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 April 30, 2004

                         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 is an accelerated filer (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 May 24, 2004,  the  registrant had  outstanding  83,736,028  shares of Common
Stock, par value $.01 per share,  which is the registrant's only class of common
stock.


<PAGE>






                                TABLE OF CONTENTS


<TABLE>

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements.

<S>                                                                                <C>
          Condensed Balance Sheets as of April 30, 2004 (Unaudited) and
             October 31, 2003                                                            3

         Condensed Statements of Operations (Unaudited) for the six months
            ended April 30, 2004 and 2003                                                4

         Condensed Statements of Operations (Unaudited) for the three months
            ended April 30, 2004 and 2003                                                5

          Condensed Statements of Cash Flows (Unaudited) for the six months
            ended April 30, 2004 and 2003                                                6

         Notes to Condensed Financial Statements (Unaudited)                        7 - 13

Item 2.  Management's Discussion and Analysis of Financial Condition and
            Results of Operations.                                                 14 - 26

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.                    26

Item 4.  Controls and Procedures.                                                       26


PART II.  OTHER INFORMATION

Item 6.   Exhibits and Reports on Form 8-K.                                             27

          SIGNATURES                                                                    28

</TABLE>



<PAGE>





                          PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements.

                                 COPYTELE, INC.
                            CONDENSED BALANCE SHEETS


<TABLE>
<CAPTION>

                                                                           (Unaudited)
                                                                           ------------
                                                                             April 30,     October 31,
                                         ASSETS                                2004            2003
                                         ------                            ------------   -------------
CURRENT ASSETS:
<S>                                                                        <C>             <C>
   Cash and cash equivalents                                               $  1,243,279    $  1,023,531
   Accounts receivable, net of allowance for doubtful accounts of
      $149,455 and $159,230, respectively                                        44,656          41,500
   Other receivables                                                            100,105         127,124
   Inventories                                                                1,064,184       1,044,875
   Prepaid expenses and other current assets                                     23,283          47,972
                                                                           ------------    ------------
                        Total current assets                                  2,475,507       2,285,002

PROPERTY AND EQUIPMENT, net                                                      34,863          39,480

OTHER ASSETS                                                                      5,509           6,009
                                                                           ------------    ------------
                                                                           $  2,515,879    $  2,330,491
                                                                           ============    ============
                          LIABILITIES AND SHAREHOLDERS' EQUITY
                          ------------------------------------
CURRENT LIABILITIES:
   Accounts payable                                                        $    373,869    $    316,865
   Accrued liabilities                                                           34,451          25,420
                                                                           ------------    ------------
                        Total current liabilities                               408,320         342,285
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; 83,609,478 and 80,151,478 shares issued
      and outstanding, respectively                                             836,095         801,515
   Additional paid-in capital                                                67,871,424      66,282,397
   Accumulated deficit                                                      (66,599,960)    (65,095,706)
                                                                           ------------    ------------
                                                                              2,107,559       1,988,206
                                                                           ------------    ------------
                                                                           $  2,515,879    $  2,330,491
                                                                           ============    ============
</TABLE>

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

                                       3
<PAGE>





                                 COPYTELE, INC.
                 CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)


<TABLE>
<CAPTION>
                                                          For the Six Months Ended
                                                                  April 30,
                                                        ----------------------------
                                                            2004             2003
                                                        ------------    ------------
<S>                                                    <C>              <C>
REVENUE                                                 $    140,804    $    113,082

COST OF REVENUE                                               46,298          77,685
                                                        ------------    ------------

         Gross profit                                         94,506          35,397
                                                        ------------    ------------
OPERATING EXPENSES
         Research and development expenses                   991,179         894,747
         Selling, general and administrative expenses        609,549         917,838
                                                        ------------    ------------
                  Total operating expenses                 1,600,728       1,812,585
                                                        ------------    ------------

LOSS FROM OPERATIONS                                      (1,506,222)     (1,777,188)

INTEREST INCOME                                                1,968           2,568
                                                        ------------    ------------

NET LOSS                                                $ (1,504,254)   $ (1,774,620)
                                                        ============    ============
PER SHARE INFORMATION:
Net loss per share:
         Basic and Diluted                              $      (0.02)   $      (0.02)
                                                        ============    ============
Shares used in computing net loss per share:
         Basic and Diluted                                81,382,989      72,213,599
                                                        ============    ============
</TABLE>

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

                                       4


<PAGE>





                                 COPYTELE, INC.
                 CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)


<TABLE>
<CAPTION>
                                                         For the Three Months Ended
                                                                  April 30,
                                                        ----------------------------
                                                            2004             2003
                                                        ------------    ------------
<S>                                                    <C>              <C>
REVENUE                                                 $    101,804    $     21,743

COST OF REVENUE                                               31,699          15,660
                                                        ------------    ------------

         Gross profit                                         70,105           6,083
                                                        ------------    ------------
OPERATING EXPENSES
         Research and development expenses                   506,636         403,120
         Selling, general and administrative expenses        259,388         573,886
                                                        ------------    ------------
                  Total operating expenses                   766,024         977,006
                                                        ------------    ------------

LOSS FROM OPERATIONS                                        (695,919)       (907,923)

INTEREST INCOME                                                1,019             899
                                                        ------------    ------------

NET LOSS                                                $   (694,900)   $   (970,024)
                                                        ============    ============
PER SHARE INFORMATION:
Net loss per share:
         Basic and Diluted                              $      (0.01)   $      (0.01)
                                                        ============    ============
Shares used in computing net loss per share:
         Basic and Diluted                                82,167,680      73,417,701
                                                        ============    ============
</TABLE>



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




                                       5
<PAGE>

                                 COPYTELE, INC.
                 CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

<TABLE>
<CAPTION>
                                                                          For the Six Months Ended
                                                                                 April 30,
                                                                         --------------------------
                                                                             2004           2003
                                                                         -----------    -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                      <C>            <C>
   Payments to suppliers, employees and  consultants                     $  (646,345)   $  (631,616)
   Cash received from customers                                              211,609         92,306
   Interest received                                                           1,968          2,568
                                                                         -----------    -----------
           Net cash used in operating activities                            (432,768)      (536,742)
                                                                         -----------    -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Payments for purchases of property and equipment                           (6,074)            --
                                                                         -----------    -----------
           Net cash used in investing activities                              (6,074)            --
                                                                         -----------    -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from exercise of stock options, net of registration costs        658,590         89,714
                                                                         -----------    -----------
           Net cash provided by financing activities                         658,590         89,714
                                                                         -----------    -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                         219,748       (447,028)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                           1,023,531        854,822
                                                                         -----------    -----------
CASH AND CASH EQUIVALENTS AT  END OF PERIOD                              $ 1,243,279    $   407,794
                                                                         ===========    ===========

RECONCILIATION OF NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES:
   Net loss                                                              $(1,504,254)   $(1,774,620)
   Stock option compensation to consultants                                   17,136             --
   Stock awards granted to employees and consultants pursuant to stock
      incentive plans                                                        947,881        772,205
   Provision for (recovery of) bad debts                                     (52,772)       206,622
   Depreciation and amortization                                              10,691         18,927
   Change in operating assets and liabilities:
      Accounts receivable and other receivables                               76,635        (20,776)
      Inventories                                                            (19,309)       264,047
      Prepaid expenses and other current assets                               24,689        (10,484)
      Other assets                                                               500            145
      Accounts payable and  accrued liabilities                               66,035          7,192
                                                                         -----------    -----------
           Net cash used in operating activities                         $  (432,768)   $  (536,742)
                                                                         ===========    ===========
</TABLE>


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



                                       6
<PAGE>




                                 COPYTELE, INC.

