SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

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


                  For the quarterly period ended July 31, 2007

                         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 September 12, 2007, the registrant had outstanding 105,280,755 shares of
Common Stock, par value $.01 per share, which is the registrant's only class of
common stock.

<PAGE>

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

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

        Condensed Consolidated Balance Sheets as of July 31, 2007
         (Unaudited) and October 31, 2006                                      3

        Condensed Consolidated Statements of Operations (Unaudited) for
         the nine months ended July 31, 2007 and 2006                          4

        Condensed Consolidated Statements of Operations (Unaudited) for
         the three months ended July 31, 2007 and 2006                         5

        Condensed Consolidated Statements of Cash Flows (Unaudited) for
         the nine months ended July 31, 2007 and 2006                          6

        Notes to Condensed Consolidated Financial Statements (Unaudited)  7 - 18

Item 2. Management's Discussion and Analysis of Financial Condition and
         Results of Operations.                                          19 - 30

Item 3. Quantitative and Qualitative Disclosures About Market Risk.           30

Item 4. Controls and Procedures.                                              31


PART II. OTHER INFORMATION

Item 1A. Risk Factors.                                                        31

Item 6. Exhibits.                                                             31

        SIGNATURES                                                            32


                                       2
<PAGE>

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

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

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

                                                  (Unaudited)
                                                 --------------
                                                    July 31,        October 31,
                   ASSETS                             2007             2006*
                   ------                        --------------   --------------

CURRENT ASSETS:
   Cash and cash equivalents                     $     652,765    $   1,281,660
   Short-term investments                              400,000           38,000
   Accounts receivable                                  60,000           10,165
   Inventories                                         214,489          260,823
   Prepaid expenses and other current assets            41,099           32,011
                                                 --------------   --------------
       Total current assets                          1,368,353        1,622,659

PROPERTY AND EQUIPMENT, net                             24,154           23,083

INVESTMENT, at cost                                    417,000          207,000

OTHER ASSETS                                            10,887           10,887
                                                 --------------   --------------
                                                 $   1,820,394    $   1,863,629
                                                 ==============   ==============

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

CURRENT LIABILITIES:
   Accounts payable                              $     243,927    $     532,707
   Accrued liabilities                                  76,416           49,081
                                                 --------------   --------------
       Total current liabilities                       320,343          581,788

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; 104,913,375
    and 99,260,395 shares issued and outstanding,
    respectively                                     1,049,134          992,604
   Additional paid-in capital                       85,220,287       80,797,756
   Accumulated deficit                             (84,769,370)     (80,508,519)
                                                 --------------   --------------
                                                     1,500,051        1,281,841
                                                 --------------   --------------
                                                 $   1,820,394    $   1,863,629
                                                 ==============   ==============

* Derived from audited balance sheet included in our Annual Report on Form 10-K
for the fiscal year ended October 31, 2006.

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

                                       3
<PAGE>

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

                                                     For the Nine Months Ended
                                                              July 31,
                                                  ------------------------------
                                                       2007             2006
                                                  --------------   -------------

NET SALES                                         $     341,177    $    397,773

COST OF SALES                                           113,765         120,558
                                                  --------------   -------------

    Gross profit                                        227,412         277,215
                                                  --------------   -------------

OPERATING EXPENSES
    Research and development expenses                 2,589,936       3,582,867
    Selling, general and administrative expenses      1,923,448       2,514,218
                                                  --------------   -------------
        Total operating expenses                      4,513,384       6,097,085
                                                  --------------   -------------

LOSS FROM OPERATIONS                                 (4,285,972)     (5,819,870)

INTEREST INCOME                                          25,121          20,159
                                                  --------------   -------------

NET LOSS                                          $  (4,260,851)   $ (5,799,711)
                                                  ==============   =============


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

Shares used in computing net loss per share:
    Basic and Diluted                               102,422,570      94,551,079
                                                  ==============   =============

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

                                       4
<PAGE>

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

                                                    For the Three Months Ended
                                                              July 31,
                                                  ------------------------------
                                                       2007             2006
                                                  --------------   -------------

