SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

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


                  For the quarterly period ended April 30, 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 executive offices)                     (Zip Code)


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


Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                                  Yes  X   No
                                      ---     ---

Indicate by check mark whether the registrant is 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 June 5, 2006, the registrant had outstanding 95,770,376 shares of Common
Stock, par value $.01 per share, which is the registrant's only class of common
stock.

<PAGE>


<TABLE>
<CAPTION>
                                TABLE OF CONTENTS
                                -----------------


PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements.

         Condensed Balance Sheets as of April 30, 2006 (Unaudited) and
<S>                                                                                              <C>
          October 31, 2005                                                                       3

         Condensed Statements of Operations (Unaudited) for the six months
          ended April 30, 2006 and 2005                                                          4

         Condensed Statements of Operations (Unaudited) for the three months
          ended April 30, 2006 and 2005                                                          5

         Condensed Statements of Cash Flows (Unaudited) for the six months
          ended April 30, 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 - 33


PART II. OTHER INFORMATION

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.                            33

Item 6.  Exhibits.                                                                               33

         SIGNATURES                                                                              34
</TABLE>

                                       2
<PAGE>



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

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

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

                                                                                             (Unaudited)
                                                                                          ------------------
                                                                                              April 30,            October 31,
                                     ASSETS                                                     2006                  2005*
                                     ------                                               ------------------    ------------------

CURRENT ASSETS:

<S>                                                                                         <C>                   <C>
   Cash and cash equivalents                                                                $      732,027        $      506,517
   Short-term investments                                                                          398,000               400,776
   Accounts receivable                                                                              50,200                32,117
   Other receivables, net                                                                           18,000                30,000
   Inventories                                                                                     307,970               384,996
   Prepaid expenses and other current assets                                                        60,110                79,829
                                                                                          ------------------    ------------------
                        Total current assets                                                     1,566,307             1,434,235

PROPERTY AND EQUIPMENT, net                                                                         28,168                27,131

INVESTMENT, at cost                                                                                 97,000                    -

OTHER ASSETS                                                                                         4,887                 4,887
                                                                                          ------------------    ------------------
                                                                                            $    1,696,362        $    1,466,253
                                                                                          ==================    ==================

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

CURRENT LIABILITIES:
   Accounts payable                                                                         $      312,503        $      270,806
   Accrued liabilities                                                                              59,230                77,424
                                                                                          ------------------    ------------------
                        Total current liabilities                                                  371,733               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;
      95,230,901 and 91,975,538 shares issued and outstanding, respectively                       952,309                919,755

   Additional paid-in capital                                                                   76,932,374            73,105,886
   Accumulated deficit                                                                         (76,560,054)          (72,907,618)
                                                                                          ------------------    ------------------
                                                                                                 1,324,629             1,118,023
                                                                                          ------------------    ------------------
                                                                                            $    1,696,362        $    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>

<TABLE>
<CAPTION>

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

                                                                                                  For the Six Months Ended
                                                                                          ----------------------------------------
                                                                                                          April 30,
                                                                                          ----------------------------------------
                                                                                                 2006                  2005
                                                                                          ------------------    ------------------

<S>                                                                                        <C>                   <C>
NET SALES                                                                                   $      266,928        $      259,300

COST OF SALES                                                                                       81,313               200,431
                                                                                          ------------------    ------------------

      Gross profit                                                                                 185,615                58,869
                                                                                          ------------------    ------------------

OPERATING EXPENSES
      Research and development expenses                                                          2,270,395             1,239,888
      Selling, general and administrative expenses                                               1,580,364             1,011,742
                                                                                          ------------------    ------------------
                        Total operating expenses                                                 3,850,759             2,251,630
                                                                                          ------------------    ------------------

LOSS FROM OPERATIONS                                                                            (3,665,144)           (2,192,761)

INTEREST INCOME                                                                                     12,708                 6,272
                                                                                          ------------------    ------------------

NET LOSS                                                                                    $   (3,652,436)       $   (2,186,489)
                                                                                          ==================    ==================


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

Shares used in computing net loss per share:
      Basic and Diluted                                                                         93,821,919            86,742,842
                                                                                          ==================    ==================
</TABLE>