                     NOTES TO CONDENSED FINANCIAL STATEMENTS

                                   (UNAUDITED)


1. NATURE AND DEVELOPMENT OF BUSINESS AND FUNDING
   ----------------------------------------------

Organization and Basis of Presentation
--------------------------------------

         CopyTele,  Inc. was  incorporated  on November 5, 1982.  Our  principal
operations  include the  development,  production  and  marketing of thin,  high
brightness,  flat panel  video  displays  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  financial  statements  have been prepared in accordance
with accounting  principles  generally  accepted in the United States of America
("US GAAP") for 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  six-month  and
three-month periods ended April 30, 2004 and 2003. 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.

         The  results of  operations  for interim  periods  may not  necessarily
reflect  the results of  operations  for a full year.  Reference  is made to the
audited financial  statements and notes thereto included in our Annual Report on
Form 10-K for the  fiscal  year  ended  October  31,  2003,  for more  extensive
disclosures than contained in these condensed financial statements.

Products and Key Relationships
------------------------------

         Our line of hardware-based  encryption  products presently includes the
USS-900,  the  DCS-1200,  the  DCS-1400,  the  STS-1500  and  the  ULP-1.  These
encryption  products are  multi-functional,  hardware  based digital  encryption
systems that provide  high-grade voice, fax and data encryption using either the
Citadel(TM)  CCX encryption  cryptographic  chip (which is  manufactured  by the
Harris Corporation) or the Triple DES or AES algorithm  (algorithms available in
the public domain which are used by many U.S. government agencies). In addition,
we have developed the USS-900 Security Software, a software security product for
the  encryption of data files and e-mail  attachments in both desktop and laptop
computers utilizing Microsoft Windows operating systems, using either the Triple
DES or the AES algorithm.  We have also developed the DCS-1800 Security Software
to encrypt  voice and data in  cellular  and  satellite  phones,  scanners,  and
printers. Furthermore, we have developed modifications of our standard equipment
for specific  applications  and are producing the USS-900T to provide  automatic
fax  security  and the  USS-900TD  to provide  voice and fax  security  over the
Thuraya satellite network, built by Boeing Satellite Systems, Inc. ("Boeing). We
have also  developed and are producing the DCS-1400D  which is combined with the
Thuraya handset to provide



                                        7
<PAGE>


voice security over the Thuraya satellite network. We are continuing our
research and development activities for additional encryption products. We sell
our encryption products through a distributor/dealer network and to end-users.

         In April 2004,  we entered  into an  agreement  with  Boeing,  allowing
Boeing to provide our  encryption  products  for use over the Thuraya  satellite
communications  network.  Boeing  will  use the  USS-900  for fax  and/or  voice
encryption, and the DCS-1200 and DCS-1400 for voice encryption. Boeing will sell
these units for use with its Thuraya handsets  throughout the Thuraya  satellite
network. Our encryption  technology has been integrated directly into this phone
system.  Our products enable the Thuraya  satellite network to provide encrypted
communications  between  satellite  phones,  from satellite phones to desk-based
phones or between  desk-based  phones.  We are  supplying  Boeing  our  USS-900,
USS-900T,  USS-900TD,  DCS-1200, DCS-1400, DCS-1400D products in connection with
our agreement.

         We have  provided our hardware  and  software  encryption  solutions to
several  other  large  organizations  which  are  evaluating  our  solutions  in
connection  with their  security  requirements.  Our USS-900 has  recently  been
selected by a major U.S. company to secure its worldwide fax communications.

         We are also  continuing our research and  development  activities  with
respect  to flat  panel  display  technologies,  including  our thin  flat  high
brightness  video displays.  We have developed,  in conjunction  with Volga Svet
Ltd. ("Volga"), several engineering models of high-brightness,  monochrome video
displays,  including a 3.7-inch  (diagonal)  display  having 160 x 80 pixels,  a
5-inch  (diagonal)  display having 320 x 240 pixels,  and a 3.5-inch  (diagonal)
display having 320 x 160 pixels, and we believe that smaller and larger displays
can be made with our technology.  We have been  demonstrating  our displays to a
number of companies  involving  applications  where we believe our displays have
performance  advantages  over LCDs.  These  applications  include use in outdoor
products which operate over wide air  temperature  ranges,  require wide viewing
angles,  and must operate under high and low light ambient  conditions.  We have
received an initial order for a seed quantity of our display  modules to replace
LCDs in an existing product which displays  operating  instructions and operates
in an outdoor environment. Based on this requirement and the interest of several
potential purchasers, together with Volga, we have started to produce monochrome
versions  of our high  brightness  displays  using  Volga's  current  production
facilities. The initial display modules we are producing are fulfilling the seed
order and, based on this, we have made  modifications  to the display modules to
meet customer requirements.

         We have recently  received from the U.S. patent office patents for four
variations  of our video  display  technology  and a notice of  allowance of the
claims contained in our patent  application for one other variation of our video
display technology.

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

         From our  inception  through June 2001,  we had 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


                                       8
<PAGE>


public offering, and upon the exercise of stock options. Commencing in the
fourth quarter of fiscal 1999, we began to generate cash flows from sales of our
products, and, from June 2001 to January 2002, we received development payments
from Futaba Corporation of Japan.

         During the six months ended April 30, 2004,  our  operating  activities
used  approximately  $433,000 in cash. This resulted from payments to suppliers,
employees and consultants of approximately $646,000, which was offset by cash of
approximately  $212,000  received from  collections  of accounts  receivable and
other  receivables  related to sales of  encryption  products  and  services and
approximately  $2,000 of interest  income  received.  In  addition,  we received
approximately  $659,000 in cash upon the exercise of stock options and purchased
approximately $6,000 of equipment. As a result, our cash and cash equivalents at
April  30,  2004  increased  to  approximately   $1,243,000  from  approximately
$1,024,000 at the end of fiscal 2003.

         The auditor's report on our financial statements as of October 31, 2003
states that the net loss incurred  during the year ended  October 31, 2003,  our
accumulated  deficit as of that date, and the other factors  described in Note 1
to the Financial  Statements  included in our Annual Report on Form 10-K for the
year ended  October  31,  2003,  raise  substantial  doubt  about our ability to
continue as a going concern.  The auditor's  report on our financial  statements
for the year ended October 31, 2002 contained a similar statement. Our financial
statements  have been prepared  assuming we will continue as a going concern and
do not  include  any  adjustments  that might  result  from the  outcome of this
uncertainty.