NET SALES                                         $     114,000    $    130,845

COST OF SALES                                            36,962          39,245
                                                  --------------   -------------

    Gross profit                                         77,038          91,600
                                                  --------------   -------------

OPERATING EXPENSES
    Research and development expenses                   670,722       1,312,472
    Selling, general and administrative expenses        469,089         933,854
                                                  --------------   -------------
        Total operating expenses                      1,139,811       2,246,326
                                                  --------------   -------------

LOSS FROM OPERATIONS                                 (1,062,773)     (2,154,726)

INTEREST INCOME                                           7,252           7,451
                                                  --------------   -------------

NET LOSS                                          $  (1,055,521)   $ (2,147,275)
                                                  ==============   =============


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

Shares used in computing net loss per share:
    Basic and Diluted                               104,121,311      95,985,622
                                                  ==============   =============

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

                                       5
<PAGE>

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

                                                     For the Nine Months Ended
                                                              July 31,
                                                   -----------------------------
                                                       2007             2006
                                                   -------------   -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
  Payments to suppliers, employees and consultants $ (2,182,027)   $ (1,920,582)
  Cash received from customers                          291,342         404,123
  Interest received                                      25,121          20,159
                                                   -------------   -------------
      Net cash used in operating activities          (1,865,564)     (1,496,300)
                                                   -------------   -------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Proceeds from maturities of short-term
   investments (certificates of deposit)                463,000         400,776
  Disbursements to acquire short-term investments
   (certificates of deposit)                           (825,000)       (398,000)
  Disbursements to acquire Digital Info Security
   Co., Inc. common stock                                     -        (110,000)
  Payments for purchases of property and equipment       (8,781)        (10,226)
                                                   -------------   -------------
      Net cash used in investing activities            (370,781)       (117,450)
                                                   -------------   -------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from exercise of stock options             1,607,450       1,718,499
                                                   -------------   -------------
      Net cash provided by financing activities       1,607,450       1,718,499
                                                   -------------   -------------

NET (DECREASE) INCREASE IN CASH AND CASH
 EQUIVALENTS                                           (628,895)        104,749

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD      1,281,660         506,517
                                                   -------------   -------------

CASH AND CASH EQUIVALENTS AT END OF PERIOD         $    652,765    $    611,266
                                                   =============   =============

RECONCILIATION OF NET LOSS TO NET CASH USED IN
 OPERATING ACTIVITIES:
  Net loss                                         $ (4,260,851)   $ (5,799,711)
  Stock option compensation to employees              1,074,504       2,469,563
  Stock option compensation to consultants                    -         119,262
  Stock awards granted to employees and consultants
   pursuant to stock incentive plans                  1,587,108       1,586,647
  Provision for doubtful accounts and other
   receivables                                                -          18,287
  Depreciation and amortization                           7,709          11,616
  Change in operating assets and liabilities:
    Accounts receivable                                 (49,835)         12,637
    Inventories                                          46,334         103,889
    Prepaid expenses and other current assets            (9,088)         44,062
    Other assets                                              -          (6,287)
    Accounts payable and accrued liabilities           (261,445)        (56,265)
                                                   -------------   -------------
      Net cash used in operating activities        $ (1,865,564)   $ (1,496,300)
                                                   =============   =============

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
 ACTIVITIES:
  Unregistered common stock issued in connection
   with investment in Digital Info Security Co.,
   Inc.                                            $    210,000    $     97,000
                                                   =============   =============

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

                                       6
<PAGE>

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

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

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

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

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

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

     The condensed  consolidated  financial  statements are unaudited,  and have
been prepared in accordance with accounting principles generally accepted in the
United States of America ("US GAAP") for interim financial  reporting,  and with
the rules and  regulations of the Securities and Exchange  Commission  regarding
interim  financial  reporting.  Accordingly,  they  do  not  include  all of the
information and footnotes required by US GAAP for complete financial statements.
The information  contained herein is for the nine-month and three-month  periods
ended  July  31,  2007  and  2006.  In  management's  opinion,  all  adjustments
(consisting only of normal recurring adjustments considered necessary for a fair
presentation  of the results of operations  for such periods) have been included
herein.  Certain  prior year  amounts  have been  reclassified  to conform  with
current year presentation.

