  141.  SFAS  No.  141R is
effective  for fiscal  years and  interim  periods  within  those  fiscal  years
beginning on or after  December  15, 2008.  The adoption of SFAS No. 141R is not
expected to have a material effect on our consolidated financial statements.

                                       39
<PAGE>

         In  December  2007,  the  FASB  issued  SFAS No.  160,  "Noncontrolling
Interests  in  Consolidated  Financial  Statements,  an amendment of ARB No. 51"
("SFAS No. 160").  SFAS No. 160 establishes  accounting and reporting  standards
for the noncontrolling  interests in a subsidiary and for the deconsolidation of
a  subsidiary.  SFAS No. 160 is effective  for fiscal years and interim  periods
within those fiscal years  beginning on or after December 15, 2008. The adoption
of SFAS No. 160 is not  expected to have a material  effect on our  consolidated
financial statements.

         In  September   2006,  the  FASB  issued  SFAS  No.  157,  "Fair  Value
Measurements"  ("SFAS  No.  157"),  to clarify  the  definition  of fair  value,
establish a framework for measuring fair value and expand the disclosures  about
fair value measurements. SFAS No. 157 defines fair value as the price that would
be  received  to sell an asset or paid to  transfer  a  liability  in an orderly
transaction  between  market  participants  at the  measurement  date (an  exact
price). SFAS No. 157 also stipulates that, as a market-based  measurement,  fair
value  measurement  should be determined  based on the  assumptions  that market
participants would use in pricing the asset or liability, and establishes a fair
value hierarchy that distinguishes  between (a) market  participant  assumptions
developed  based  on  market  data  obtained  from  sources  independent  of the
reporting  entity  (observable  inputs)  and  (b)  the  reporting  entity's  own
assumptions  about market  participant  assumptions  developed based on the best
information available in the circumstances  (unobservable  inputs). SFAS No. 157
is effective for fiscal years beginning after November 15, 2007. The adoption of
SFAS No.  157 did not  have a  material  effect  on our  consolidated  financial
statements.

          In February 2008, the FASB issued FASB Staff Position  ("FSP") No. FAS
157-2, "Effective Date of FASB Statement No. 157" ("FSP No. FAS 157-2") This FSP
permits a one-year  deferral of  application  of SFAS No. 157 for non  financial
assets and  liabilities  measured at fair value on a  non-recurring  basis.  The
adoption of FSP No. FAS 157-2 is not  expected to have a material  effect on our
consolidated financial statements.

         In April  2009,  the FASB issued FSP No. FAS 157-4,  "Determining  Fair
Value When the  Volume and Level of  Activity  for the Asset or  Liability  Have
Significant  Decreased and Identifying  Transactions That Are Not Orderly" ("FSP
No. FAS 157-4"). This FSP provides additional guidance for estimating fair value
in accordance  with SFAS No. 157 when there has been a  significant  decrease in
market  activity  for a  financial  asset.  An  entity is  required  to base its
conclusion  about  whether a  transaction  was  distressed  on the weight of the
evidence  presented.  This FSP also re-affirms that the objective of fair value,
when the market for an asset is not active,  is the price that would be received
to sell the asset in an orderly  market (as  opposed to a  distressed  or forced
transaction).  Additional  enhanced  disclosures are also required in accordance
with this FSP. FSP No. FAS 157-4 must be applied  prospectively and is effective
for interim and annual  periods  ending after June 15, 2009. The adoption of FSP
No.  FAS 157-4 did not have a  material  effect  on our  consolidated  financial
statements.

         In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, "Interim
Disclosures about Fair Value of Financial  Instruments"  ("FSP No. FAS 107-1 and
APB  28-1"),  principally  to  require  publicly  traded  companies  to  provide
disclosures  about  fair value of  financial  instruments  in interim  financial
information.  This guidance is effective for interim and annual  periods  ending

                                       40
<PAGE>

after June 15, 2009. The adoption of FSP No. FAS 107-1 and APB 28-1 did not have
a material effect on our consolidated financial statements.