         Based on  reductions  in  operating  expenses  that  have been made and
additional reductions that may be implemented, if necessary, we believe that our
existing  cash and accounts  receivable,  together with cash flows from expected
sales of  encryption  products  and flat  panel  displays,  and other  potential
sources of cash flows,  will be sufficient to enable us to continue in operation
until at least the end of the  second  quarter  of  fiscal  2005.  However,  our
projections of future cash needs and cash flows may differ from actual  results.
We are seeking to improve our liquidity  through  increased  sales or license of
products and technology and may also seek to improve our liquidity through sales
of debt or equity securities.  We currently have no arrangements with respect to
additional  financing.   There  can  be  no  assurance  that  we  will  generate
significant  revenues in the future  (through sales or otherwise) to improve our
liquidity,   that  we  will  generate  sufficient  revenues  to  sustain  future
operations  and/or  profitability,  that we will be able to expand  our  current
distributor/dealer  network, that 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, at terms that we would deem favorable.

2. Stock-Based Compensation
---------------------------

         In December 2002,  the Financial  Accounting  Standards  Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting
for  Stock-Based   Compensation-Transition  and  Disclosure",   which  addresses
financial  accounting and reporting for recording expenses for the fair value of
stock  options.  SFAS 148  provides  alternative  methods  of  transition  for a
voluntary  change to fair  value  based  method of  accounting  for  stock-based
employee compensation.  Additionally,  SFAS 148 requires more prominent and more
frequent  disclosures in


                                       9
<PAGE>


financial statements about the effects of stock-based compensation. The adoption
of SFAS No. 148 disclosure requirements, effective February 1, 2003, had no
effect on our financial position or results of operations. SFAS No. 123
"Accounting for Stock Based Compensation" encourages but does not require
companies to record compensation cost for stock-based employee compensation
plans at fair value. We account for stock options granted to employees using the
intrinsic value method prescribed in APB Opinion No. 25 "Accounting for Stock
Issued to Employees" and comply with the disclosure provisions of SFAS No. 123
and SFAS No. 148. Compensation cost for stock options is measured as the excess,
if any, of the quoted market price of our stock at the date of grant over the
amount an employee must pay to acquire the stock. In accordance with APB Opinion
No. 25, we have not recognized any compensation cost, as all option grants to
employees have been made at the fair market value of our stock on the date of
grant.

         Had  compensation  cost for stock  options  granted to  employees  been
determined  at fair value,  consistent  with SFAS No. 123,  our net loss and net
loss per share would have increased to the following adjusted amounts:

<TABLE>
<CAPTION>
                                                 For the Six Months Ended         For the Three Months Ended
                                                         April 30,                        April 30,
                                                --------------------------        --------------------------
                                                   2004            2003              2004             2003
                                                -----------    -----------        ----------       ---------
<S>                                             <C>            <C>                <C>              <C>
Net loss as reported                            $(1,504,254)   $(1,774,620)       $(694,900)       $(970,024)
Add: Total stock-based employee
     compensation expense, determined
     under fair value based method, for
     all awards, net of related tax effect         (362,043)        (5,955)        (177,920)          (3,081)
                                                -----------    -----------        ---------        ---------
Net loss as adjusted                            $(1,866,297)   $(1,780,575)       $(872,820)       $(973,105)
                                                ===========    ===========        =========        =========

Net loss per share, basic and diluted:
    As reported                                 $     (0.02)   $     (0.02)       $   (0.01)       $   (0.01)
                                                ===========    ===========        =========        =========
    As adjusted                                 $     (0.02)   $     (0.02)       $   (0.01)       $   (0.01)
                                                ===========    ===========        =========        =========
</TABLE>


         During the six-month  periods ended April 30, 2004 and 2003, we granted
to employees and consultants  options to purchase  1,320,000  shares and 460,000
shares,  respectively,  pursuant to the CopyTele, Inc. 2000 Share Incentive Plan
(the "2000 Share Plan") and the Copytele,  Inc. 2003 Share  Incentive  Plan (the
"2003 Share Plan").  We account for options granted to non-employee  consultants
using the fair value method required by SFAS No. 123.  Compensation  expense for
consultants, recognized during the six-month and three-month periods ended April
30, 2004, was each  approximately  $17,000.  We recognized no such  compensation
expense for  consultants  during the  six-month  period  ended  April 30,  2003.
Options  granted  during the  six-month  period  ended April 30,  2004  included
options to  purchase  500,000  shares  and  150,000  shares  granted to Denis A.
Krusos,  our  Chairman of the Board and Chief  Executive  Officer,  and Frank J.
DiSanto, our President, respectively. In addition, during the period from May 1,
2004  through  May 24,  2004,  we granted  options to purchase  250,000  shares,
100,000 shares,  60,000 shares, 60,000 shares, and 50,000 shares, to Mr. Krusos,
Mr. DiSanto,  Anthony Bowers, a director,  George P. Larounis,  a director,  and
Henry P.  Herms,  our Vice  President  - Finance  and Chief  Financial  Officer,
respectively.  During the six-month periods ended April 30, 2004 and 2003, stock
options to


                                       10
<PAGE>


purchase 1,438,500 shares and 440,000 shares, respectively, were exercised, with
aggregate proceeds of approximately $659,000 and $99,000, respectively.

         During the  six-month  periods ended April 30, 2004 and 2003, we issued
1,498,665 shares and 2,761,175 shares, respectively,  of common stock to certain
employees  for  services  rendered,  principally  in lieu of cash  compensation,
pursuant to the 2000 Share Plan and the 2003 Share Plan,  which includes 135,000
shares issued to Mr. Krusos during the six-month period ended April 30, 2004. We
recorded  compensation  costs of  approximately  $712,000  and  $575,000 for the
six-month periods ended April 30, 2004 and 2003, respectively, for the shares of
common stock issued to  employees.  In addition,  during the  six-month  periods
ended  April 30, 2004 and 2003,  we issued  520,835  shares and 991,777  shares,
respectively,  of common stock to consultants for services  rendered pursuant to
the 2000 Share Plan and the 2003 Share Plan. We recorded  consulting  expense of
approximately  $236,000 and $198,000 for the  six-month  periods ended April 30,
2004  and  2003,  respectively,  for  the  shares  of  common  stock  issued  to
consultants.

         As of April 30, 2004, 2,548 shares and 3,095,629 shares,  respectively,
were  available  for future  grants under the 2000 Share Plan and the 2003 Share
Plan.

3.       OTHER RECEIVABLES

         In May and June  2002,  we  received  restricted  common  stock  from a
customer in connection with an outstanding  accounts receivable of approximately
$323,000 and anticipated  settling this accounts receivable through the ultimate
sale of the  restricted  common stock.  This customer has agreed with us to cure
any deficiency between the proceeds from the sale of the restricted common stock
and the  balance  of the  outstanding  accounts  receivable.  In  addition,  the
customer's principal shareholder has personally agreed to cure any deficiency in
the event that the customer  defaults on its agreement to cure such  deficiency,
up to  $292,000.  As of April  30,  2004,  we  received  aggregate  proceeds  of
approximately  $88,000 from the sale of a portion of the restricted common stock
and we intend to sell the  remaining  portion of such stock during  fiscal 2004.
This receivable is stated at management's estimate of its net realizable value.