     The condensed  consolidated  financial  statements  include the accounts of
CopyTele,  Inc. and its wholly owned subsidiary,  CopyTele  International,  Ltd.
CopyTele  International,  Ltd. was incorporated in the British Virgin Islands on
July  12,  2007,  and  as  of  July  31,  2007  was  inactive.  All  significant
intercompany accounts and transactions have been eliminated in consolidation.

     The results of operations for interim periods presented are not necessarily
indicative  of the results  that may be expected  for a full year or any interim
period.  Reference is made to the audited financial statements and notes thereto
included in our Annual Report on Form 10-K for the fiscal year ended October 31,
2006, 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 fiscal 1999, we have generated
cash flows from sales of our encryption products.

                                       7
<PAGE>

     During the nine  months  ended July 31,  2007,  our cash used in  operating
activities  was  approximately  $1,866,000.   This  resulted  from  payments  to
suppliers,  employees and  consultants of  approximately  $2,182,000,  which was
offset by cash of approximately  $291,000  received from collections of accounts
receivable   related  to  sales  of  encryption   products  and  services,   and
approximately  $25,000 of interest income  received.  Our cash used in investing
activities  during  the  nine  months  ended  July 31,  2007  was  approximately
$371,000,  which resulted from purchases of short-term investments consisting of
certificates of deposit of approximately $825,000 and purchases of approximately
$9,000 of equipment,  offset by approximately  $463,000 received upon maturities
of  short-term  investments  consisting  of  certificates  of deposit.  Our cash
provided by financing  activities  during the nine months ended July 31, 2007 of
approximately  $1,607,000 resulted from cash received upon the exercise of stock
options.  Accordingly,  during the nine months ended July 31, 2007, our cash and
cash  equivalents  decreased  by  approximately   $629,000  and  our  short-term
investments  increased by approximately  $362,000.  As a result,  our cash, cash
equivalents,   and  short-term  investments,  at  July  31,  2007  decreased  to
approximately  $1,053,000  from  approximately  $1,320,000  at the end of fiscal
2006.

     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  are  also
continuing  to pursue  marketing  and  licensing  opportunities  for our display
technology.  As of July 31, 2007, we had not yet recorded any revenue from sales
or licensing of our display.  During the nine-month  period ended July 31, 2007,
we  recognized  revenue  from  sales of  encryption  products  and  services  of
approximately $341,000.

     We believe that our existing cash, cash equivalents, short-term investments
and  accounts  receivable,  together  with cash  flows  from  expected  sales of
encryption products and flat panel displays, and other potential sources of cash
flows,  will be sufficient to enable us to continue in operation  until at least
the end of the third quarter of fiscal 2008. We anticipate that, thereafter,  we
will  require  additional  funds to  continue  our  marketing,  production,  and
research and development activities, and we will require outside funding if cash
generated from operations is insufficient to satisfy our liquidity requirements.
However,  our  projections  of future  cash needs and cash flows may differ from
actual  results.  If current cash and cash that may be generated from operations
are insufficient to satisfy our liquidity requirements, we may seek to sell debt
or equity securities or to obtain a line of credit prior to the third quarter of
fiscal 2008. 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  other  sources  of  funding  would be
available,  if needed,  on favorable  terms or at all. If we cannot  obtain such
funds  if  needed,  we  would  need  to  curtail  or  cease  some  or all of our
operations.

                                       8
<PAGE>

     The  auditor's  report on our  financial  statements as of October 31, 2006
states that the net loss incurred  during the year ended  October 31, 2006,  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,  2006,  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, 2005 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.

