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, 2006

                         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                                      (Zip Code)
     executive offices)


                                 (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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
  Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]

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 5, 2006, the registrant had outstanding 96,991,388 shares of Common
Stock, par value $.01 per share, which is the registrant's only class of common
stock.

<PAGE>


                                TABLE OF CONTENTS


PART I.   FINANCIAL INFORMATION

Item 1.   Financial Statements.

          Condensed Balance Sheets as of July 31, 2006 (Unaudited) and
           October 31, 2005                                                    3

          Condensed Statements of Operations (Unaudited) for the nine
           months ended July 31, 2006 and 2005                                 4

          Condensed Statements of Operations (Unaudited) for the three
           months ended July 31, 2006 and 2005                                 5

          Condensed Statements of Cash Flows (Unaudited) for the nine
           months ended July 31, 2006 and 2005                                 6

          Notes to Condensed Financial Statements (Unaudited)               7-17

Item 2.   Management's Discussion and Analysis of Financial Condition
           and Results of Operations.                                      18-32

Item 3.   Quantitative and Qualitative Disclosures About Market Risk.         32

Item 4.   Controls and Procedures.                                            32


PART II.  OTHER INFORMATION

Item 6.   Exhibits.                                                           33

          SIGNATURES                                                          33


                                       2
<PAGE>

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

Item 1.  Financial Statements.
         ---------------------

<TABLE>
<CAPTION>
                                 COPYTELE, INC.
                            CONDENSED BALANCE SHEETS
                            ------------------------

                                                                   (Unaudited)
                                                                  --------------
                                                                     July 31,      October 31,
                                    ASSETS                             2006           2005*
                                    ------                        -------------- --------------
<S>                                                                <C>            <C>
CURRENT ASSETS:
   Cash and cash equivalents                                       $    611,266   $    506,517
   Short-term investments                                               398,000        400,776
   Accounts receivable                                                   19,480         32,117
   Other receivables, net                                                18,000         30,000
   Inventories                                                          281,107        384,996
   Prepaid expenses and other current assets                             35,767         79,829
                                                                    ------------   ------------
                        Total current assets                          1,363,620      1,434,235

PROPERTY AND EQUIPMENT, net                                              25,741         27,131

INVESTMENT, at cost                                                     207,000              -

OTHER ASSETS                                                              4,887          4,887
                                                                    ------------   ------------
                                                                   $  1,601,248   $  1,466,253
                                                                    ============   ============

               LIABILITIES AND SHAREHOLDERS' EQUITY
               ------------------------------------
CURRENT LIABILITIES:
   Accounts payable                                                $    252,771   $    270,806
   Accrued liabilities                                                   39,194         77,424
                                                                    ------------   ------------
                       Total current liabilities                        291,965        348,230

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; 96,761,673 and 91,975,538 shares issued and
    outstanding, respectively                                           967,617        919,755
   Additional paid-in capital                                        79,048,995     73,105,886
   Accumulated deficit                                              (78,707,329)   (72,907,618)
                                                                    ------------   ------------
                                                                      1,309,283      1,118,023
                                                                    ------------   ------------
                                                                   $  1,601,248   $  1,466,253
                                                                    ============   ============
</TABLE>

* Derived from audited balance sheet included in our Annual Report on Form 10-K
for the fiscal year ended October 31, 2005.

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


                                       3
<PAGE>

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

                                                      For the Nine Months Ended
                                                               July 31,
                                                      --------------------------
                                                          2006          2005
                                                      ------------  ------------

NET SALES                                             $   397,773   $   391,425

COST OF SALES                                             120,558       555,259
                                                      ------------  ------------

         Gross profit (loss)                              277,215      (163,834)
                                                      ------------  ------------

OPERATING EXPENSES
         Research and development expenses              3,582,867     1,725,197
         Selling, general and administrative expenses   2,514,218     1,426,936
                                                      ------------  ------------
                  Total operating expenses              6,097,085     3,152,133
                                                      ------------  ------------

LOSS FROM OPERATIONS                                   (5,819,870)   (3,315,967)

INTEREST INCOME                                            20,159        10,425
                                                      ------------  ------------

NET LOSS                                              $(5,799,711)  $(3,305,542)
                                                      ============  ============



PER SHARE INFORMATION:
Net loss per share:
         Basic and Diluted                            $     (0.06)  $     (0.04)
                                                      ============  ============

Shares used in computing net loss per share:
         Basic and Diluted                             94,551,079    87,619,508
                                                      ============  ============



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


                                       4
<PAGE>

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

                                                      For the Three Months Ended
                                                               July 31,
                                                      --------------------------
                                                          2006          2005
                                                      ------------  ------------

NET SALES                                             $   130,845   $   132,125

COST OF SALES                                              39,245       354,828
                                                      ------------  ------------

         Gross profit (loss)                               91,600      (222,703)
                                                      ------------  ------------

OPERATING EXPENSES
         Research and development expenses              1,312,472       485,309
         Selling, general and administrative expenses     933,854       415,194
                                                      ------------  ------------
                  Total operating expenses              2,246,326       900,503
                                                      ------------  ------------

LOSS FROM OPERATIONS                                   (2,154,726)   (1,123,206)

INTEREST INCOME                                             7,451         4,153
                                                      ------------  ------------

NET LOSS                                              $(2,147,275)  $(1,119,053)
                                                      ============  ============



PER SHARE INFORMATION:
Net loss per share:
         Basic and Diluted                            $     (0.02)  $     (0.01)
                                                      ============  ============

Shares used in computing net loss per share:
         Basic and Diluted                             95,985,622    89,344,254
                                                      ============  ============

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


                                       5
<PAGE>

<TABLE>
<CAPTION>

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


                                                                                For the Nine Months Ended
                                                                                         July 31,
                                                                                --------------------------
                                                                                    2006          2005
                                                                                 ------------  -----------
<S>                                                                             <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Payments to suppliers, employees and  consultants                            $ (1,920,582) $(1,675,809)
   Cash received from customers                                                      404,123      369,874
   Interest received                                                                  20,159       10,425
                                                                                 ------------  -----------
           Net cash used in operating activities                                  (1,496,300)  (1,295,510)
                                                                                 ------------  -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Proceeds from maturities of short-term investments (certificates of deposit)      400,776            -
   Acquisition of short-term investments (certificates of deposit)                  (398,000)    (398,353)
   Investment in Digital  Info Security Co., Inc. common stock                      (110,000)           -
   Payments for purchases of property and equipment                                  (10,226)      (3,322)
                                                                                 ------------  -----------
           Net cash used in investing activities                                    (117,450)    (401,675)
                                                                                 ------------  -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from exercise of stock options                                         1,718,499    1,276,200
                                                                                 ------------  -----------
           Net cash provided by financing activities                               1,718,499    1,276,200
                                                                                 ------------  -----------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                 104,749     (420,985)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                     506,517    1,002,777
                                                                                 ------------  -----------