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

                                       4

<PAGE>

<TABLE>
<CAPTION>

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

                                                                                                For the Three Months Ended
                                                                                          ---------------------------------------
                                                                                                          April 30,
                                                                                          ----------------------------------------
                                                                                                 2006                  2005
                                                                                          ------------------    ------------------

<S>                                                                                         <C>                   <C>
NET SALES                                                                                   $       71,538        $       46,709

COST OF SALES                                                                                       25,855               135,858
                                                                                          ------------------    ------------------

      Gross profit (loss)                                                                           45,683               (89,149)
                                                                                          ------------------    ------------------

OPERATING EXPENSES
      Research and development expenses                                                          1,613,807               649,935
      Selling, general and administrative expenses                                                 851,268               445,471
                                                                                          ------------------    ------------------
                        Total operating expenses                                                 2,465,075             1,095,406
                                                                                          ------------------    ------------------

LOSS FROM OPERATIONS                                                                            (2,419,392)           (1,184,555)

INTEREST INCOME                                                                                      6,513                 4,560
                                                                                          ------------------    ------------------

NET LOSS                                                                                    $   (2,412,879)       $   (1,179,995)
                                                                                          ==================    ==================

PER SHARE INFORMATION:
Net loss per share:
      Basic and Diluted                                                                     $        (0.03)       $        (0.01)
                                                                                          ==================    ==================
Shares used in computing net loss per share:
      Basic and Diluted                                                                         94,407,865            87,341,635
                                                                                          ==================    ==================
</TABLE>

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 Six Months Ended
                                                                                                          April 30,
                                                                                          ----------------------------------------
                                                                                                 2006                  2005
                                                                                          ------------------    ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                                         <C>                   <C>
   Payments to suppliers, employees and  consultants                                        $   (1,284,101)       $   (1,184,067)
   Cash received from customers                                                                    248,845               316,910
   Interest received                                                                                12,708                 6,272
                                                                                          ------------------    ------------------
      Net cash used in operating activities                                                     (1,022,548)             (860,885)
                                                                                          ------------------    ------------------

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)             (395,964)
   Payments for purchases of property and equipment                                                 (8,917)               (2,256)
                                                                                          ------------------    ------------------
      Net cash used in investing activities                                                         (6,141)             (398,220)
                                                                                          ------------------    ------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from exercise of stock options                                                       1,254,199               896,950
                                                                                          ------------------    ------------------
      Net cash provided by financing activities                                                  1,254,199               896,950
                                                                                          ------------------    ------------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                               225,510              (362,155)

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

CASH AND CASH EQUIVALENTS AT  END OF PERIOD                                                 $      732,027        $      640,622
                                                                                          ==================    ==================

RECONCILIATION OF NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES:

   Net loss                                                                                 $   (3,652,436)       $   (2,186,489)
   Stock option compensation to employees                                                        1,517,351                     -
   Stock option compensation to consultants                                                         21,858                44,609
   Stock awards granted to employees and consultants pursuant to stock
      incentive plans                                                                              968,634             1,031,381
   Provision for (recovery of) doubtful accounts                                                    18,287                (8,622)
   Provision for excess inventory                                                                        -               125,000
   Depreciation and amortization                                                                     7,880                 7,299
   Change in operating assets and liabilities:
      Accounts receivable and other receivables                                                    (24,370)               57,610
      Inventories                                                                                   77,026                (2,810)
      Prepaid expenses and other current assets                                                     19,719               105,946
      Accounts payable and  accrued liabilities                                                     23,503               (34,809)
                                                                                          ------------------    ------------------
         Net cash used in operating activities                                              $   (1,022,548)       $     (860,885)
                                                                                          ==================    ==================

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  six-month  and
three-month periods ended April 30, 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 six months ended April 30, 2006, our operating  activities  used
approximately  $1,023,000  in cash.  This  resulted  from payments to suppliers,
employees and consultants of approximately $1,284,000,  which was offset by cash
of  approximately  $249,000  received from  collections  of accounts  receivable
related to sales of encryption  products and  approximately  $13,000 of interest