         In April  2009,  the FASB  issued  FSP No.  FAS  115-2  and FAS  124-2,
"Recognition  and  Presentation of  Other-Than-Temporary  Investments"  (FSP No.
115-2  and  FSP   124-2").   FSP  No.  FAS  115-23  and  FSP  124-2  amends  the
other-than-temporary  impairment guidance for debt securities. Under FSP No. FAS
115-2 and FAS 124-2, the pre-existing  "intent and ability" trigger was modified
such that an other-than-temporary impairment is now trigged when there is intent
to sell the  security,  it is more  likely  than not that the  security  will be
required to be sold before recovery in value, or the security is not expected to
recover the entire amortized cost basis of the security ("credit related loss").
Credit   related   losses   on   debt   securities   will   be   considered   an
other-than-temporary impairment recognized in earnings, and any other losses due
to a decline in fair  value  relative  to the  amortized  cost  deemed not to be
other-than-temporary will be recorded in other comprehensive income. FSP No. FAS
115-2 and 124-2 is effective  for interim and annual  periods  ending after June
15,  2009.  The  adoption of FSP No. FAS 115-2 and 124-2 did not have a material
effect on our consolidated financial statements.

         In May 2009, the FASB issued SFAS No. 165,  "Subsequent  Events" ("SFAS
No. 165").  SFAS No. 165  establishes  accounting  and  reporting  standards for
events that occur after the balance sheet date but before  financial  statements
are issued or are  available to be issued.  SFAS No. 165 is effective for fiscal
years and interim  periods  ending after June 15, 2009. The adoption of SFAS No.
165 did not have a material effect on our consolidated financial statements.

         In June 2009, the FASB issued SFAS No. 168, "FASB Accounting  Standards
Codification  and the Hierarchy of Generally  Accepted  Accounting  Principles."
This  standard  replaces  SFAS No. 162,  "The  Hierarchy of  Generally  Accepted
Accounting  Principles,"  and  establishes  only two  levels  of U.S.  generally
accepted accounting principles (GAAP): authoritative and non-authoritative.  The
FASB Accounting Standards Codification (the Codification) will become the source
of authoritative,  nongovernmental  GAAP for Securities and Exchange  Commission
("SEC") registrants. All other non-grandfathered,  non-SEC accounting literature
not included in the Codification will become non-authoritative. This Standard is
effective for financial  statements for interim or annual reporting ending after
September  15,  2009.  As the  Codification  was not intended to change or alter
existing  GAAP,  it will not  have  any  effect  on our  consolidated  financial
statements.

FORWARD-LOOKING STATEMENTS
--------------------------

         Information  included in this Quarterly Report on Form 10-Q may contain
forward-looking   statements  within  the  meaning  of  the  Private  Securities
Litigation Reform Act of 1995.  Forward-looking statements are not statements of
historical facts, but rather reflect our current expectations  concerning future
events and results. We generally use the words "believes," "expects," "intends,"
"plans,"  "anticipates,"  "likely,"  "will" and similar  expressions to identify
forward-looking  statements.  Such forward-looking  statements,  including those
concerning our  expectations,  involve risks,  uncertainties  and other factors,
some of which are  beyond  our  control,  which may  cause our  actual  results,
performance or achievements,  or industry  results,  to be materially  different
from any future results,  performance,  or achievements  expressed or implied by
such forward-looking statements. These risks, uncertainties and factors include,

                                       41
<PAGE>

but are not  limited  to,  those  factors  set forth in Part II, Item 1A - "Risk
Factors" below and Note 1 to the Condensed  Consolidated  Financial  Statements.
You should read this  discussion  and analysis  along with our Annual  Report on
Form 10-K for the year ended  October  31, 2008 and the  condensed  consolidated
financial  statements  included in this Report.  We undertake no  obligation  to
publicly update or revise any forward-looking statements, whether as a result of
new  information,  future events or  otherwise.  You are cautioned not to unduly
rely  on  such  forward-looking   statements  when  evaluating  the  information
presented in this Report.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.
         -----------------------------------------------------------

         As of July 31,  2009,  we had invested a portion of our cash on hand in
short-term, fixed rate and highly liquid instruments that have historically been
reinvested  when  they  mature  throughout  the  year.   Although  our  existing
short-term  instruments  are not  considered  at risk with respect to changes in
interest  rates or markets  for these  instruments,  our rate of return on these
securities could be affected at the time of reinvestment, if any.