CASH AND CASH EQUIVALENTS AT  END OF PERIOD                                     $    611,266  $   581,792
                                                                                 ============  ===========

RECONCILIATION OF NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES:
   Net loss                                                                     $ (5,799,711) $(3,305,542)
   Stock option compensation to employees                                          2,469,563            -
   Stock option compensation to consultants                                          119,262       44,609
   Stock awards granted to employees and consultants pursuant to stock
      incentive plans                                                              1,586,647    1,482,088
   Provision for (recovery of) doubtful accounts                                      18,287       (3,622)
   Provision for excess inventory                                                          -      437,990
   Depreciation and amortization                                                      11,616       10,969
   Change in operating assets and liabilities:
      Accounts receivable and other receivables                                        6,350      (21,551)
      Inventories                                                                    103,889        6,419
      Prepaid expenses and other current assets                                       44,062      110,159
      Other assets                                                                         -          621
      Accounts payable and  accrued liabilities                                      (56,265)     (57,650)
                                                                                 ------------  -----------
           Net cash used in operating activities                                $ (1,496,300) $(1,295,510)
                                                                                 ============  ===========

SUPPLEMENTAL DISCLOSURE  OF NON-CASH INVESTING AND
    FINANCING ACTIVITIES:
    Unregistered common stock issued in connection with investment in
        Digital Info Security Co., Inc.                                         $     97,000  $         -
                                                                                 ============  ===========
    Unregistered common stock issued to settle a liability                      $          -  $   115,372
                                                                                 ============  ===========
</TABLE>


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


                                       6
<PAGE>


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

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

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


1.   ORGANIZATION AND FUNDING
     ------------------------

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

     CopyTele, Inc. was incorporated on November 5, 1982. Our principal
operations are the development, production and marketing of a thin, flat
low-voltage phosphor display 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 nine-month and
three-month periods ended July 31, 2006 and 2005. 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 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, 2005, for more extensive disclosures
than contained in these condensed 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 public offering, and upon the exercise of stock
options. In 2001 and 2002, we also received payments under a technology
development agreement. In addition, commencing in the fourth quarter of fiscal
1999, we have generated cash flows from sales of our encryption products.

     During the nine months ended July 31, 2006, our operating activities used
approximately $1,496,000 in cash. This resulted from payments to suppliers,
employees and consultants of approximately $1,921,000, which was offset by cash
of approximately $404,000 received from collections of accounts receivable
related to sales of encryption products and approximately $20,000 of interest
income received. In addition, we received approximately $1,718,000 in cash upon


                                       7
<PAGE>

the exercise of stock options and approximately $401,000 of proceeds from
maturities of short-term investments consisting of certificates of deposit. We
also acquired $398,000 of short-term investments consisting of certificates of
deposit, invested $110,000 in Digital Security Info Co., Inc. common stock and
purchased approximately $10,000 of equipment. As a result, our cash, cash
equivalents, and short-term investments increased to approximately $1,009,000 at
July 31, 2006 from approximately $907,000 at the end of fiscal 2005.

     We believe that our existing cash, short-term investments 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
third quarter of fiscal 2007. 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 third quarter of
fiscal 2007. The sale of additional equity securities or convertible debt could
result in dilution to our stockholders. 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 or otherwise) to improve our
liquidity 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 funds will be available to us from debt or
equity financings or that, if available, we will be able to obtain such funds on
favorable terms and conditions. If we cannot obtain such funds if needed, we
would need to curtail or cease some or all of our operations.

     The auditor's report on our financial statements as of October 31, 2005
states that the net loss incurred during the year ended October 31, 2005, 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, 2005, 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, 2004 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.

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.

     Prior to November 1, 2005, we followed Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards ("SFAS") No. 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure" ("SFAS No.
148"), which addressed financial accounting and reporting for recording expenses
for the fair value of stock options. SFAS No. 148 required prominent disclosures


                                       8
<PAGE>

in financial statements about the effects of stock-based compensation and
provided alternative methods of transition for a voluntary change to fair
value-based method of accounting for stock-based employee compensation. SFAS No.
123 "Accounting for Stock Based Compensation" ("SFAS No. 123") encouraged but
did not require companies to record compensation cost for stock-based employee
compensation plans at fair value. During this period, we accounted for stock
options granted to employees and directors using the intrinsic value method
prescribed in Accounting Principles Board ("APB") Opinion No. 25 "Accounting for
Stock Issued to Employees" ("APB Opinion No. 25") and complied with the
disclosure provisions of SFAS No. 123 and SFAS No. 148 through October 31, 2005.
Compensation cost for stock options issued to employees and directors was
measured as the excess, if any, of the quoted market price of our stock at the
date of grant over the amount an employee or director must pay to acquire the
stock. In accordance with APB Opinion No. 25, we did not recognize any
compensation cost for stock options issued to employees and directors for the
nine-month and three-month periods ended July 31, 2005, as all option grants to
employees and directors during such periods were made at the fair market value
of our stock on the date of grant.

     Had compensation cost for stock options granted to employees and directors
been determined at fair value, consistent with SFAS No. 123, our net loss and
net loss per share for the nine-month and three-month periods ended July 31,
2005 would have increased to the following adjusted amounts:
<TABLE>
<CAPTION>

                                                            For the Nine         For the Three
                                                            Months Ended         Months Ended
                                                            July 31, 2005        July 31, 2005
                                                            -------------        -------------
<S>                                                             <C>                     <C>
Net loss as reported                                        $  (3,305,542)       $  (1,119,053)
Add: Total stock-based employee compensation expense,
     determined under fair value based method, for all
     awards, net of related tax effect                         (2,017,510)            (287,386)
                                                            -------------        -------------
Net loss as adjusted                                        $  (5,323,052)       $  (1,406,429)
                                                            =============        =============
Net loss per share, basic and diluted:
     As reported                                            $       (0.04)       $       (0.01)
                                                            =============        =============
     As adjusted                                            $       (0.06)       $       (0.02)
                                                            =============        =============
</TABLE>

     In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS No. 123R") which addresses the accounting for share-based
payment transactions in which a company receives employee services in exchange
for either equity instruments of the company or liabilities that are based on
the fair value of the company's equity instruments or that may be settled by the
issuance of such equity instruments. SFAS No. 123R eliminates the ability to
account for share-based compensation transactions using the intrinsic value
method and requires, instead, that such transactions be accounted for using a
fair-value-based method and recognized as expense in the statement of
operations. In March 2005, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 107 ("SAB No. 107") relating to SFAS No. 123R.

     Effective November 1, 2005, the beginning of our first quarter of fiscal
2006, we adopted SFAS No. 123R. We have elected to use the modified prospective


                                       9
<PAGE>

transition method as permitted by SFAS No. 123R and therefore, our financial
statements for prior periods have not been restated to reflect, and do not
include, the effect of SFAS No. 123R. Under this transition method, we apply the
provisions of SFAS No. 123R to new awards and to awards modified, repurchased,
or cancelled after October 31, 2005. We recognize compensation expense for stock
option awards on a straight-line basis over the requisite service period of the
grant. Additionally, we recognize compensation cost for the portion of awards
that were outstanding, but for which the requisite service had not been rendered
(unvested awards), as of October 31, 2005, as the remaining service is rendered.
The compensation cost we record for these awards are based on their grant date
fair value as calculated for the pro forma disclosures required by SFAS No. 123.