                                       7

<PAGE>

income received. In addition, we received approximately  $1,254,000 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 and purchased  approximately $9,000 of equipment. As a result, our cash,
cash  equivalents,   and  short-term   investments  increased  to  approximately
$1,130,000  at April 30, 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 CRT displays,  and other potential sources of cash flows, will be
sufficient  to enable us to continue in operation  until at least the end of the
second quarter of fiscal 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 second  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
six-month and three-month  periods ended April 30, 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  six-month  and  three-month  periods ended April 30,
2005 would have increased to the following adjusted amounts:

<TABLE>
<CAPTION>
                                                                               For the Six                 For the Three
                                                                               Months Ended                Months Ended
                                                                              April 30, 2005              April 30, 2005
                                                                          ---------------------      ----------------------

<S>                                                                          <C>                        <C>
Net loss as reported                                                         $   (2,186,489)            $   (1,179,995)
Add: Total stock-based employee compensation expense,
      determined under fair value based method, for all
      awards, net of related tax effect                                          (1,730,134)                (1,403,518)
                                                                          ---------------------      ----------------------
Net loss as adjusted                                                         $   (3,916,623)            $   (2,583,513)
                                                                          =====================      ======================

Net loss per share, basic and diluted:
      As reported                                                                 $ (0.03)                   $ (0.01)
                                                                                  ========                   ========
      As adjusted                                                                 $ (0.05)                   $ (0.03)
                                                                                  ========                   ========
</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
transition  method as permitted by SFAS No. 123R and  therefore,  our  financial

                                       9

<PAGE>

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 will
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 will 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
will be 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   $1,517,000  and  $1,402,000  of  stock-based
compensation  expense,  related  to  stock  options  granted  to  employees  and
directors,  for the  six-month  and  three-month  periods  ended April 30, 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 six-month and three-month periods ended April
30, 2006 by $0.02 and $0.02, respectively.

     Included in the  stock-based  compensation  cost  related to stock  options
granted to employees and directors recorded during the six-month and three-month
periods ended April 30, 2006 was approximately $9,000 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 April 30,
2006, there was  approximately  $9,000 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 six-month  periods ended April 30,
2006 and 2005, of approximately  $22,000 and $45,000,  respectively,  and during
the three-month periods ended April 30, 2006 and 2005, of approximately  $22,000
and  $40,000,   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 six months ended April 30, 2006 were within
two of the groups,  consisting  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 Six Months             For the Three Months
                                                              Ended April 30,                 Ended April 30,
                                                       ---------------------------     ---------------------------
                                                                          2005                            2005
                                                           2006        (pro forma)         2006        (pro forma)
                                                       -----------     -----------     -----------     -----------
   <S>                                                    <C>             <C>              <C>             <C>
   Expected term (in years)                                2.4             2.5              2.6             2.5
   Volatility                                              97%            110%              100%            108%
   Risk-free interest rate                                4.35%           3.39%            4.37%           3.50%
   Dividend yield                                           0               0                0               0
   Weighted average fair value at grant date              $0.44           $0.42            $0.48           $0.40
</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 on a U.S.  Treasury  note with a term
appropriate for 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

                                       11

<PAGE>

expected  forfeitures,   which  are  forfeitures  of  the  unvested  portion  of
surrendered  options. We estimated expected  forfeitures based on our historical
experience.

     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  six-month  periods ended April 30, 2006 and 2005, we granted to
employees and  consultants  options to purchase  3,575,000  shares and 4,225,000
shares,  respectively,  of common stock at weighted  average  exercise prices of
$.83 and $.67 per share, respectively, pursuant to the CopyTele, Inc. 2003 Share
Incentive Plan (the "2003 Share Plan"). During the six-month periods ended April
30, 2006 and 2005,  stock  options to purchase  2,034,725  shares and  1,288,800
shares, respectively,  of common stock were exercised with aggregate proceeds of
approximately $1,254,000 and $897,000, respectively.