4.       INVENTORIES

         Inventories consist of the following as of:


                                   April 30,  October 31
                                    2004         2003
                                 ----------   ----------

         Component parts         $  354,477   $  341,344
         Work-in-process             82,452       48,324
         Finished products          627,255      655,207
                                 ----------   ----------
                                 $1,064,184   $1,044,875
                                 ==========   ==========



5. NET INCOME (LOSS) PER SHARE OF COMMON STOCK
   -------------------------------------------

         We comply with the provisions of SFAS No. 128, "Earnings Per Share." In
accordance  with SFAS No. 128,  basic net income (loss) per common share ("Basic
EPS") is computed by dividing net income (loss) by the weighted  average  number
of common  shares  outstanding.  Diluted  net


                                       11
<PAGE>


income (loss) per common share ("Diluted EPS") is computed by dividing net
income (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 stock equivalents then outstanding would be anti-dilutive. For
this reason, excluded from the calculation of Diluted EPS for the six-month and
three-month periods ended April 30, 2004 and 2003 were options to purchase
14,879,546 shares and 14,004,746 shares, respectively.

6. SEGMENT INFORMATION
   -------------------

         We follow the provisions of SFAS No. 131,"Disclosures about Segments of
an  Enterprise  and Related  Information."  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) Flat-panel display and (ii) Encryption products
and services.

         The  following  represents  selected  financial   information  for  our
segments for the  six-month  and  three-month  periods  ended April 30, 2004 and
2003:

<TABLE>
<CAPTION>
                                                                          Encryption Products
               Segment Data                     Flat-Panel Display            and Services                 Total
-------------------------------------------    ---------------------     ----------------------    ---------------------
<S>                                            <C>                       <C>                       <C>
Six Months Ended April 30, 2004:
   Revenue                                     $              --         $              140,840    $             140,804
   Net loss                                             (737,345)                      (766,909)              (1,504,254)

Six Months Ended April 30, 2003:
   Revenue                                     $              --         $              113,082    $             113,082
   Net loss                                             (788,798)                      (985,822)              (1,774,620)

                                                                          Encryption Products
               Segment Data                     Flat-Panel Display            and Services                 Total
-------------------------------------------    ---------------------     ----------------------    ---------------------
Three Months Ended April 30, 2004:
   Revenue                                     $              --         $              101,804    $             101,804
   Net loss                                             (299,277)                      (395,623)                (694,900)

Three Months Ended April 30, 2003:
   Revenue                                     $              --         $               21,743    $              21,743
   Net loss                                             (425,323)                      (544,701)                (970,024)
</TABLE>


                                       12
<PAGE>


7. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
   ------------------------------------------

         In December 2003, the Security and Exchange  Commission  ("SEC") issued
Staff  Accounting  Bulletin  ("SAB")  No.  104,  "Revenue  Recognition",   which
codifies,  revises  and  rescinds  certain  sections  of SAB No.  101,  "Revenue
Recognition",  in order  to make  this  interpretive  guidance  consistent  with
current  authoritative  accounting  and  auditing  guidance  and SEC  rules  and
regulations.  The issuance of SAB No. 104 did not have a material  effect on our
financial position or results of operations.






                                       13
<PAGE>




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

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,
but  are not  limited  to,  those  factors  set  forth  in  "General  Risks  and
Uncertainties"  below and Note 1 to Condensed Financial  Statements.  You should
read the following  discussion and analysis along with our Annual Report on Form
10-K for the year ended October 31, 2003 and the condensed 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.


GENERAL
-------

         Our  principal  operations  include  the  development,  production  and
marketing  of  thin,   high-brightness,   flat  panel  video  displays  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.


         Our line of hardware-based  encryption  products presently includes the
USS-900,  the  DCS-1200,  the  DCS-1400,  the  STS-1500  and  the  ULP-1.  These
encryption  products are  multi-functional,  hardware  based digital  encryption
systems that provide  high-grade voice, fax and data encryption using either the
Citadel(TM)  CCX encryption  cryptographic  chip (which is  manufactured  by the
Harris Corporation) or the Triple DES or AES algorithm  (algorithms available in
the public domain which are used by many U.S. government agencies). In addition,
we have developed the USS-900 Security Software, a software security product for
the  encryption of data files and e-mail  attachments in both desktop and laptop
computers utilizing Microsoft Windows operating systems, using either the Triple
DES or the AES algorithm.  We have also developed the DCS-1800 Security Software
to encrypt  voice and data in  cellular  and  satellite  phones,  scanners,  and
printers. Furthermore, we have developed modifications of our standard equipment
for specific  applications  and are producing the USS-900T to provide  automatic
fax  security  and the  USS-900TD  to provide  voice and fax  security  over the
Thuraya satellite network,  built by Boeing Satellite Systems,  Inc. ("Boeing").
We have also  developed and are  producing the DCS-1400D  which is combined with
the  Thuraya  handset to  provide  voice  security  over


                                       14
<PAGE>


the Thuraya satellite network. We are continuing our research and development
activities for additional encryption products.


         We  are  currently  using  several  U.S.-based   electronic  production
contractors to produce the components  for our encryption  devices.  We sell our
encryption products through a distributor/dealer network and to end-users.


         In April 2004,  we entered  into an  agreement  with  Boeing,  allowing
Boeing to provide our  encryption  products  for use over the Thuraya  satellite
communications  network.  Boeing  will  use the  USS-900  for fax  and/or  voice
encryption, and the DCS-1200 and DCS-1400 for voice encryption. Boeing will sell
these units for use with its Thuraya handsets  throughout the Thuraya  satellite
network. Our encryption  technology has been integrated directly into this phone
system.  Our products enable the Thuraya  satellite network to provide encrypted
communications  between  satellite  phones,  from satellite phones to desk-based
phones or between  desk-based  phones.  The use of  encryption  is  expected  to
benefit Thuraya satellite  telecommunications customers that Boeing is currently
serving in Iraq under a recently  awarded  contract.  Boeing is providing mobile
satellite  services to the  Coalition  Provisional  Authority,  to  officials in
Baghdad's 18 governing  ministries,  to U.S.  military  forces and to other U.S.
personnel in Iraq. We are  supplying  Boeing our USS-900,  USS-900T,  USS-900TD,
DCS-1200, DCS-1400, DCS-1400D products in connection with our agreement.


         We have  provided our hardware  and  software  encryption  solutions to
several  other  large  organizations  which  are  evaluating  our  solutions  in
connection  with their  security  requirements.  Our USS-900 has  recently  been
selected by a major U.S. company to secure its worldwide fax communications.  In
addition,  we have received  orders from other U.S.  companies that  principally
supply U.S. government agencies and foreign governments, to provide our USS-900,
DCS-1200,   and  DCS-1400  to  encrypt  voice,  fax,  and  data  over  satellite
communication  systems.  Such  companies  placed  their orders after an extended
evaluation of our products' performance using the Iridium, Globalstar, Immarset,
Immarset M-4, Mini M and Thuraya satellite  communication  networks.  We believe
that encrypting  information over satellite  networks is in the early stages and
expect this field to be an expanding opportunity for our encryption products due
to the rising demand for information security over many regions of the world.