         At July 31, 2009,  our  investment in Videocon GDRs is recorded at fair
value of approximately  $5,654,000 including an unrealized loss of approximately
$10,546,000  and has exposure to price risk. The fair value of the Videocon GDRs
is based on the underlying price of Videocon's equity shares which are traded on
stock  exchanges in India with prices  quoted in rupees.  Accordingly,  the fair
value of the Videocon GDRs is subject to price risk and foreign  exchange  risk.
The  potential  loss in fair value  resulting  from a  hypothetical  10% adverse
change in prices of Videocon  equity shares quoted by Indian stock exchanges and
in foreign currency exchange rates, as of July 31, 2009 amounts to approximately
$565,000.

         Our  investment  in DISC  common  stock at July 31, 2009 is recorded at
fair value $220,000 including an unrealized loss of $156,000 and has exposure to
price risk. DISC's common stock is not registered under the Securities  Exchange
Act of 1934,  but is quoted on the Pink Sheets.  Accordingly,  the fair value of
DISC's common stock is subject to price risk.  The potential  loss in fair value
resulting from a hypothetical 10% adverse change in price of this investment, as
of July 31, 2009 amounts to approximately $22,000.

Item 4.  Controls and Procedures.
         ------------------------

         We  carried  out an  evaluation,  under  the  supervision  and with the
participation  of our  management  including our Chairman of the Board and Chief
Executive Officer and our Vice President - Finance and Chief Financial  Officer,
of the effectiveness of the design and operation of our disclosure  controls and
procedures  pursuant to Rule 13-15(b) of the Securities Exchange Act of 1934, as
amended.  Based  upon  that  evaluation,  our  Chairman  of the  Board and Chief
Executive  Officer and our Vice President - Finance and Chief Financial  Officer
concluded  that our  disclosure  controls and procedures are effective as of the
end of the period covered by this report.

         There was no change in our internal  control over  financial  reporting
during the  quarter  ended July 31,  2009 that has  materially  affected,  or is
reasonably  likely to materially  affect,  our internal  control over  financial
reporting.

                                       42
<PAGE>

                           PART II. OTHER INFORMATION

Item 1A. Risk Factors.
         -------------

         There  have been no  material  changes in our risk  factors  from those
disclosed in our Annual Report on Form 10-K for the year ended October 31, 2008.

Item 6.  Exhibits.
         ---------

              31.1  Certification  of Chief Executive  Officer,  pursuant to
              Section 302 of the Sarbanes-Oxley Act of 2002, dated September
              9, 2009.

              31.2  Certification  of Chief Financial  Officer,  pursuant to
              Section 302 of the Sarbanes-Oxley Act of 2002, dated September
              9, 2009.

              32.1  Statement of Chief Executive Officer, pursuant to Section
              1350 of  Title 18 of the United States Code, dated September 9,
              2009.

              32.2  Statement of Chief Financial Officer, pursuant to Section
              1350 of  Title 18 of the United States Code, dated September 9,
              2009.


                                   SIGNATURES
                                   ----------

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

                                                     COPYTELE, INC.


                                              By: /s/ Denis A. Krusos
                                                 -------------------------------
                                              Denis A. Krusos
                                              Chairman of the Board and
                                              Chief Executive Officer
September 9, 2009                             (Principal Executive Officer)



                                              By: /s/ Henry P. Herms
                                                 -------------------------------
                                              Henry P. Herms
                                              Vice President - Finance and
                                              Chief Financial Officer (Principal
September 9, 2009                             Financial and Accounting Officer)




                                       43