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

     As of April 30, 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 six months ended April 30, 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 April 30, 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 April 30, 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 4/30/06       Contractual Life           Price           at 4/30/06         Price
-------------------------  ---------------------------------------------------------  ---------------------------------
     <S>                     <C>                     <C>                  <C>             <C>                <C>
     $0.84 to $1.56             784,000              3.55                 $1.10             784,000          $1.10
         $2.28                  855,000              2.21                 $2.28             855,000          $2.28
     $3.38 to $4.50           2,528,000               .58                 $4.04           2,528,000          $4.04
         $6.38                  395,000               .39                 $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 six months  ended April
30, 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                                                        (160,000)           $0.46              $  68,970
                                                            -------------
Shares Under Option and Exercisable at April 30, 2006           2,628,466            $0.75              $ 132,184
                                                            =============
</TABLE>

     The following table summarizes  information about stock options outstanding
under the 2000 Share Plan as of April 30, 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 4/30/06       Contractual Life           Price           at 4/30/06         Price
-------------------------  ---------------------------------------------------------  ---------------------------------
     <S>                     <C>                     <C>                  <C>               <C>               <C>
     $0.34 - $0.40              836,000              5.12                 $0.40               836,000         $0.40
     $0.44 - $0.74              690,466              4.42                 $0.68               690,466         $0.68
     $0.94 - $1.09            1,102,000              4.44                 $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 April 30, 2006,  1,508 shares were  available for
future grants under the 2000 Share Plan.

                                       13

<PAGE>


     Information  regarding  the 2003 Share Plan for the six months  ended April
30, 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                                                         3,575,000            $0.83
Exercised                                                      (1,874,725)           $0.63             $   120,208
                                                            -------------
Shares Under Option at April 30, 2006                          14,205,475            $0.66             $ 1,947,559
                                                            =============
Shares Under Exercisable at April 30, 2006                     14,145,475            $0.66             $ 1,930,759
                                                            =============
</TABLE>

     The following table summarizes  information about stock options outstanding
under the 2003 Share Plan as of April 30, 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 4/30/06       Contractual Life           Price           at 4/30/06         Price
-------------------------  ---------------------------------------------------------  ---------------------------------
       <S>                    <C>                    <C>                  <C>             <C>                <C>
       $0.25 - $0.46          3,508,000              7.26                 $0.29           3,508,000          $0.29
       $0.51 - $0.77          4,777,400              8.72                 $0.61           4,717,400          $0.61
       $0.81 - $1.07          5,920,075              8.99                 $0.93           5,920,075          $0.93
</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 April 30, 2006,  11,570,271 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 six-month  periods ended April 30, 2006
and 2005, we issued 873,920 shares and 1,512,085 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 six-month periods ended April 30, 2006 and 2005 of
approximately  $759,000 and  $1,009,000,  respectively,  and for the three-month
periods  ended April 30, 2006 and 2005 of  approximately  $383,000 and $561,000,
respectively,  for the shares of common stock issued to employees.  In addition,
during the six-month  periods  ended April 30, 2006 and 2005, we issued  246,718
shares and 30,000  shares,  respectively,  of common  stock to  consultants  for
services  rendered  pursuant  to the 2003 Share  Plan.  We  recorded  consulting
expense for the six-month periods ended April 30, 2006 and 2005 of approximately
$210,000 and $22,000,  respectively, and for the three-month periods ended April
30, 2006 and 2005 of approximately  $117,000 and $9,000,  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 six months ended April 30,
2006, two customers in the Encryption  Products and Services Segment represented
63% and 19%, respectively, of total net sales. During the six months ended April
30,  2005,  one  customer  in  the  Encryption  Products  and  Services  Segment
represented  83% of total net sales.  At April 30,  2006,  one  customer  in the
Encryption  Products  and  Services  Segment  represented  100% 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 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, which DISC is testing. 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.  As of
the  date  of the  agreements,  DISC  had  63,233,300  shares  of  common  stock
outstanding,  including  the  shares  we  received.  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 agreement.  On May17, 2006,
we purchased an additional 1,000,000 shares of DISC's common stock for $50,000.

     Net sales during the six-month and three-month periods ended April 30, 2006
include  $50,000  of  billings  to  DISC  for  engineering  services.   Accounts
receivable at April 30, 2006 include $50,000 from DISC.