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

     We recorded approximately $2,470,000 and $952,000 of stock-based
compensation expense, related to stock options granted to employees and
directors, for the nine-month and three-month periods ended July 31, 2006,
respectively, in accordance with SFAS No. 123R. Such compensation expense is
included in the accompanying condensed 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 increased both basic and
diluted net loss per share for the nine-month and three-month periods ended July
31, 2006 by $0.03 and $0.01, respectively.

     Included in the stock-based compensation cost related to stock options
granted to employees and directors recorded during the nine-month and
three-month periods ended July 31, 2006 was approximately $14,000 and $5,000,
respectively, of expense related to the amortization of compensation cost for
stock options granted prior to but not yet vested as of October 31, 2005. As of
July 31, 2006, there was approximately $5,000 of total unrecognized compensation
cost related to non-vested share-based compensation arrangements. This
unrecognized cost is expected to be fully amortized over the remaining portion
of the current fiscal year.

     We account for options granted to non-employee consultants using the fair
value method required by SFAS No. 123R. We recognized consulting expense for
options granted to consultants, during the nine-month periods ended July 31,
2006 and 2005, of approximately $119,000 and $45,000, respectively, and during
the three-month periods ended July 31, 2006 and 2005, of approximately $97,000
and $-0-, respectively. Such consulting expense is included in the accompanying
condensed 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.

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

     In accordance with SFAS No. 123R, we estimate the fair value of stock
options granted to employees on the date of grant using the Black-Scholes
pricing model. We also used this method prior to the adoption of SFAS No. 123R
to estimate the fair value of stock options granted to employees for purposes of
the pro forma financial information set forth in our financial statements in
accordance with SFAS No. 123.


                                       10
<PAGE>

     Upon the adoption of SFAS No. 123R, we separated 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 granted to employees on the date of grant, we take a
weighted average of the assumptions used for each of these groups. All of the
stock options we granted during the nine months ended July 31, 2006 consisted of
awards of options with 10-year terms which vested immediately.

     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,
                                                 -----------------------      -----------------------
<S>                                                 <C>           <C>             <C>          <C>
                                                                 2005                           2005
                                                   2006      (pro forma)          2006     (pro forma)
                                                 ----------   ----------      ----------   ----------
Expected term (in years)                            3.0           2.5             4.3           2.5
Volatility                                           99%          109%            104%          106%
Risk-free interest rate                            4.36%         3.45%           4.37%         3.66%
Dividend yield                                        0             0               0             0
Weighted average fair value at grant date          $0.47         $0.38           $0.55         $0.23
</TABLE>

     Discussion of assumptions for fair value of stock option awards under SFAS
No. 123R.

     The expected term of stock options represents the weighted average period
the stock options are expected to remain outstanding. Because we consider our
options to be "plain vanilla", we estimated the expected term using a modified
version of the simplified method of calculation, as prescribed by SAB No. 107.
This modified calculation uses the actual life for options that have been
settled, and a uniform distribution assumption for the options still
outstanding. Under SAB No. 107, 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 options are non-transferable and
non-hedgeable.

     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 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 have reduced the fair value of the stock option awards for
expected forfeitures, which are forfeitures of the unvested portion of
surrendered options. We estimated expected forfeitures based on our historical
experience.



                                       11
<PAGE>

     Discussion of assumptions for fair value of stock option awards under SFAS
No. 123.

     Prior to adoption of SFAS 123R, we used similar assumptions to estimate the
fair value of stock options granted to employees for purposes of the pro forma
financial information set forth in our Financial Statements in accordance with
SFAS No. 123, except that forfeitures were accounted for as they occurred and we
did not separate the individuals we grant options to into separate groups.

     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.

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

     During the nine-month periods ended July 31, 2006 and 2005, we granted to
employees and consultants options to purchase 5,460,000 shares and 5,440,000
shares, respectively, of common stock at weighted average exercise prices of
$.82 and $.60 per share, respectively, pursuant to the CopyTele, Inc. 2003 Share
Incentive Plan (the "2003 Share Plan"). During the nine-month periods ended July
31, 2006 and 2005, stock options to purchase 2,697,725 shares and 2,313,800
shares, respectively, of common stock were exercised with aggregate proceeds of
approximately $1,718,000 and $1,276,000, respectively.

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

     As of July 31, 2006, we have three stock option plans: the CopyTele, Inc.
1993 Stock Option Plan (the "1993 Plan"), the CopyTele, Inc. 2000 Share
Incentive Plan (the "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.

     Information regarding the 1993 Plan for the nine months ended July 31, 2006
is as follows:
<TABLE>
<CAPTION>
                                                                             Current Weighted
                                                                             Average Exercise       Aggregate
                                                                 Shares       Price Per Share    Intrinsic Value
                                                             -------------   -----------------   ---------------
<S>                                                              <C>                <C>               <C>
Shares Under Option at October 31, 2005                         6,718,580         $3.86
Cancelled                                                      (2,156,580)        $4.81
                                                             -------------
Shares Under Option and Exercisable at July 31, 2006            4,562,000         $3.41              $-0-
                                                             =============
</TABLE>



                                       12
<PAGE>

     The following table summarizes information about stock options outstanding
under the 1993 Plan as of July 31, 2006:
<TABLE>
<CAPTION>
                                            Options Outstanding                      Options Exercisable
                         --------------------------------------------------    ---------------------------
                                                                   Weighted                      Weighted
                             Number        Weighted Average         Average        Number        Average
    Range of              Outstanding          Remaining           Exercise     Exercisable      Exercise
Exercise Prices            at 7/31/06      Contractual Life          Price      at 7/31/06        Price
---------------------    -------------    -----------------        --------    ------------     ----------
<S>                             <C>             <C>                   <C>          <C>             <C>
 $0.84 to $1.56              784,000            3.29                $1.10         784,000         $1.10
     $2.28                   855,000            1.95                $2.28         855,000         $2.28
 $3.38 to $4.50            2,528,000             .79                $4.04       2,528,000         $4.04
     $6.38                   395,000             .13                $6.38         395,000         $6.38
</TABLE>

     The exercise price of all of the 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.