         We have made  significant  advancements to develop and produce our thin
film video flat panel  displays  utilizing our electronic  emission  technology.
With Volga Svet Ltd.  ("Volga"),  a Russian  display  company  that we have been
working  with for more than six years,  we have  developed  several  engineering
models of  high-brightness,  monochrome  video  displays,  including  a 3.7-inch
(diagonal)  display having 160 x 80 pixels, a 5-inch  (diagonal)  display having
320 x 240 pixels, and a 3.5-inch  (diagonal) display having 320 x 160 pixels. We
are  providing  funding to Volga for this work;  these  development  payments to
Volga are  included in research  and  development  expenses in the  accompanying
condensed financial statements.  Volga has agreed to produce an initial quantity
of these  displays for  commercial  sales on a fixed price basis.  We anticipate
that Volga may in the future  produce  additional  quantities  of  displays  for
commercial  sales also on a fixed price basis,  but we have not entered into any
agreements with Volga for such future production.




                                       15
<PAGE>

         Currently,  liquid crystal displays ("LCDs") are the most commonly used
flat panel displays in commercial products.  We believe that our display has the
following advantages over LCD displays:


     o    No backlight (LCDs require a backlight that results in high power
          consumption and contains mercury)

     o    No thermistor (LCDs require thermistors to control operation at
          various temperatures)

     o    No polarizer (required in LCDs)

     o    No color filter (required in color LCDs)

     o    Almost hemispherical viewing angle (LCDs have limited viewing angles)

     o    Higher contrast ratio

     o    Faster video response time

     o    Operates in a wider range of air temperatures

     o    Longer life

     o    Not affected by ultraviolet light (LCDs contain a liquid crystal which
          may deteriorate after long exposure to direct sunlight)

     o    Safer (leakage of liquid crystal from LCDs may be dangerous)

         We are initially pursuing  applications for our display that we believe
will  demonstrate  these  performance  advantages.  In particular,  we have been
demonstrating  our displays to a number of companies for use in outdoor products
made by them that  operate over wide air  temperature  ranges and under high and
low light ambient conditions, and that require wide viewing angles.


         We  provided  our  display  to a  company  to  evaluate  the  display's
performance  in a product  produced by the company that operates over a wide air
temperature  range in an outdoor  environment.  After  successfully  testing our
display, that company recently issued to us a purchase order for a seed quantity
of modules  containing  our  display,  to replace LCD  modules in the  company's
product.  Another company has evaluated our display for a product the company is
developing  in the field of emergency  communication,  and we are  modifying our
display  in  response  to the  requirements  of such  product.  Based  on  these
developments,  we have,  together  with  Volga,  started to  produce  our 5-inch
(diagonal)  high-brightness  displays using Volga's current production facility.
The initial  display modules we are producing are fulfilling the seed order and,
based on  this,  we have  made  modifications  to the  display  modules  to meet
customer requirements.



                                       16
<PAGE>


         In addition,  we are pursuing other  opportunities by demonstrating our
displays to companies having large quantity display applications,  and we are in
the process of responding  to their  requests for pricing based on their display
specifications and quantity  requirements.  These companies'  applications would
require large  quantities of displays to be located in retail stores,  airports,
vending  machines  and  automobiles.  For  automobiles,  the  displays  would be
required to have the  capability to provide  wide-screen  or standard TV formats
for digital TV and DVD operation. To prepare for these potential  opportunities,
we are working with several Asian companies to supplement Volga's production and
to produce larger size color displays.


         We also are  developing  modifications  to our  display  technology  to
incorporate  the matrix  structure  and drivers of LCDs into our display so that
our display may be produced more easily by facilities  currently producing LCDs.
We have been  working with an LCD  manufacturing  company,  located in Asia,  to
incorporate its LCD technology as part of our display.  We have received samples
of that company's color LCDs which  incorporate  TFT (thin film  technology) and
LCD driver technology,  and we have performed tests and simulations to determine
the  modifications   necessary  to  that  technology  to  meet  to  our  display
requirements.  We are in the process of  finalizing  a design for up to a 7-inch
(diagonal)  color  display  with 1,440 x 234  pixels.  The design is expected to
operate using low voltages and contain color phosphors in each pixel. The design
is also  contemplated  to use our electron  emission  technology to activate the
phosphors.  We  anticipate  that  the  display  will  be  compatible  with  both
wide-screen and standard TV formats for digital TV and DVD operation. We believe
that this will  enable us to be able to produce  displays  which  could meet the
requirements of several companies' large quantity applications.  There can be no
assurance  that we can develop or produce color video displays or displays using
modified TFT  technology or that we can produce  larger display sizes or greater
quantities using such technology.


         We have recently  received from the U.S. patent office patents for four
variations  of our video  display  technology  and a notice of  allowance of the
claims contained in our patent  application for one other variation of our video
display  technology.  We are continuing to apply for additional  patents for our
video display technology.


         There  can be no  assurance  that  we can  produce  commercial  quality
displays,  that we can produce such displays in commercial  quantities,  that we
can  successfully  market our  displays,  or of the revenue we might derive from
sales of our displays.



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

         Our 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 financial
statements and the reported amounts of revenue and expenses during the reporting
periods.


                                       17
<PAGE>

         We believe the following  critical  accounting  polices affect the more
significant  judgments and estimates  used in the  preparation  of our financial
statements.  For  additional  discussion on the  application  of these and other
accounting polices, refer to the financial statements and notes thereto included
in our Annual Report on Form 10-K for the year ended October 31, 2003.

REVENUE RECOGNITION
-------------------

         Sales
         -----
                  Revenues  from  sales  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.

         Sales Returns and Allowances
         ----------------------------

                  Revenues are recorded net of estimated sales returns.

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 income (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.


STOCK BASED COMPENSATION
------------------------

         We account for stock options  granted to employees  using the intrinsic
value method  prescribed in APB Opinion No. 25  "Accounting  for Stock Issued to
Employees" and comply with the disclosure  provision of SFAS No. 123 "Accounting
for Stock  Based  Compensation"  and SFAS No. 148  "Accounting  for Stock  Based
Compensation - Transition and  Disclosure,  an amendment of SFAS No. 123". If we
were to include the cost of employee stock option  compensation in the financial
statements,  our net loss for the six-month and three-month  periods ended April
30,  2004 and 2003 would  have  increased  by  approximately  $362,000,  $6,000,
$178,000 and $3,000, respectively,  based on the fair value of the stock options
granted to employees.



                                       18
<PAGE>


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

Six months ended April 30, 2004 compared with six months ended April 30, 2003
-----------------------------------------------------------------------------

         SALES
         -----

         Revenue.  Revenue from sales increased by approximately  $28,000 in the
six-month period ended April 30, 2004, to approximately $141,000, as compared to
approximately  $113,000 in the comparable  prior-year period. All revenue during
both periods was from encryption products and services.  The increase in revenue
was principally due to an increase in unit sales of our encryption products. Our
encryption  sales  have been  limited  and are  sensitive  to  individual  large
transactions.  We believe  that  changes in revenue  between  periods  generally
represent  the  nature  of the early  stage of our  product  and  sales  channel
development.