                                       15

<PAGE>





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

     Inventories consist of the following as of:

                                                   April 30,    October 31,
                                                     2006          2005
                                                 -----------    -----------
       Component parts                           $  118,419     $  134,084
       Work-in-process                               51,765         41,379
       Finished products                            137,786        209,533
                                                 -----------    -----------
                                                 $  307,970     $  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  six-month  periods ended
April 30,  2006 and  2005,  were  options  to  purchase  21,395,941  shares  and
30,505,246 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  six-month and  three-month  periods ended
April 30, 2006 and 2005:

<TABLE>
<CAPTION>
                                                                      Encryption Products
            Segment Data                   Flat-Panel Display             and Services                 Total
------------------------------------     ----------------------     ----------------------     ---------------------

Six Months Ended April 30, 2006:
<S>                                        <C>                        <C>                       <C>
   Net sales                               $        -                 $      266,928            $     266,928
   Net loss                                    (1,702,286)                (1,950,150)              (3,652,436)

Six Months Ended April 30, 2005:
   Net sales                               $        -                 $      259,300            $     259,300
   Net loss                                      (948,120)                (1,238,369)              (2,186,489)
</TABLE>


                                       16

<PAGE>

<TABLE>
<CAPTION>
                                                                      Encryption Products
            Segment Data                   Flat-Panel Display             and Services                 Total
------------------------------------     ----------------------     ----------------------     ---------------------

Three Months Ended April 30, 2006:
<S>                                        <C>                        <C>                       <C>
   Net sales                               $        -                 $       71,538            $      71,538
   Net loss                                    (1,037,530)                (1,375,349)              (2,412,879)

Three Months Ended April 30, 2005:
   Net sales                               $        -                 $       46,709            $      46,709
   Net loss                                      (430,881)                  (749,114)              (1,179,995)
</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 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.  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 eight 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 are extremely small
carbon  elements,  approximately  10,000 times thinner than the width of a human
hair, that emit electrons under controllable conditions. We are working with one
of our sources of nanotubes, a U.S. company, to incorporate its carbon nanotubes
into our 5.5 inch diagonal color and monochrome displays.

                                       18

<PAGE>

     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.  Our Display is capable
of operating  under both  sunlight and  nighttime  conditions.  As a result,  we
believe that our Displays can meet performance requirements for both outdoor and
indoor applications.  We have also reduced the operating voltage requirements of
our  Displays  to further  improve  the  reliability  and extend the life of our
displays.

     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. We are also working with
two companies to secure information between corporate servers and printers,  and
between users and high speed networks.

     In February 2006, we licensed to Digital Info Security Co., Inc.  ("DISC"),
an encryption  system that  integrates  our  encryption  technology  into DISC's

                                       19

<PAGE>

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 testing the system.
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.  As of the date of the  agreements,  DISC had 63,233,300
shares of common stock outstanding, including the shares we received. On May 17,
2006,  we purchased an  additional  1,000,000  shares of DISC's common stock for
$50,000.

     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 ("ASPI"),  the supplier of the next generation voice and data handset
for the Thuraya  network,  and with Boeing to integrate our encryption  solution
into ASPI'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
ASPI's evaluation. Based on the results of these evaluations, we will modify our
encryption design to integrate our encryption solution 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 are supplying 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. The TCP/IP encryption provided
by our DCS-1700 is also being evaluated by firms that require secure data backup
to meet HIPAA, Sarbanes-Oxley, Gramm-Leach-Bliley and other corporate governance
requirements.