     Information regarding the 2000 Share Plan for the nine months ended July
31, 2006 is as follows:
<TABLE>
<CAPTION>
                                                                            Current Weighted
                                                                            Average Exercise       Aggregate
                                                               Shares        Price Per Share    Intrinsic Value
                                                             -----------    ----------------    ---------------
<S>                                                             <C>               <C>                 <C>
Shares Under Option at October 31, 2005                       2,788,466          $0.73
Exercised                                                      (220,000)         $0.45               $87,170
Cancelled                                                       (20,000)         $0.74
                                                             -----------
Shares Under Option and Exercisable at July 31, 2006          2,548,466          $0.76                 $-0-
                                                             ===========
</TABLE>

     The following table summarizes information about stock options outstanding
under the 2000 Share Plan as of July 31, 2006:
<TABLE>
<CAPTION>
                                      Options Outstanding                            Options Exercisable
                        ----------------------------------------------          ----------------------------
<S>                          <C>              <C>             <C>                 <C>                  <C>
                                                            Weighted                                Weighted
                          Number        Weighted Average    Average               Number             Average
    Range of            Outstanding          Remaining      Exercise            Exercisable         Exercise
Exercise Prices         at 7/31/06      Contractual Life      Price             at 7/31/06            Price
----------------        -----------     ----------------    --------            -----------      -----------
 $0.34 - $0.40            796,000            4.85            $0.40                 796,000            $0.40
 $0.44 - $0.74            650,466            4.43            $0.68                 650,466            $0.68
 $0.94 - $1.09          1,102,000            4.19            $1.06               1,102,000            $1.06
</TABLE>

     The exercise price of all of the 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, 2006, 21,508 shares were available for
future grants under the 2000 Share Plan.



                                       13
<PAGE>

     Information regarding the 2003 Share Plan for the nine months ended July
31, 2006 is as follows:
<TABLE>
<CAPTION>
                                                                             Current Weighted
                                                                             Average Exercise        Aggregate
                                                                 Shares      Price Per Share      Intrinsic Value
                                                              ------------  -----------------     ---------------
<S>                                                                <C>             <C>                   <C>
Shares Under Option at October 31, 2005                        12,505,200          $0.61
Granted                                                         5,460,000          $0.82
Exercised                                                      (2,477,725)         $0.65             $ 138,828
                                                              ------------
Shares Under Option at July 31, 2006                           15,487,475          $0.68             $  43,412
                                                              ============
Shares Under Exercisable at July 31, 2006                      15,427,475          $0.68             $  33,812
                                                              ============
</TABLE>

     The following table summarizes information about stock options outstanding
under the 2003 Share Plan as of July 31, 2006:
<TABLE>
<CAPTION>
                                          Options Outstanding                        Options Exercisable
                         ----------------------------------------------         -----------------------------
<S>                           <C>               <C>             <C>                 <C>              <C>
                                                               Weighted                            Weighted
                            Number       Weighted Average      Average             Number          Average
    Range of             Outstanding        Remaining          Exercise         Exercisable        Exercise
Exercise Prices          at 7/31/06      Contractual Life       Price            at 7/31/06          Price
---------------          ------------   ------------------    ---------         ---------------   -----------
 $0.25 - $0.46            3,480,000             7.01             $0.29           3,480,000          $0.29
 $0.51 - $0.77            4,877,400             8.58             $0.61           4,817,400          $0.61
 $0.81 - $1.07            7,130,075             8.93             $0.91           7,130,075          $0.91
</TABLE>

     The exercise price of all of the 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, 2006, 8,817,499 shares were available
for future grants under the 2003 Share Plan.

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

     We account for stock awards granted to employees and consultants based on
their grant date fair value. During the nine-month periods ended July 31, 2006
and 2005, we issued 1,695,050 shares and 2,417,715 shares, respectively, of
common stock to certain employees for services rendered, principally in lieu of
cash compensation, pursuant to the 2003 Share Plan and 2000 Share Plan. We
recorded compensation expense for the nine-month periods ended July 31, 2006 and
2005 of approximately $1,342,000 and $1,453,000, respectively, and for the
three-month periods ended July 31, 2006 and 2005 of approximately $583,000 and
$443,000, respectively, for the shares of common stock issued to employees. In
addition, during the nine-month periods ended July 31, 2006 and 2005, we issued
293,360 shares and 45,000 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, 2006 and 2005 of approximately
$245,000 and $30,000, respectively, and for the three-month periods ended July
31, 2006 and 2005 of approximately $35,000 and $7,000, respectively, for the
shares of common stock issued to consultants.


                                       14
<PAGE>

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 and
other receivables 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,
2006, two customers in the Encryption Products and Services Segment represented
51% and 24%, respectively, of total net sales. During the nine months ended July
31, 2005, one customer in the Encryption Products and Services Segment
represented 78% of total net sales. At July 31, 2006, one customer in the
Encryption Products and Services Segment represented 86% of net accounts
receivable and at October 31, 2005, one customer in the Encryption Products and
Services Segment represented 100% of net accounts receivable.

4.   SHORT-TERM INVESTMENTS
     ----------------------

     Short-term investments represent certificates of deposits, carried at
amortized cost, with maturities of less than twelve months. The fair values of
the certificates of deposits, including accrued interest, approximate their
carrying value due to their short maturities.

5.   INVESTMENT IN AND RELATED PARTY TRANSACTIONS WITH DIGITAL INFO SECURITY
     -----------------------------------------------------------------------
     CO., INC.
     ---------

     On February 13, 2006, we entered into a Software License and Distribution
Agreement (the "License Agreement") to license to Digital Info Security Co.,
Inc. ("DISC"), a privately held corporation, an encryption system that
integrates our encryption technology into DISC's secure e-mail services. The
system is intended to allow companies to encrypt all e-mail transactions in a
manner transparent to the individual user. We developed a prototype of the
system jointly with DISC and DISC is field testing the system internally and
with potential customers. Concurrently with entering into the License Agreement
with DISC, we entered into an Exchange Agreement whereby 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. On May 17, 2006 and July 14, 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, respectively. Our investment in
DISC is recorded in the accompanying condensed balance sheet at cost based on
the closing price of our common stock on the date of the Exchange Agreement for
the shares issued under the agreement, and the price paid for the shares
purchased on May 17, 2006 and July 14, 2006.

     Net sales during the nine-month and three-month periods ended July 31, 2006
include $95,000 and $45,000, respectively, of billings to DISC for engineering
services.


                                       15
<PAGE>

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

     Inventories consist of the following as of:

                                              July 31,          October 31,
                                                2006               2005
                                             ----------         ----------
       Component parts                       $  117,139         $  134,084
       Work-in-process                           50,422             41,379
       Finished products                        113,546            209,533
                                             ----------         ----------
                                             $  281,107         $  384,996
                                             ==========         ==========

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

     We comply with the provisions of SFAS No. 128, "Earnings Per Share" ("SFAS
No. 128"). 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 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 nine-month periods ended
July 31, 2006 and 2005, were options to purchase 22,597,941 shares and
20,127,246 shares, respectively.