         Gross  Profit.  Gross  profit  from sales of  encryption  products  and
services increased by approximately  $59,000 in the six-month period ended April
30, 2004, to approximately  $95,000, as compared to approximately $35,000 in the
comparable  prior-year  period.  The  increase  in gross  profit  was due to the
increase  in  revenue  and  to  higher  gross  profit   percentages  on  certain
transactions as compared to the prior-year period.  Gross profit as a percent of
revenue  increased to approximately  67% in the six-month period ended April 30,
2004, as compared to  approximately  31% in the  comparable  prior-year  period.
Because of the limited number of transactions during each of the periods,  gross
profit percentages are sensitive to individual transactions.

         RESEARCH AND DEVELOPMENT EXPENSES

         Research and development expenses increased by approximately $96,000 in
the  six-month  period ended April 30, 2004,  to  approximately  $991,000,  from
approximately  $895,000 in the  comparable  prior-year  period.  The increase in
research and development  expenses is principally due to an increase in employee
compensation  and  related  costs of  approximately  $59,000  and an increase in
consultant expense of approximately $42,000.


         SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

         Selling, general and administrative expenses decreased by approximately
$308,000 to approximately $610,000 in the six-month period ended April 30, 2004,
from approximately $918,000 in the comparable prior-year period. The decrease in
selling, general and administrative expenses is principally due to a decrease in
the provision for bad debts of approximately $259,000 resulting from an increase
in the  allowance  for  doubtful  accounts  in the prior  year of  approximately
$207,000 and a decrease in the current period of approximately $53,000 resulting
from a  recovery  of  previously  reserved  amounts,  a write  down  of  Magicom
inventory in the prior year of approximately  $58,000, a decrease in advertising
expense of  approximately  $41,000 and the  elimination  of expenses  related to
listing  on the  Nasdaq  Stock  Market of  approximately  $34,000,  offset by an
increase employee compensation and related costs of approximately $63,000.


                                       19
<PAGE>


         INTEREST INCOME

         The decrease in interest  income in the six months ended April 30, 2004
to approximately $2,000 from approximately  $3,000 in the comparable  prior-year
period resulted primarily from a reduction in the prevailing interest rates.

Three months ended April 30, 2004 compared with three months ended April 30,
2003
--------------------------------------------------------------------------------

         SALES

         Revenue.  Revenue from sales increased by approximately  $80,000 in the
three-month period ended April 30, 2004, to approximately  $102,000, as compared
to approximately $22,000 in the comparable prior-year period. All revenue during
both periods was from encryption products and services.  The increase in revenue
was  principally  due an increase  unit sales of our  encryption  products.  Our
encryption  sales  have been  limited  and are  sensitive  to  individual  large
transactions.  We believe  that  changes in revenue  between  periods  generally
represent  the  nature  of the early  stage of our  product  and  sales  channel
development.


         Gross  Profit.  Gross  profit  from sales of  encryption  products  and
services  increased by  approximately  $64,000 in the  three-month  period ended
April 30, 2004, to approximately $70,000, as compared to approximately $6,000 in
the comparable prior-year period. The increase in gross profit was primarily due
to the increase in revenue.  Gross  profit as a percent of revenue  increased to
approximately 69% in the three-month period ended April 30, 2004, as compared to
approximately 28% in the comparable  prior-year  period.  Because of the limited
number of transactions during each of the periods,  gross profit percentages are
sensitive to individual transactions.

         RESEARCH AND DEVELOPMENT EXPENSES

         Research and development  expenses increased by approximately  $104,000
in the three-month period ended April 30, 2004, to approximately  $507,000, from
approximately  $403,000 in the  comparable  prior-year  period.  The increase in
research and development  expenses is principally due to an increase in employee
compensation  and  related  costs of  approximately  $76,000  and an increase in
consultant expense of approximately $27,000.


         SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

         Selling, general and administrative expenses decreased by approximately
$315,000 to  approximately  $259,000 in the  three-month  period ended April 30,
2004,  from  approximately  $574,000 in the comparable  prior-year  period.  The
decrease in selling, general and administrative expenses is principally due to a
decrease in the provision for bad debts of approximately $252,000 resulting from
an  increase  in the  allowance  for  doubtful  accounts  in the  prior  year of
approximately  $200,000  and a decrease in the current  period of  approximately
$53,000 resulting from a recovery of previously  reserved amounts,  a write down
of  Magicom  inventory  in the  prior  year  of  approximately  $58,000  and the
elimination  of  expenses  related  to listing  on the  Nasdaq  Stock  Market of
approximately  $24,000,  offset by an increase employee compensation and related
costs of approximately $71,000.


                                       20
<PAGE>

         INTEREST INCOME

         Interest income in each of the three-month periods ended April 30, 2004
and 2003 was approximately $1,000.


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

         From our inception  through June 2001, we 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 public offering,  and upon
the exercise of stock options.  Commencing in the fourth quarter of fiscal 1999,
we also began to generate cash flows from sales of our products,  and, from June
2001 to January 2002, we received  development  payments from Futaba Corporation
of Japan.

         During the six months ended April 30, 2004,  our  operating  activities
used  approximately  $443,000 in cash. This resulted from payments to suppliers,
employees and consultants of approximately $646,000, which was offset by cash of
approximately  $212,000  received from  collections  of accounts  receivable and
other  receivables  related to sales of  encryption  products  and  services and
approximately  $2,000 of interest  income  received.  In  addition,  we received
approximately  $659,000 in cash upon the exercise of stock options and purchased
approximately $6,000 of equipment. As a result, our cash and cash equivalents at
April  30,  2004  increased  to  approximately   $1,243,000  from  approximately
$1,024,000 at the end of fiscal 2003.

         Accounts   receivable    increased   by   approximately   $3,000   from
approximately  $42,000  at the end of fiscal  2003 to  approximately  $45,000 at
April 30, 2004.  The increase in accounts  receivable is a result of an increase
in  revenue  and the  timing of  collections.  Other  receivables  decreased  by
approximately  $27,000 from approximately  $127,000 at the end of fiscal 2003 to
approximately $100,000 at April 30, 2004. The decrease in other receivables is a
result of  proceeds  received  from the sale of a portion  of the  common  stock
received from a customer to settle this accounts  receivable  and other receipts
from the customer aggregating  approximately  $80,000,  offset by a reduction of
the provision for bad debts related to this accounts receivable of approximately
$53,000.  The reduction of the provision for bad debts is based on  management's
estimate of the other receivables' net realizable value.  Inventories  increased
approximately  $19,000  from  approximately  $1,045,000  at October  31, 2003 to
approximately  $1,064,000  at April  30,  2004,  as a result  of the  timing  of
shipments and production  schedules.  Prepaid  expenses and other current assets
decreased  by  approximately  $25,000 from  approximately  $48,000 at the end of
fiscal  2003 to  approximately  $23,000  at April 30,  2004,  as a result of the
timing of  payments.  Accounts  payable and  accrued  liabilities  increased  by
approximately  $66,000 from approximately  $342,000 at the end of fiscal 2003 to
approximately $408,000 at April 30, 2004, as a result of the timing of payments.