     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

                                       21

<PAGE>

balances and cash flows from operations.  Since our initial public offering, our
cash flows have been  primarily  generated  through the sales of common stock in
private  placements and upon exercise of stock options.  Since 1999 we have also
generated  cash  flows from sales of our  encryption  products.  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 second 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  $1,517,000 and  $1,402,000 of stock-based  compensation
expense,  related to stock options  granted to employees and directors,  for the
six-month and three-month periods ended April 30, 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 six-month and three-month periods ended April 30, 2005. If
we had included the cost of employee stock option  compensation in the financial
statements for the six-month and  three-month  periods ended April 30, 2005, our
net loss  would have  increased  by  approximately  $1,730,000  and  $1,404,000,
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
---------------------

Six months ended April 30, 2006 compared with six months ended April 30, 2005
-----------------------------------------------------------------------------

     Net Sales and Gross Profit

     Net Sales.  Net sales  increased by  approximately  $8,000 in the six-month
period  ended  April  30,  2006,  to  approximately  $267,000,  as  compared  to

                                       23

<PAGE>

approximately  $259,000 in the comparable  prior-year period. All revenue during
both  periods was from  encryption  products and  services.  The increase in net
sales resulted from revenue from encryption services of approximately $50,000 in
the current  period  compared to $0 in the prior year,  offset by a reduction in
unit sales of approximately $42,000. The revenue from encryption services in the
current period resulted from engineering services 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  $127,000 in the  six-month  period ended April 30,
2006, to approximately  $186,000,  as compared to  approximately  $59,000 in the
comparable  prior-year  period.  Gross  profit as a percent  of net sales in the
six-month period ended April 30, 2006 was  approximately  70%. Gross profit as a
percent  of net  sales  in  the  six-month  period  ended  April  30,  2005  was
approximately 23%. The increase in gross profit and gross profit as a percent of
net sales is primarily the result of the  provision for excess  inventory due to
changes in product  requirements of $125,000 recorded in the prior-year  period.
Because of the limited number of transactions during each of the periods,  gross
profit percentages are sensitive to individual transactions.

     Research and Development Expenses

     Research and development expenses increased by approximately  $1,030,000 in
the six-month  period ended April 30, 2006, to  approximately  $2,270,000,  from
approximately  $1,240,000 in the comparable  prior-year  period. The increase in
research and  development  expenses was principally due to employee stock option
compensation expense of approximately  $1,109,000 in the current period compared
to $0 in  the  prior-year  period  and  an  increase  in  outside  research  and
development expense of approximately  $37,000,  offset by a decrease in employee
compensation,   other  than  stock  option   expense,   and  related   costs  of
approximately  $145,000. 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. The decrease in employee compensation
and related costs primarily  resulted from the grant of employee  bonuses in the
prior-year period.

     Selling, General and Administrative Expenses

     Selling,  general and  administrative  expenses  increased by approximately
$568,000 to  approximately  $1,580,000 in the  six-month  period ended April 30,
2006, from  approximately  $1,012,000 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  $408,000 in the
current  period  compared  to $0 in the  prior-year  period and an  increase  in
professional  fees of approximately  $163,000,  offset by a decrease in employee
compensation,   other  than  stock  option   expense,   and  related   costs  of
approximately  $26,000.  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  $13,000 in the six-month  period ended
April 30, 2006,  compared to approximately  $6,000 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 April 30, 2006 compared with three months ended April 30,
----------------------------------------------------------------------------
2005
----

     Net Sales and Gross Profit

     Net Sales. Net sales increased by approximately  $25,000 in the three-month
period  ended  April  30,  2006,  to  approximately   $72,000,  as  compared  to
approximately  $47,000 in the comparable  prior-year  period. All revenue during
both  periods was from  encryption  products and  services.  The increase in net
sales resulted from revenue from encryption services of approximately $50,000 in
the current  period  compared to $0 in the prior year,  offset by a reduction in
unit sales of approximately $25,000. The revenue from encryption services in the
current period resulted from engineering services 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  $135,000 in the three-month  period ended April 30,
2006, to approximately  $46,000, as compared to a loss of approximately  $89,000
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 $125,000  recorded in the prior-year  period.  Gross profit as a
percent  of net  sales  in the  three-month  period  ended  April  30,  2006 was
approximately  64%.  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  $964,000 in
the three-month period ended April 30, 2006, to approximately  $1,614,000,  from
approximately  $650,000 in the  comparable  prior-year  period.  The increase in
research and  development  expenses was principally due to employee stock option
compensation expense of approximately  $1,065,000 in the current period compared
to $0 in the prior-year period,  offset by a decrease in employee  compensation,
other than stock option expense,  and related costs of  approximately  $133,000.
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. The decrease in employee  compensation  and related
costs  primarily  resulted from the grant of employee  bonuses in the prior-year
period.