8.   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) Flat-panel display 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, 2006 and 2005:
<TABLE>
<CAPTION>
                                                            Encryption Products
        Segment Data                 Flat-Panel Display         and Services              Total
--------------------------------     ------------------     --------------------    -----------------
<S>                                             <C>                     <C>                <C>
Nine Months Ended July 31, 2006:
   Net sales                         $            -            $      397,773        $     397,773
   Net loss                              (2,772,330)               (3,027,381)          (5,799,711)

Nine Months Ended July 31, 2005:
   Net sales                         $            -            $      391,425        $     391,425
   Net loss                              (1,310,575)               (1,994,967)          (3,305,542)
</TABLE>



                                       16
<PAGE>

<TABLE>
<CAPTION>

                                                            Encryption Products
        Segment Data                 Flat-Panel Display           and Services             Total
---------------------------------    ------------------     --------------------    -----------------
<S>                                         <C>                         <C>                 <C>
Three Months Ended July 31, 2006:
   Net sales                         $            -            $      130,845        $     130,845
   Net loss                              (1,070,044)               (1,077,231)          (2,147,275)

Three Months Ended July 31, 2005:
   Net sales                         $            -            $      132,125        $     132,125
   Net loss                                (362,455)                 (756,598)          (1,119,053)
</TABLE>










                                       17
<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 a
thin, flat low- voltage phosphor display ("Display") 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.

     After more than eight years of developing our thin, flat Display
technology, we have achieved our goal of producing a flat panel Display that
matches many of the beneficial characteristics of a cathode ray tube ("CRT") but
is thin, operates at a low voltage and consumes less power. Our Display operates
at a low voltage of 40 volts as compared to voltages up to 10,000 volts for CRT
and field emission displays. We achieved this goal by creating a TFT (thin film
technology) based pixel matrix electron control system ("PMECS") that can
operate with virtually any electron emission system. We have produced models of
full color Displays that are able to show TV programs and can be connected to a
DVD or VCR player to show color or black and white movies.

     Our Displays incorporating PMECS consist of two thin glass substrates which
are vacuumed and sealed using our unique low-temperature technology that is
compatible with amphorous silicon TFT technology, which is the dominant TFT LCD
technology. Our Displays can operate with virtually any type of electron
emission system, have gray scale and color or monochrome capability, operate at
low voltages, have no pixel cross-talk (i.e., the operation of a pixel does not
interfere with other pixels), and consume low power. We have developed
proprietary low-voltage (40 volts) red, green and blue color phosphors that are
utilized for our color Displays. In addition, PMECS, in conjunction with our
electron emission technologies, is applicable to any size display from small
hand-held devices to large HDTV products. We believe that our Displays with
PMECS could potentially have a cost similar to a CRT and thus cost less than
current LCD or plasma displays.

     The PMECS, which is located on one of the substrates, is being exclusively
produced for us by an Asian company utilizing its mass production TFT liquid
crystal display ("LCD") facilities. Our supplier has incorporated the PMECS into
5.5 inch (diagonal) TFT color matrix structures with 960 x 234 pixels. We are
now producing, with the assistance of Volga Svet Ltd. ("Volga"), a Russian
display company that we have been working with for more than nine years, our
color Displays using these structures in combination with our proprietary
electron emission technologies. These emission technologies, which include
carbon nanotubes, both reflective and non-reflective planar edge, and film
emitters, are suitable for a variety of display applications. In particular, we
are incorporating our low-voltage and low-power carbon nanotube electron
emission system into our displays. These carbon nanotubes, which are supplied to
us by a U.S. company, are extremely small carbon elements, approximately 10,000
times thinner than the width of a human hair, that emit electrons under
controllable conditions.

     We have developed a process of selectively placing low voltage carbon
nanotubes in close proximity to pixels containing red, green, and blue
phosphors. The nanotubes are used as a source of electronics to activate the



                                       18
<PAGE>

phosphors which emit light, thus displaying video images. This allows our
display system to consume low power and utilize low operating voltages, which
improves the reliability and extends the life of our Displays. We have also
intensified the brightness of the pixels, allowing our Display to operate under
both sunlight and nighttime conditions. As a result, we believe that our
Displays can meet performance requirements for both outdoor and indoor
applications. Furthermore, we have developed a rapid sealing process for our
Display that could also be applied to any display requiring a vacuum. We have
also developed a system to vacuum our display which results in our display to
have a very thin profile, less than LCD or Plasma displays. In addition, we have
successfully tested our Displays under various environmental conditions. This
included subjecting our Displays to shock, vibration, and operating temperatures
from -40(degree)C to 85(degree)C.

     We are continuing discussions with several companies to either produce
portions of our Display or license our display technology for use of our Display
as part of their products. 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. See "General Risks and Uncertainties"
below.

     We produce and market a line of high-grade, hardware and software based
encryption products that provide security for voice, fax, and data transmissions
utilizing cellular, satellite, digital and analog communication media. Our
encryption technology products encode information through a complex mathematical
formula called an algorithm. The algorithm requires a secret "key" to both
encrypt and decrypt information. Only the secret key that is used to encrypt the
information can be used to decrypt the information. Our products automatically
generate new secret keys electronically with each call. When communicating
encrypted information over a communications media, all of our products generally
are required at both the sending and receiving end.

     Our line of encryption products consists mainly of our 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 two software-based security
products - one that uses either the Triple DES or the AES algorithm to encrypt
data files and e-mail attachments in both desktop and laptop computers utilizing
Microsoft Windows operating systems and another that is able to encrypt voice
and data transmitted between cellular and satellite phones and among servers,
scanners, and printers. We sell our encryption products directly to end-users
and through dealers and distributors.

     We have expanded our encryption product line and currently have 17
different products in our product line. We have continued to direct our
marketing efforts toward participation in the security opportunities created by
the U.S. Department of Homeland Security, the U.S. Defense Department, the
Health Insurance Portability and Accountability Act ("HIPAA"), the
Sarbanes-Oxley Act, and the Gramm-Leach-Bliley Act. We have entered into
agreements with two major companies to supply them with our encryption
equipment, which is capable of securing fax, voice, and data information over
satellite, digital, and analog communication networks.



                                       19
<PAGE>

     In February 2006, we licensed to Digital Info Security Co., Inc. ("DISC"),
an encryption system that integrates our encryption technology into DISC's
secure e-mail services. The system, our DCS-2200, is intended to allow companies
to encrypt all e-mail transactions in a manner transparent to the individual
user. We developed a prototype of the system and DISC is field testing the
system internally and with potential customers. With this product, DISC is able
to differentiate itself from other e-mail compliance companies. In furtherance
of the relationship between the two companies, we exchanged 100,000 shares of
our common stock for 5,000,000 shares of DISC's common stock. On May 17, 2006
and July 14, 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,
respectively. As of July 31, 2006, we hold approximately 11% of the outstanding
shares of DISC.