         As a result  of these  changes,  working  capital  at  April  30,  2004
increased to approximately  $2,067,000 from approximately  $1,943,000 at the end
of fiscal 2003.


                                       21
<PAGE>


         Our working capital includes  inventory of approximately  $1,064,000 at
April 30, 2004.  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.

         Our plans and  expectations  for our working  capital needs also assume
that our  Chairman of the Board and Chief  Executive  Officer and our  President
will continue to perform  services  without  significant  cash  compensation  or
pension  benefits.  There can be no assurance that they will continue to provide
such services under such compensation arrangements.

         The auditor's report on our financial statements as of October 31, 2003
states that the net loss incurred  during the year ended  October 31, 2003,  our
accumulated  deficit as of that date, and the other factors  described in Note 1
to the Financial  Statements  included in our Annual Report on Form 10-K for the
year ended  October  31,  2003,  raise  substantial  doubt  about our ability to
continue as a going concern.  The auditor's  report on our financial  statements
for the year ended October 31, 2002 contained a similar statement. Our financial
statements  have been prepared  assuming we will continue as a going concern and
do not  include  any  adjustments  that might  result  from the  outcome of this
uncertainty.

         Based on  reductions  in  operating  expenses  that  have been made and
additional reductions that may be implemented, if necessary, we believe that our
existing  cash and accounts  receivable,  together with cash flows from expected
sales of  encryption  products  and flat  panel  displays,  and other  potential
sources of cash flows,  will be sufficient to enable us to continue in operation
until at least the end of the second quarter of fiscal 2005. We anticipate that,
thereafter,  we  will  require  additional  funds  to  continue  our  marketing,
production, and research and development activities, and we will require outside
funding if cash  generated  from  operations  is  insufficient  to  satisfy  our
liquidity  requirements.  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  prior to the first  quarter of fiscal  2005.  The sale of  additional
equity   securities  or  convertible  debt  could  result  in  dilution  to  our
stockholders.  We can give  you no  assurance  that we will be able to  generate
adequate funds from operations,  that funds will be available to us from debt or
equity financings or a line of credit or that, if available,  we will be able to
obtain  such funds on  favorable  terms and  conditions.  We  currently  have no
arrangements with respect to additional financing.

         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 on a non-exclusive basis and to end-users.  We have provided
several large organizations our hardware and software  encryption  solutions and
they  are   evaluating   our  solutions  in  connection   with  their   security
requirements. We have also begun to market our flat panel video display products
to  potential  purchasers  for  incorporation  into their  products.  During the
six-month  period ended April,  2004, we have  recognized  revenue from sales of
approximately $141,000.

                                       22
<PAGE>


         The  following  table  presents  our  expected  cash  requirements  for
contractual obligations outstanding as April 30, 2004:


<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                $      251,000   $      280,000               --               --    $      531,000
                                --------------   --------------   --------------   --------------    --------------

Total Contractual
Cash Obligations                $      251,000   $      280,000               --               --    $      531,000
                                ==============   ==============   ==============   ==============    ==============
</TABLE>


IMPACT OF RECENT ACCOUNTING PPRONOUNCEMENTS
-------------------------------------------

         In December 2003, the Security and Exchange  Commission  ("SEC") issued
Staff  Accounting  Bulletin  ("SAB")  No.  104,  "Revenue  Recognition",   which
codifies,  revises  and  rescinds  certain  sections  of SAB No.  101,  "Revenue
Recognition",  in order  to make  this  interpretive  guidance  consistent  with
current  authoritative  accounting  and  auditing  guidance  and SEC  rules  and
regulations.  The issuance of SAB No. 104 did not have a material  effect on our
financial position or results of operations.


GENERAL RISKS AND UNCERTAINTIES
-------------------------------

         Our business involves a high degree of risk and uncertainty, including,
but not limited to, the following risks and uncertainties:


o    WE HAVE EXPERIENCED SIGNIFICANT NET LOSSES AND NEGATIVE CASH FLOWS FROM
     OPERATIONS AND THEY MAY CONTINUE.

         We have had net losses and negative cash flows from  operations in each
year since our inception and in the six months ended April 30, 2004,  and we may
continue to incur substantial  losses and experience  substantial  negative cash
flows from  operations.  We have  incurred  substantial  costs and  expenses  in
developing our encryption and flat panel display technologies and in our efforts
to produce  commercially  marketable products  incorporating our technology.  We
have had limited  sales of products to support  our  operations  from  inception
through  April 30,  2004.  We have set forth below our net losses,  research and
development  expenses and net cash used in operations for the six-month  periods
ended April 30, 2004 and 2003,  and for the fiscal years ended  October 31, 2003
and 2002:


                                       23
<PAGE>

<TABLE>
<CAPTION>
                                                            (Unaudited)
                                                          Six Months Ended                  Fiscal Years Ended
                                                              April 30,                         October 31,
                                                   ------------------------------    ------------------------------
                                                       2004             2003              2003             2002
                                                   ------------    -------------     --------------    ------------
<S>                                                <C>             <C>               <C>               <C>
Net loss                                           $  1,504,254    $   1,774,620     $    3,114,411    $  3,285,240
Research and development expenses                  $    991,179    $     894,747     $    1,807,742    $  1,625,974
Net cash used in operations                        $    432,768    $     536,742     $      958,501    $    431,471
</TABLE>

o        WE MAY NEED ADDITIONAL FUNDING IN THE FUTURE WHICH MAY NOT BE AVAILABLE
         ON ACCEPTABLE  TERMS AND, IF  AVAILABLE,  MAY RESULT IN DILUTION TO OUR
         STOCKHOLDERS,  AND OUR  AUDITORS  HAVE ISSUED A "GOING  CONCERN"  AUDIT
         OPINION.

         We anticipate  that, if cash generated from  operations is insufficient
to satisfy our requirements,  we will require additional funding to continue our
research and  development  activities  and market our  products.  The  auditor's
report on our  financial  statements  as of October 31, 2003 states that the net
loss incurred during the year ended October 31, 2003, our accumulated deficit as
of that  date,  and  the  other  factors  described  in Note 1 to the  Financial
Statements included in our Annual Report on Form 10-K for the year ended October
31,  2003,  raise  substantial  doubt  about our  ability to continue as a going
concern.  The auditor's  report on our financial  statements  for the year ended
October 31, 2002 contained a similar  statement.  Our financial  statements have
been  prepared  assuming we will  continue as a going concern and do not include
any adjustments that might result from the outcome of this uncertainty.