                                       25

<PAGE>

     Selling, General and Administrative Expenses

     Selling,  general and  administrative  expenses  increased by approximately
$406,000 to  approximately  $851,000 in the  three-month  period ended April 30,
2006,  from  approximately  $445,000 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  $337,000 in the
current  period  compared  to  $0 in  the  prior-year  period,  an  increase  in
professional fees of approximately  $70,000 and an increase in the provision for
bad debts related to other  receivables of  approximately  $21,000,  offset by a
decrease in employee compensation,  other than stock option expense, and related
costs of approximately  $40,000.  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.  The  increase  in the
provision for bad debts resulted from a current  period  provision for bad debts
of  approximately  $12,000,  offset by a recovery  in the prior  year  period of
previously reserved amounts of approximately $9,000.

     Interest Income

     Interest income was approximately  $7,000 in three-month period ended April
30, 2006, compared to approximately $5,000 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 six months ended April 30, 2006, our operating  activities  used
approximately  $1,023,000  in cash.  This  resulted  from payments to suppliers,
employees and consultants of approximately $1,284,000,  which was offset by cash
of  approximately  $249,000  received from  collections  of accounts  receivable
related to sales of encryption  products and  approximately  $13,000 of interest
income received. In addition, we received approximately  $1,254,000 in cash upon
the  exercise of stock  options,  acquired  $398,000 of  short-term  investments
consisting  of  certificates  of deposit and purchased  approximately  $9,000 of
equipment,   which  was  offset  by  proceeds  from   maturities  of  short-term
investments consisting of certificates of deposit of approximately  $401,000. As
a result, our cash, cash equivalents,  and short-term  investments  increased to
approximately  $1,130,000 at April 30, 2006 from  approximately  $907,000 at the
end of fiscal 2005.

     Accounts receivable  increased by approximately  $18,000 from approximately
$32,000 at the end of fiscal 2005 to  approximately  $50,000 at April 30,  2006.
The increase 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

                                       26

<PAGE>

$18,000 at April 30, 2006. The decrease in other  receivables is a result of our
taking a provision  for bad debts related to this  receivable of $12,000  during
the three-month period ended April 30, 2006. Inventories decreased approximately
$77,000  from  approximately  $385,000  at  October  31,  2005 to  approximately
$308,000 at April 30, 2006, primarily as a result of the timing of shipments and
production  schedules.  Prepaid  expenses and other current assets  decreased by
approximately  $20,000 from  approximately  $80,000 at the end of fiscal 2005 to
approximately  $60,000 at April 30, 2006, as a result of the timing of payments.
Accounts payable and accrued liabilities increased by approximately $24,000 from
approximately  $348,000 at the end of fiscal 2005 to  approximately  $372,000 at
April 30, 2006, as a result the timing of payments.

     As a result of these changes,  working  capital at April 30, 2006 increased
to approximately  $1,195,000 from approximately  $1,086,000 at the end of fiscal
2005.

     Our working capital includes  inventory of approximately  $308,000 at April
30, 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  six-month  periods  ended  April 30,  2006 and 2005,  we issued
873,920 shares and 1,512,085  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 six-month periods ended April 30, 2006 and 2005 of approximately
$759,000 and $1,009,000,  respectively,  and for the  three-month  periods ended
April 30, 2006 and 2005 of  approximately  $383,000 and $561,000,  respectively,
for the shares of common stock  issued to  employees.  In  addition,  during the
six-month  periods ended April 30, 2006 and 2005, we issued  246,718  shares and
30,000  shares,  respectively,  of  common  stock to  consultants  for  services
rendered pursuant to the 2003 Share Plan. We recorded consulting expense for the
six-month  periods ended April 30, 2006 and 2005 of  approximately  $210,000 and
$22,000,  respectively, and for the three-month periods ended April 30, 2006 and
2005 of  approximately  $117,000  and  $9,000,  respectively,  for the shares of
common stock issued to consultants.  During the  three-month  period ended April
30, 2006, we acquired a minority interest in DISC, a privately held corporation,
by  exchanging  100,000  unregistered  shares of our common stock for  5,000,000
shares of DISC's common  stock.  During the  three-month  period ended April 30,
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

                                       27

<PAGE>

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 second 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 second  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 six months  ended April 30,  2006,  we have  recognized  revenue from
sales of encryption products and services of approximately $267,000.