     We have developed a line of products for use over the satellite
communications network of the Thuraya Satellite Telecommunications Company
("Thuraya"), located in Dubai, United Arab Emirates. The Thuraya network,
developed by the Boeing Company ("Boeing"), provides satellite communications in
Europe, Africa, Russia, the Middle East and Asia. Our products enable the
Thuraya network to provide encrypted communications between satellite phones,
from satellite phones to desk-based phones, or between desk-based phones. Our
products can encrypt both data and, with our DCS-1400-D, which uses a compact
encryption module attached to the Thuraya handset, voice communication over the
Thuraya network. End-users benefiting from our encryption technology include
Thuraya customers served by Boeing in Iraq, U.S. military forces in the Middle
East, and other U.S. government personnel.

     Several companies are distributing and marketing our line of products for
use with the Thuraya network. We have an agreement with Boeing under which
Boeing is a distributor of such products. In addition, a major Thuraya service
provider has also become a distributor of, and has purchased, certain of such
products. Thuraya itself has included 13 of our encryption products sold by
Boeing on the Boeing page of Thuraya's website,
http://www.thuraya.com/country/int_sp/boeing/products.htm. Our products are also
being marketed by another of Thuraya's international service providers, Fort
Info Technology FZC, located in Dubai, and are listed on Fort Info Technology's
website, www.forttel.com, under Secure Communications.

     Under our agreement with Boeing, Boeing is the exclusive distributor of our
DCS-1400-D (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. We have expanded our line of products
distributed by Boeing, which now consists of 13 products. These products contain
the brand name of Thuraya and have operating controls in Arabic. We have also
developed for Boeing a voice product to operate over the Thuraya network having
a higher level of security. We are cooperating with Asia Pacific Satellite
Industries ("APSI"), the supplier of the next generation voice and data handset
for the Thuraya network, and with Boeing to integrate our encryption solution
into APSI's handset. As a first step, we have received samples of the next
generation handset from APSI to evaluate the encryption operation of our
DCS-1200, DCS-1400 and USS-900. We have also sent samples of our devices for
APSI's evaluation and their testing indicates that the DCS-1200 and DCS-1400 can
operate with the new handset.


                                       20
<PAGE>

     In connection with Boeing becoming the exclusive distributor of certain of
our products, Boeing authorized us to use its name on our website. Accordingly,
customers desiring to purchase these encryption products can find authorized
Boeing sales information on the "Encryption Products" page of our website. In
May 2006, Boeing demonstrated our encryption products to Thuraya service
providers.

     Our encryption products can also be used to further encrypt data over the
Globalstar network. Globalstar provides a satellite voice and data service
throughout a world-wide coverage area. Our DCS-1200 and DCS-1400 encryption
devices are included on the Globalstar webpage,
http://www.globalstarusa.com/en/products/encryption.php.

     We have developed a prototype hardware device to encrypt Short Message
Service ("SMS"), an inexpensive text message communication protocol that is used
in many cellular and satellite phones and networks. We currently plan to utilize
this encryption solution in conjunction with the Thuraya handsets, but it can be
used for data communications across other platforms as well.

     Our products provide secure communications with many different satellite
phones, including the Thuraya 7100/7101 handheld terminal ("HHT"), Globalstar
GPS-1600 HHT, Telit SAT-550/600 HHT, Globalstar GPS-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, including
Teknobil's Next Thuraya Docker, Thuraya's Fixed Docking Adapter, APSI's FDU-2500
Fixed Docking Unit, and Sattrans's SAT-OFFICE Fixed Docking Unit and SAT-VDA
Hands-Free Car Kit.

     We have also developed modifications of our standard equipment for other
applications. We have provided modifications of our hardware and software
encryption solutions to several large organizations which are evaluating our
products in connection with their security requirements. We have supplied our
USS-900AF automatic fax encryption product to a major U.S. defense contractor to
secure its worldwide fax communication.

     We are also providing our DCS-1700 to several U.S. companies to encrypt the
network data communication links between corporate servers, scanners, and
printers contained in multi-functional products. In addition, we have supplied
another company our encryption equipment to secure its executive
teleconferencing system.

     There is continued interest in our encryption products by governments
located in the Americas, Europe, Africa, Asia and the Middle East. Applications
for these customers include voice, fax and data security using land-line and
wireless phones. Product evaluations by these customers are usually thorough and
take time to materialize into firm orders.

     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



                                       21
<PAGE>

generated cash flows from sales of our encryption products. 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. We have also been working with
several large organizations to provide them with both our hardware and software
encryption solutions for them to evaluate whether the solutions meet their
security requirements and have begun supplying several major U.S. companies with
our encryption products. We have also begun to market our flat panel video
display products to potential purchasers for incorporation into their products.
We anticipate that current cash on hand, cash generated from operations, and
cash generated from the exercise of employee options will be adequate to fund
our operations at least through the end of the third quarter of fiscal 2007.

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.

     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, 2005.

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

     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.

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.



                                       22
<PAGE>

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

     Prior to November 1, 2005, we accounted for stock options granted to
employees and directors using the intrinsic value method prescribed in
Accounting Principles Board ("APB") Opinion No. 25 "Accounting for Stock Issued
to Employees" ("APB Opinion No. 25") and complied with the disclosure provision
of Statement of Financial Accounting Standards ("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". In
December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No.
123 (revised 2004), "Share-Based Payment" ("SFAS No. 123R"), which addresses the
accounting for share-based payment transactions in which a company receives
employee services in exchange for either equity instruments of the company or
liabilities that are based on the fair value of the company's equity instruments
or that may be settled by the issuance of such equity instruments. SFAS No. 123R
eliminates the ability to account for share-based compensation transactions
using the intrinsic value method and requires that such transactions be
accounted for using a fair-value-based method and recognized as expense in the
statement of operations.

     Effective November 1, 2005, we adopted SFAS No. 123R. Under the fair value
recognition provisions of SFAS No. 123R, stock-based compensation cost is
estimated at the grant date based on the fair value of the award and is
recognized as expense ratably over the requisite service period of the award. We
recorded approximately $2,470,000 and $952,000 of stock-based compensation
expense, related to stock options granted to employees and directors, for the
nine-month and three-month periods ended July 31, 2006, respectively. Under the
accounting method we followed prior to November 1, 2005, we did not record any
stock-based compensation expense related to stock options granted to employees
and directors for the nine-month and three-month periods ended July 31, 2005. If
we had included the cost of employee stock option compensation in the financial
statements for the nine-month and three-month periods ended July 31, 2005, our
net loss would have increased by approximately $2,018,000 and $287,000,
respectively, based on the fair value of the stock options granted to employees.
See Note 2 to the 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.