     In December 2004, the Financial  Accounting Standards Board ("FASB") issued
Statement of Financial  Accounting  Standards  ("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.  In  March  2005,  the
Securities  and Exchange  Commission  issued Staff  Accounting  Bulletin No. 107
("SAB No. 107") relating to SFAS No. 123R. We account for stock options  granted
to  employees  and  directors  using SFAS No. 123R.  We  recognize  compensation
expense for stock  option  awards on a  straight-line  basis over the  requisite
service period of the grant.

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

     We  recorded  stock-based  compensation  expense  related to stock  options
granted to employees and non-employee directors of approximately  $1,075,000 and
$2,470,000   for  the   nine-month   periods  ended  July  31,  2007  and  2006,
respectively,  and of  approximately  $88,000 and $952,000  for the  three-month
periods ended July 31, 2007 and 2006, respectively,  in accordance with SFAS No.
123R.  Such  compensation  expense is  included  in the  accompanying  condensed
statements of operations in either research and development expenses or selling,
general  and  administrative  expenses,  as  applicable  based on the  functions
performed by such employees and directors. Such stock-based compensation expense
increased both basic and diluted net loss per share for the  nine-month  periods
ended  July 31,  2007 and 2006 by $0.01  and  $0.03,  respectively,  and for the
three-month   periods  ended  July  31,  2007  and  2006  by  $0.00  and  $0.01,
respectively.

     Expense related to the amortization of compensation  cost for stock options
granted  prior to but not yet  vested  as of the end of the prior  fiscal  year,
included in the stock-based  compensation  cost related to stock options granted
to  employees  and  directors,  was  approximately  $19,000  and $14,000 for the
nine-month periods ended July 31, 2007 and 2006, respectively, and approximately
$6,000 and  $5,000 for the  three-month  periods  ended July 31,  2007 and 2006,
respectively.  As of July 31,  2007,  there  was  approximately  $6,000 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.

                                       9
<PAGE>

     We account for options  granted to consultants  using the fair value method
required by SFAS No. 123R. We recognized  consulting expense for options granted
to consultants,  during the nine-month  periods ended July 31, 2007 and 2006, of
approximately  $-0- and  $119,000,  respectively,  and  during  the  three-month
periods  ended  July 31,  2007 and  2006,  of  approximately  $-0- and  $97,000,
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, non-employee directors and consultants on the date
of grant using the  Black-Scholes  pricing model. We separate the individuals we
grant  stock  options  to into  three  relatively  homogenous  groups,  based on
exercise and post-vesting  employment  termination  behaviors.  To determine the
weighted  average  fair value of stock  options on the date of grant,  we take a
weighted  average of the assumptions  used for each of these groups.  All of the
stock options we granted during the  nine-month  periods ended July 31, 2007 and
2006 consisted of awards of options with 10-year terms which vested immediately.

     We  estimated  the fair value of stock option  awards  using the  following
assumptions:

                                                   For the Nine    For the Three
                                                   Months Ended    Months Ended
                                                      July 31,        July 31,
                                                 --------------- ---------------
                                                   2007    2006    2007    2006
                                                 ------- ------- ------- -------
Expected term (in years)                            3.0     3.0     1.5     4.3
Volatility                                           92%     99%     78%    104%
Risk-free interest rate                            4.64%   4.36%   4.87%   4.37%
Dividend yield                                        0       0       0       0
Weighted average fair value at grant date         $0.37   $0.47   $0.22   $0.55

     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.

                                       10
<PAGE>

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

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

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

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

     We will  reconsider  use of the  Black-Scholes  pricing model if additional
information  becomes  available in the future that indicates another model would
be more appropriate,  or if grants issued in future periods have characteristics
that cannot be reasonably estimated using this model.

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

     During the  nine-month  periods  ended July 31,  2007 and 2006,  we granted
options to purchase  2,880,000  shares and 5,460,000  shares,  respectively,  to
employees,  non-employee  directors and  consultants of common stock at weighted
average  exercise prices of $.66 and $.82 per share,  respectively,  pursuant to
the CopyTele, Inc. 2003 Share Incentive Plan (the "2003 Share Plan"). During the
nine-month  periods  ended July 31,  2007 and 2006,  stock  options to  purchase
2,997,230  shares  and  2,697,725  shares,  respectively,  of common  stock were
exercised with aggregate  proceeds of  approximately  $1,607,000 and $1,718,000,
respectively.