     The following table presents our expected cash requirements for contractual
obligations outstanding as of April 30, 2006:


                                     Payments Due by Period
                                     ----------------------
                      Less
Contractual           than        1-3         4-5        After
 Obligations         1 year      years       years      5 years      Total
-----------------  ----------  ----------  ----------  ----------  ----------

Consulting
 Agreement         $ 127,500           -           -           -   $ 127,500

Noncancelable
 Operating Leases  $ 264,000   $ 434,000           -           -   $ 698,000
                   ----------  ----------  ----------  ----------  ----------

Total Contractual
 Cash Obligations  $ 391,500   $ 434,000           -           -   $ 825,500
                   ==========  ==========  ==========  ==========  ==========


                                       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 six months  ended  April 30,  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
April 30, 2006. We have set forth below our net losses, research and development

                                       29

<PAGE>

expenses and net cash used in operations  for the six-month  periods ended April
30, 2006 and 2005, and for the fiscal years ended October 31, 2005 and 2004:


<TABLE>
<CAPTION>
                                                    (Unaudited)
                                                  Six Months Ended                 Fiscal Years Ended
                                                     April 30,                         October 31,
                                           -----------------------------      ------------------------------
                                                2006            2005               2005            2004
                                                ----            ----               ----            ----
<S>                                         <C>             <C>                <C>             <C>
Net loss                                    $ 3,652,436     $ 2,186,489        $ 4,451,257     $ 3,360,655
Research and development expenses           $ 2,270,395     $ 1,239,888        $ 2,266,911     $ 2,164,427
Net cash used in operations                 $ 1,022,548     $   860,855        $ 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  second  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 second  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.

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<PAGE>



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
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

                                       31

<PAGE>

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.

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.

                                       32

<PAGE>

     There was no change in our internal control over financial reporting during
the quarter ended April 30, 2006 that has materially affected,  or is reasonably
likely to materially affect, our internal control over financial reporting.


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

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
        ------------------------------------------------------------

     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, which DISC is testing. 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  shares of our
common stock for 5,000,000  shares of DISC's common stock.  The shares of common
stock we issued were issued  without  registration  in reliance on the exemption
provided  by  Section  4(2) of the  Securities  Act of  1933,  as  amended,  for
transactions  not involving a public  offering.  In claiming such exemption,  we
relied on  representations  that,  among other  things,  DISC was  acquiring the
shares for its own account  (and not for the  account of others) for  investment
and not with a view to the distribution thereof.

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

         31.1  Certification of Chief Executive Officer, pursuant to Section 302
               of the Sarbanes-Oxley Act of 2002, dated June 9, 2006.

         31.2  Certification of Chief Financial Officer, pursuant to Section 302
               of the Sarbanes-Oxley Act of 2002, dated June 9, 2006.

         32.1  Statement of Chief Executive Officer, pursuant to Section 1350 of
               Title 18 of the United States Code, dated June 9, 2006.

         32.2  Statement of Chief Financial Officer, pursuant to Section 1350 of
               Title 18 of the United States Code, dated June 9, 2006.


                                       33

<PAGE>


                                   SIGNATURES
                                   ----------

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

                                              COPYTELE, INC.


                                              By: /s/ Denis A. Krusos
                                              ----------------------------------
                                              Denis A. Krusos
                                              Chairman of the Board and
                                              Chief Executive Officer
June 9, 2006                                  (Principal Executive Officer)



                                              By: /s/ Henry P. Herms
                                              ----------------------------------
                                              Henry P. Herms
                                              Vice President -- Finance and
                                              Chief Financial Officer (Principal
June 9, 2006                                  Financial and Accounting Officer)


                                       34