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

Nine months ended July 31, 2006 compared with nine months ended July 31, 2005
-----------------------------------------------------------------------------

     Net Sales and Gross Profit

     Net Sales. Net sales increased by approximately $7,000 in the nine-month
period ended July 31, 2006, to approximately $398,000, as compared to
approximately $391,000 in the comparable prior-year period. All revenue during
both periods was from encryption products and services. The increase in net



                                       23
<PAGE>

sales resulted from an increase in revenue from encryption services of
approximately $35,000, offset by a reduction in unit sales of approximately
$28,000. The revenue from encryption services in the current period resulted
from engineering services in the amount of $95,000 billed to DISC. Our
encryption sales have been limited and are sensitive to individual large
transactions. We believe that changes in sales 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 $441,000 in the nine-month period ended July 31,
2006, to approximately $277,000, as compared to a loss of approximately $164,000
in the comparable prior-year period. The increase in gross profit is primarily
the result of the provision for excess inventory due to changes in product
requirements of $438,000 recorded in the prior-year period. Gross profit as a
percent of net sales in the nine-month period ended July 31, 2006 was
approximately 70%. Gross profit as a percent of net sales in the nine-month
period ended July 31, 2005 is not meaningful due to the loss resulting from the
inventory adjustment recorded during the 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 $1,858,000 in
the nine-month period ended July 31, 2006, to approximately $3,583,000, from
approximately $1,725,000 in the comparable prior-year period. The increase in
research and development expenses was principally due to employee stock option
compensation expense of approximately $1,711,000 in the current period compared
to $-0- in the prior-year period, an increase in outside research and
development expense of approximately $84,000 and an increase in patent related
expenses of approximately $44,000. The employee stock option compensation
expense included in our financial statements in the current period is a result
of our adopting SFAS No. 123R, effective November 1, 2005.

     Selling, General and Administrative Expenses

     Selling, general and administrative expenses increased by approximately
$1,087,000 to approximately $2,514,000 in the nine-month period ended July 31,
2006, from approximately $1,427,000 in the comparable prior-year period. The
increase in selling, general and administrative expenses was principally due to
employee stock option compensation expense of approximately $758,000 in the
current period compared to $-0- in the prior-year period, an increase in
professional fees of approximately $199,000, an increase in consulting expense
of approximately $40,000 and an increase in employee compensation, other than
stock option expense, and related costs of approximately $31,000. The employee
stock option compensation expense included in our financial statements in the
current period is a result of our adopting SFAS No. 123R, effective November 1,
2005.



                                       24
<PAGE>

     Interest Income

     Interest income was approximately $20,000 in the nine-month period ended
July 31, 2006, compared to approximately $10,000 in the comparable prior-year
period. The increase in interest income was principally the result of an
increase in prevailing interest rates.

Three months ended July 31, 2006 compared with three months ended July 31, 2005
-------------------------------------------------------------------------------

     Net Sales and Gross Profit

     Net Sales. Net sales decreased by approximately $1,000 in the three-month
period ended July 31, 2006, to approximately $131,000, as compared to
approximately $132,000 in the comparable prior-year period. All revenue during
both periods was from encryption products and services. The decrease in net
sales resulted from a decrease in revenue from encryption services of
approximately $15,000, offset by an increase in unit sales of approximately
$14,000. The revenue from encryption services in the current period resulted
from engineering services in the amount of $45,000 billed to DISC. Our
encryption sales have been limited and are sensitive to individual large
transactions. We believe that changes in sales 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 $315,000 in the three-month period ended July 31,
2006, to approximately $92,000, as compared to a loss of approximately $223,000
in the comparable prior-year period. The increase in gross profit is primarily
the result of the provision for excess inventory due to changes in product
requirements of $313,000 recorded in the prior-year period. Gross profit as a
percent of net sales in the three-month period ended July 31, 2006 was
approximately 70%. Gross profit as a percent of net sales in the comparable
prior-year period is not meaningful due to the loss recorded during the 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 $827,000 in
the three-month period ended July 31, 2006, to approximately $1,312,000, from
approximately $485,000 in the comparable prior-year period. The increase in
research and development expenses was principally due to employee stock option
compensation expense of approximately $602,000 in the current period compared to
$-0- in the prior-year period, an increase in employee compensation, other than
stock option expense, and related costs of approximately $140,000, an increase
in outside research and development expense of approximately $47,000 and an
increase in patent related expenses of approximately $25,000. The employee stock
option compensation expense included in our financial statements in the current
period is a result of our adopting SFAS No. 123R, effective November 1, 2005.



                                       25
<PAGE>

     Selling, General and Administrative Expenses

     Selling, general and administrative expenses increased by approximately
$519,000 to approximately $934,000 in the three-month period ended July 31,
2006, from approximately $415,000 in the comparable prior-year period. The
increase in selling, general and administrative expenses was principally due to
employee stock option compensation expense of approximately $350,000 in the
current period compared to $-0- in the prior-year period, an increase in
professional fees of approximately $36,000, an increase in employee
compensation, other than stock option expense, and related costs of
approximately $58,000 and an increase in consulting expense of approximately
$71,000. The employee stock option compensation expense included in our
financial statements in the current period is a result of our adopting SFAS No.
123R, effective November 1, 2005.

     Interest Income

     Interest income was approximately $7,000 in three-month period ended July
31, 2006, compared to approximately $4,000 in the comparable prior-year period.
The increase in interest income was principally the result of an increase in
prevailing 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 public offering, and upon the exercise of stock
options. In 2001 and 2002, we also received payments under a technology
development agreement. In addition, commencing in the fourth quarter of fiscal
1999, we began to generate cash flows from sales of our encryption products.

     During the nine months ended July 31, 2006, our operating activities used
approximately $1,496,000 in cash. This resulted from payments to suppliers,
employees and consultants of approximately $1,921,000, which was offset by cash
of approximately $404,000 received from collections of accounts receivable
related to sales of encryption products and approximately $20,000 of interest
income received. In addition, we received approximately $1,718,000 in cash upon
the exercise of stock options and approximately $401,000 of proceeds from
maturities of short-term investments consisting of certificates of deposit. We
also acquired $398,000 of short-term investments consisting of certificates of
deposit, invested $110,000 in Digital Security Info Co., Inc. common stock and
purchased approximately $10,000 of equipment. As a result, our cash, cash
equivalents, and short-term investments increased to approximately $1,009,000 at
July 31, 2006 from approximately $907,000 at the end of fiscal 2005.

     Accounts receivable decreased by approximately $13,000 from approximately
$32,000 at the end of fiscal 2005 to approximately $19,000 at July 31, 2006. The
decrease in accounts receivable is a result of the timing of collections. Other
receivables decreased by $12,000 from $30,000 at the end of fiscal 2005 to
$18,000 at July 31, 2006. The decrease in other receivables is a result of our
taking a provision for bad debts related to this receivable during the
nine-month period ended July 31, 2006. Inventories decreased approximately


                                       26
<PAGE>

$104,000 from approximately $385,000 at October 31, 2005 to approximately
$281,000 at July 31, 2006, primarily as a result of the timing of shipments and
production schedules. Prepaid expenses and other current assets decreased by
approximately $44,000 from approximately $80,000 at the end of fiscal 2005 to
approximately $36,000 at July 31, 2006, as a result of the timing of payments.
Accounts payable and accrued liabilities decreased by approximately $56,000 from
approximately $348,000 at the end of fiscal 2005 to approximately $292,000 at
July 31, 2006, as a result the timing of payments.