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

     As of July 31, 2007, 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.

     On July 14, 1993,  our  shareholders  approved the 1993 Plan. The 1993 Plan
was amended as of May 3, 1995 and May 10, 1996 to, among other things,  increase
the number of shares available for issuance  thereunder from 6,000,000 shares to
20,000,000  shares,  after giving  consideration to stock splits.  The 1993 Plan
provided  for the  granting of incentive  stock  options and stock  appreciation
rights to key employees,  and non-qualified stock options and stock appreciation
rights to key employees and consultants of the Company.

     The  1993  Plan was  administered  by the  Stock  Option  Committee,  which
determined the option price,  term and provisions of each option.  However,  the
purchase price of shares  issuable upon the exercise of incentive  stock options
could not be less than the fair market value of such shares at the date of grant
and incentive  stock options are not  exercisable  for more than 10 years.  Upon
approval of the 2000 Share Plan by our  shareholders in July 2000, the 1993 Plan
was terminated with respect to the grant of future options. Since June 2004, the
1993 Plan has been administered by the Board of Directors.

                                       11
<PAGE>

     Information regarding the 1993 Plan for the nine months ended July 31, 2007
is as follows:

                                                     Current Weighted  Aggregate
                                                     Average Exercise  Intrinsic
                                           Shares    Price Per Share     Value
                                         ----------- ----------------  ---------
Shares Under Option at October 31, 2006   4,167,000        $3.13
 Expired                                 (1,553,000)       $4.46
                                         -----------
Shares Under Option and Exercisable at
 July 31, 2007                            2,614,000        $2.33         $-0-
                                         -----------

     The following table summarizes  information about stock options outstanding
under the 1993 Plan as of July 31, 2007:
<TABLE>
<CAPTION>
<S>     <C>     <C>          <C>          <C>        <C>          <C>          <C>
                          Options Outstanding                  Options Exercisable
                 -----------------------------------  -----------------------------------
                                Weighted                            Weighted
                                Average     Weighted                 Average    Weighted
                    Number      Remaining    Average     Number     Remaining    Average
   Range of      Outstanding  Contractual   Exercise  Exercisable  Contractual  Exercise
Exercise Prices  at 7/31/07       Life       Price    at 7/31/07      Life       Price
-----------------------------------------------------------------------------------------

$0.84 to $1.56     784,000        2.29       $1.10      784,000        2.29      $1.10
    $2.28          855,000        .95        $2.28      855,000        .95       $2.28
    $3.38          975,000        0.28       $3.38      975,000        0.28      $3.38
</TABLE>

     The  exercise  price with respect to 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.

     On July 25,  2000,  our  shareholders  approved  the 2000 Share  Plan.  The
maximum  number of shares of common  stock  that may be  granted  was  5,000,000
shares.  On July 6, 2001 and July 16,  2002,  the 2000 Share Plan was amended by
our Board of Directors to increase the maximum  number of shares of common stock
that may be granted to 10,000,000  shares and 15,000,000  shares,  respectively.
These  amendments  were  approved  by our  shareholders  on August 16,  2001 and
September 12, 2002, respectively.  The 2000 Share Plan provides for the grant of
incentive stock options,  nonqualified stock options, stock appreciation rights,
stock  awards,   performance  awards  and  stock  units  to  key  employees  and
consultants of the Company.

     The 2000 Share Plan was administered by the Stock Option Committee  through
June 2004 and since that date has been  administered  by the Board of Directors,
which determines the option price, term and provisions of each option;  however,
the purchase  price of shares  issuable  upon the  exercise of  incentive  stock
options  will not be less than the fair market  value of such shares at the date
of grant and incentive  stock options will not be  exercisable  for more than 10
years.