         Based on  reductions  in  operating  expenses  that  have been made and
additional reductions that may be implemented, if necessary, we believe that our
existing  cash and accounts  receivable,  together with cash flows from expected
sales of  encryption  products  and flat  panel  displays,  and other  potential
sources of cash flows,  will be sufficient to enable us to continue in operation
until at least the end of the second quarter of fiscal 2005. We anticipate that,
thereafter, we will require additional funds to continue marketing,  production,
and research and development activities,  and we will require outside funding if
cash  generated  from  operations  is  insufficient  to  satisfy  our  liquidity
requirements.  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  prior to the
second  quarter of fiscal 2005.  The sale of  additional  equity  securities  or
convertible debt could result in dilution to our  stockholders.  We can give you
no assurance that we will be able to generate  adequate  funds from  operations,
that funds will be available to us from debt or equity  financings  or a line of
credit or that, if available,  we will be able to obtain such funds on favorable
terms  and  conditions.  We  currently  have no  arrangements  with  respect  to
additional financing.


o    WE MAY NOT GENERATE SUFFICIENT REVENUES TO SUPPORT OUR OPERATIONS IN THE
     FUTURE OR TO GENERATE PROFITS.


         We are  engaged  in two  principal  operations:  (i)  the  development,
production and marketing of thin  high-brightness  flat panel video displays and
(ii) the development,  production and marketing of  multi-functional  encryption
products that provide information  security for domestic and



                                       24
<PAGE>

international users over virtually every communications media. We have only
recently started to produce monochrome versions of our high-brightness flat
panel displays and our encryption products are only in their initial stages of
commercial production. Our investments in research and development are
considerable. Our ability to generate sufficient revenues to support our
operations in the future or to generate profits will depend upon numerous
factors, many of which are beyond our control, including:

     o    our ability to successfully market our line of thin high-brightness
          flat panel video displays and encryption products;

     o    the capability of Volga to produce thin high-brightness monochrome
          video displays and supply them to us;

     o    our ability to jointly develop with Volga and produce a full-color
          video display;

     o    our production capabilities and those of our suppliers as required for
          the production of our encryption products;

     o    long-term performance of our products;

     o    the capability of our dealers and distributors to adequately service
          our encryption products;

     o    our ability to maintain an acceptable pricing level to end-users for
          both our encryption and display products;

     o    the ability of suppliers to meet our requirements and schedule;

     o    our ability to successfully develop other new products under
          development;

     o    rapidly changing consumer preferences;

     o    the possible development of competitive products that could render our
          products obsolete or unmarketable;

     o    our future negotiations with Volga with respect to payments and other
          arrangements under our Joint Cooperation Agreement with Volga.


         Because  our  revenue is subject  to  fluctuation,  we may be unable to
reduce  operating  expenses  quickly  enough to offset  any  unexpected  revenue
shortfall.  If we have a  shortfall  in revenue in  relation  to  expenses,  our
operating results would suffer. Our operating results for any particular quarter
may not be  indicative  of future  operating  results.  You  should  not rely on
quarter-to-quarter  comparisons of results of operations as an indication of our
future performance.


o    WE ARE DEPENDENT UPON A FEW KEY EXECUTIVES AND THE LOSS OF THEIR SERVICES
     COULD ADVERSELY AFFECT US.

         Our future  success is  dependent  on our  ability to hire,  retain and
motivate highly qualified personnel.  In particular,  our success depends on the
continued  efforts of our Chief  Executive  Officer,  Denis A.  Krusos,  and our
President,  Frank J. DiSanto, who founded our company in 1982 and are engaged in
the  management  and  operations of our  business,  including all aspects of the
development,  production and marketing of our encryption products and flat panel
display  technology.  In addition,  Messrs.  Krusos and DiSanto,  as well as our
other skilled  management and technical  personnel,  are important to our future
business  and  financial  arrangements.  The  loss of the  services  of any such
persons  could have a material  adverse  effect on our  business  and  operating
results.



                                       25
<PAGE>

o    THE VERY COMPETITIVE MARKETS FOR OUR ENCRYPTION PRODUCTS AND FLAT PANEL
     DISPLAY TECHNOLOGY COULD HAVE A HARMFUL EFFECT ON OUR BUSINESS AND
     OPERATING RESULTS.

         The  markets  for  our  encryption  products  and  flat  panel  display
technology  worldwide are highly competitive and subject to rapid  technological
changes.  Most of our  competitors  are larger  than us and  possess  financial,
research,  service  support,   marketing,   manufacturing  and  other  resources
significantly greater than ours. Competitive pressures may have a harmful effect
on our business and operating results.


o    OUR COMMON STOCK IS SUBJECT TO THE SEC'S PENNY STOCK RULES WHICH MAY MAKE
     OUR SHARES MORE DIFFICULT TO SELL.

         Our stock fits the definition of a penny stock. The SEC rules regarding
penny  stocks may have the effect of  reducing  trading  activity  in our common
stock and making it more  difficult for  investors to sell.  The rules require a
broker to deliver a risk  disclosure  document that provides  information  about
penny  stocks and the nature and level of risks in the penny stock  market.  The
broker  must also give bid and  offer  quotations  and  broker  and  salesperson
compensation information to the customer orally or in writing prior to effecting
a transaction and in writing with the confirmation. The SEC rules also require a
broker  to make a  special  written  determination  that  the  penny  stock is a
suitable  investment  for the  purchaser  and  receive the  purchaser's  written
agreement  to  the  transaction  before  completion  of the  transaction.  These
requirements  may result in a lower trading volume of our common stock and lower
trading prices.


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

         We have  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  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.

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 April 30, 2004 that has  materially  affected,  or is
reasonably  likely to materially  affect,  our internal  control over  financial
reporting.



                                       26
<PAGE>


                           PART II. OTHER INFORMATION
                           --------------------------


Item 6.  Exhibits and Reports on Form 8-K.
         ---------------------------------

(a) Exhibits
    --------

   31.1   Certification of Chief Executive Officer, pursuant to Section 302 of
          the Sarbanes-Oxley Act of 2002, dated June 1, 2004.

   31.2   Certification of Chief Financial Officer, pursuant to Section 302 of
          the Sarbanes-Oxley Act of 2002, dated June 1, 2004.

   32.1   Statement of Chief Executive Officer, pursuant to Section 1350 of
          Title 18 of the United States Code, dated June 1, 2004.

   32.2   Statement of Chief Financial Officer, pursuant to Section 1350 of
          Title 18 of the United States Code, dated June 1, 2004.

   99.1   Grant Agreement between Copytele, Inc. and Denis A. Krusos, dated
          February 23, 2004.

   99.2   Grant Agreement between Copytele, Inc. and Frank J. DiSanto, dated
          February 23, 2004.

   99.3   Grant Agreement between Copytele, Inc. and Denis A. Krusos, dated
          April 2, 2004.

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

    We  filed no Current Reports on Form 8-K during the quarter ended April 30,
    2004.



                                       27
<PAGE>



                                   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,
                                            Chief Executive Officer
June 1, 2004                                (Principal Executive Officer)


                                            By: /s/ Henry P. Herms
                                            ------------------------------------
                                            Henry P. Herms
                                            Vice President - Finance and
                                            Chief Financial Officer (Principal
June 1, 2004                                Financial and Accounting Officer)



                                       28