     As a result of these changes, working capital at July 31, 2006 decreased to
approximately $1,072,000 from approximately $1,086,000 at the end of fiscal
2005.

     Our working capital includes inventory of approximately $281,000 at July
31, 2006. 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.

     During the nine-month periods ended July 31, 2006 and 2005, we issued
1,695,050 shares and 2,417,715 shares, respectively, of common stock to certain
employees for services rendered, principally in lieu of cash compensation,
pursuant to the 2003 Share Plan and 2000 Share Plan. We recorded compensation
expense for the nine-month periods ended July 31, 2006 and 2005 of approximately
$1,342,000 and $1,453,000, respectively, and for the three-month periods ended
July 31, 2006 and 2005 of approximately $583,000 and $443,000, respectively, for
the shares of common stock issued to employees. In addition, during the
nine-month periods ended July 31, 2006 and 2005, we issued 293,360 shares and
45,000 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, 2006 and 2005 of approximately $245,000 and
$30,000, respectively, and for the three-month periods ended July 31, 2006 and
2005 of approximately $35,000 and $7,000, respectively, for the shares of common
stock issued to consultants. During the nine-month period ended July 31, 2006,
we acquired a minority interest in DISC, a privately held corporation, in part
by exchanging 100,000 unregistered shares of our common stock for 5,000,000
shares of DISC's common stock. During the nine-month period ended July 31, 2005,
we also issued 179,000 shares of unregistered common stock to settle a liability
of approximately $115,000.

     The auditor's report on our financial statements as of October 31, 2005
states that the net loss incurred during the year ended October 31, 2005, 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, 2005, 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, 2004 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.

     We believe that our existing cash, short-term investments and accounts
receivable, together with cash flows from expected sales of encryption products
and 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 third quarter
of fiscal 2007. We anticipate that, thereafter, we will require additional funds
to continue our marketing, production, and research and development activities,


                                       27
<PAGE>

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 third quarter of fiscal 2007. The sale of
additional equity securities or convertible debt could result in dilution to our
stockholders. 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 or otherwise) to improve our liquidity 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 funds will be available to us from debt or equity financings
or that, if available; we will be able to obtain such funds on favorable terms
and conditions. 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. We have been working with several large organizations to provide them
with both our hardware and software encryption solutions for them to evaluate
whether the solutions meet their security requirements and have begun supplying
several major U.S. companies with our encryption products. We have also begun to
market our Display by demonstrating it at flat panel display exhibitions and we
are presently involved in discussions with potential customers and licensees.
During the nine months ended July 31, 2006, we have recognized revenue from
sales of encryption products and services of approximately $398,000.

     The following table presents our expected cash requirements for contractual
obligations outstanding as of July 31, 2006:

                                          Payments Due by Period
                                          ----------------------
<TABLE>
<CAPTION>
                           Less
Contractual                than         1-3         4-5             After
Obligations              1 year        years       years           5 years         Total
-----------------      ----------   ----------   ---------     -----------    -------------
<S>                        <C>          <C>         <C>             <C>             <C>
Consulting
Agreement              $ 174,000            -         -                -        $ 174,000

Noncancelable
Operating Leases       $ 266,000    $ 366,000         -                -        $ 632,000
                       ----------   ----------   ---------     -----------    -------------
Total Contractual
Cash Obligations       $ 440,000    $ 366,000         -                -        $ 806,000
                       ==========   ==========   =========     ===========    =============
</TABLE>


                                       28
<PAGE>

IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
------------------------------------------

     In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" ("SFAS 154"). SFAS 154 replaces the Accounting Principles Board
Opinion No. 20, "Accounting Changes" and SFAS No. 3, "Reporting Accounting
Changes in Interim Financial Statements," to require retrospective application
to prior periods' financial statements of changes in accounting principle. The
provisions of SFAS 154 are effective for accounting changes made in fiscal years
beginning after December 15, 2005. The adoption of SFAS 154 is not expected to
have a material effect on our 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,
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 this discussion and analysis along with our Annual Report on Form 10-K for
the year ended October 31, 2005 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 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 nine months ended July 31, 2006, 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 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
July 31, 2006. We have set forth below our net losses, research and development
expenses and net cash used in operations for the nine-month periods ended July
31, 2006 and 2005, and for the fiscal years ended October 31, 2005 and 2004:


                                       29
<PAGE>

<TABLE>
<CAPTION>
                                                    (Unaudited)
                                                 Nine Months Ended             Fiscal Years Ended
                                                     July 31,                      October 31,
                                           ---------------------------    ---------------------------
                                               2006            2005            2005           2004
                                           -----------     -----------    -----------     -----------
<S>                                             <C>             <C>             <C>           <C>
Net loss                                   $ 5,799,711     $ 3,305,542    $ 4,451,257     $ 3,360,655
Research and development expenses          $ 3,582,867     $ 1,725,197    $ 2,266,911     $ 2,164,427
Net cash used in operations                $ 1,496,300     $ 1,295,510    $ 1,720,332     $ 1,205,122
</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, 2005 states that the net
loss incurred during the year ended October 31, 2005, 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, 2005, raise substantial doubt about our ability to continue as a going
concern. The auditor's report on our financial statements for the years ended
October 31, 2004 and 2003 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.

     We believe that our existing cash and accounts receivable, together with
cash flows from expected sales of encryption products and 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 third quarter of fiscal 2007. 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 third quarter of fiscal 2007. The sale of additional
equity securities or convertible debt could result in dilution to our
stockholders. We can give 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 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. If we cannot obtain such funds if needed, we would need
to curtail or cease some or all of our operations.

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 Displays and (ii) 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 only recently started to produce color and monochrome versions of our



                                       30
<PAGE>

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 Displays and encryption
          products;
     o    the capability of Volga to produce thin high-brightness color and
          monochrome Displays and supply them to us;
     o    our ability to jointly develop with Volga and produce a color Display
          with various electron emission systems;
     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; and
     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.


                                       31
<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 Display technologies
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 July 31, 2006 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.


                                       32
<PAGE>

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

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

              31.1   Certification of Chief Executive Officer, pursuant to
                     Section 302 of the Sarbanes-Oxley Act of 2002, dated
                     September 11, 2006.

              31.2   Certification of Chief Financial Officer, pursuant to
                     Section 302 of the Sarbanes-Oxley Act of 2002, dated
                     September 11, 2006.

              32.1   Statement of Chief Executive Officer, pursuant to Section
                     1350 of Title 18 of the United States Code, dated September
                     11, 2006.

              32.2   Statement of Chief Financial Officer, pursuant to Section
                     1350 of Title 18 of the United States Code, dated September
                     11, 2006.


                                   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 11, 2006                            (Principal Executive Officer)



                                              By: /s/ Henry P. Herms
                                                  ------------------------------
                                              Henry P. Herms
                                              Vice President - Finance and
                                              Chief Financial Officer (Principal
September 11, 2006                            Financial and Accounting Officer)






                                       33