                                       12
<PAGE>

     Information  regarding  the 2000 Share Plan for the nine months  ended July
31, 2007 is as follows:

                                                                       Aggregate
                                                     Current Weighted  ---------
                                                     Average Exercise  Intrinsic
                                           Shares    Price Per Share     Value
                                         ----------- ----------------  ---------
Shares Under Option at October 31, 2006   2,268,466        $0.80
 Exercised                                  (66,000)       $0.41        $24,720
                                         -----------

Shares Under Option and Exercisable at
 July 31, 2007                            2,202,466        $0.81         $-0-
                                         -----------

     The following table summarizes information about stock options outstanding
     under the 2000 Share Plan as of July 31, 2007:
<TABLE>
<CAPTION>
<S>     <C>     <C>          <C>           <C>       <C>          <C>          <C>
                          Options Outstanding                 Options Exercisable
                 -----------------------------------  -----------------------------------
                                Weighted                            Weighted
                                 Average    Weighted                 Average    Weighted
                   Number      Remaining     Average    Number      Remaining    Average
    Range of     Outstanding  Contractual   Exercise  Exercisable  Contractual  Exercise
Exercise Prices  at 7/31/07       Life       Price    at 7/31/07      Life        Price
-----------------------------------------------------------------------------------------

 $0.34 - $0.40     465,000        3.97       $0.40      465,000        3.97      $0.40
     $0.69         635,466        3.42       $0.69      635,466        3.42      $0.69
 $0.94 - $1.09   1,102,000        3.19       $1.06    1,102,000        3.19      $1.06
</TABLE>

     The  exercise  price with respect to all of the options  granted  under the
2000 Share Plan since its  inception  was equal to the fair market  value of the
underlying  common stock at the grant date.  As of July 31, 2007,  21,508 shares
were available for future grants under the 2000 Share Plan.

     The 2003 Share Plan provides for the grant of  nonqualified  stock options,
stock appreciation rights,  stock awards,  performance awards and stock units to
key employees and  consultants  of the Company.  The maximum number of shares of
common stock  available  for issuance  under the 2003 Share Plan  initially  was
15,000,000 shares. On October 8, 2004, February 9, 2006 and August 22, 2007, the
2003 Plan was amended by our Board of Directors  to increase the maximum  number
of shares of common stock that may be granted to  30,000,000  shares,  45,000,00
shares and  55,000,000  shares,  respectively.  Current and future  non-employee
directors  are  automatically  granted  nonqualified  stock  options to purchase
60,000  shares of common  stock  upon  their  initial  election  to the Board of
Directors and at the time of each subsequent  annual meeting of our shareholders
at which  they are  elected to the Board of  Directors.  The 2003 Share Plan was
administered by the Stock Option Committee through June 2004 and since that date
has been  administered  by the Board of Directors,  which  determines the option
price, term and provisions of each option.

                                       13
<PAGE>

     Information  regarding  the 2003 Share Plan for the nine months  ended July
31, 2007 is as follows:

                                                                       Aggregate
                                                     Current Weighted  ---------
                                                     Average Exercise  Intrinsic
                                           Shares    Price Per Share     Value
                                        ------------ ----------------  ---------
Shares Under Option at October 31, 2006  16,092,475        $0.68
  Granted                                 2,880,000        $0.66
  Exercised                              (2,931,230)       $0.54        $462,285
                                        ------------
Shares Under Option at July 31, 2007     16,041,245        $0.70          $-0-
                                        ------------
Options Exercisable at July 31, 2007     15,981,245        $0.70          $-0-
                                        ------------

     The following table summarizes  information about stock options outstanding
under the 2003 Share Plan as of July 31, 2007:
<TABLE>
<CAPTION>
<S>     <C>     <C>          <C>           <C>       <C>          <C>        <C>
                          Options Outstanding                 Options Exercisable
                 -----------------------------------  -----------------------------------
                                Weighted                            Weighted
                                Average     Weighted                 Average    Weighted
                   Number      Remaining     Average     Number     Remaining   Average
    Range of     Outstanding  Contractual   Exercise  Exercisable  Contractual  Exercise
Exercise Prices  at 7/31/07      Life         Price   at 7/31/07      Life       Price
-----------------------------------------------------------------------------------------
 $0.25 - $0.46    2,505,000      6.02        $0.29     2,505,000      6.02       $0.29
 $0.52 - $0.77    6,125,170      7.97        $0.63     6,065,170      8.00       $0.63
 $0.81 - $1.07    7,411,075      7.99        $0.91     7,411,075      7.99       $0.91
</TABLE>

     The  exercise  price with respect to all of the options  granted  under the
2003 Share Plan since its  inception  was equal to the fair market  value of the
underlying  common stock at the grant date. As of July 31, 2007,  758,027 shares
were available for future grants under the 2003 Share Plan.

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

     We account for stock awards granted to employees and  consultants  based on
their grant date fair value.  During the nine-month  periods ended July 31, 2007
and 2006, we issued  2,191,730  shares and 1,695,050  shares,  respectively,  of
common stock to certain employees for services rendered,  principally in lieu of
cash  compensation,  pursuant to the 2003 Share Plan and the 2000 Share Plan. We
recorded compensation expense for the nine-month periods ended July 31, 2007 and
2006 of  approximately  $1,473,000  and  $1,342,000,  respectively,  and for the
three-month  periods ended July 31, 2007 and 2006 of approximately  $404,000 and
$583,000,  respectively,  for the shares of common stock issued to employees. In
addition,  during the nine-month periods ended July 31, 2007 and 2006, we issued
164,020 shares and 293,360 shares, respectively,  of common stock to consultants
for services  rendered  pursuant to the 2003 Share Plan. We recorded  consulting
expense for the nine-month periods ended July 31, 2007 and 2006 of approximately
$114,000 and $245,000,  respectively, and for the three-month periods ended July
31, 2007 and 2006 of  approximately  $9,000 and $35,000,  respectively,  for the
shares of common stock issued to consultants.

                                       14
<PAGE>

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

     Financial  instruments that  potentially  subject us to  concentrations  of
credit  risk  consist  principally  of  accounts  receivable  from  sales in the
ordinary  course of business.  Management  reviews our accounts  receivable  and
other receivables for potential doubtful accounts and maintains an allowance for
estimated  uncollectible  amounts.  Generally,  no  collateral  is received from
customers  for our  accounts  receivable.  During the nine months ended July 31,
2007, two customers in the Encryption  Products and Services Segment represented
53% and 25%, respectively, of total net sales. During the nine months ended July
31,  2006,  two  customers  in the  Encryption  Products  and  Services  Segment
represented 51% and 24%, respectively, of total net sales. At July 31, 2007, one
customer in the Encryption  Products and Services  Segment  represented  100% of
accounts  receivable  and at October 31, 2006,  two customers in the  Encryption
Products and Services Segment represented 89% and 11%, respectively, of accounts
receivable.

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

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

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

     On February 13, 2006, we entered into a Software License and Distribution
Agreement (the "DISC License Agreement") to license to Digital Info Security Co
Inc. ("DISC"), an encryption system that integrates our encryption technology
into DISC's e-mail services. The system allows companies to encrypt all e-mail
transactions in a manner transparent to the individual user. Concurrently with
entering into the DISC License Agreement with DISC, we acquired a minority
interest in DISC by exchanging 100,000 unregistered shares of our common stock
for 5,000,000 shares of DISC's common stock. On May 17, 2006 and July 14, 2006,
we purchased an additional 1,000,000 shares and 1,200,000 shares, respectively,
of DISC's common stock for $50,000 and $60,000 in cash, respectively. On
November 27, 2006, we acquired an additional 5,000,000 shares of DISC's common
stock in exchange for 300,000 unregistered shares of our common stock.
Accordingly, as of July 31, 2007, we held 12,200,000 shares of DISC's common
stock, all of which were restricted securities. DISC's common stock is not
registered under the Securities Exchange Act of 1934, but is quoted on the Pink
Sheets.

     Our investment in DISC as of July 31, 2007, is recorded in the accompanying
condensed balance sheet at cost of $417,000, based on the closing price of our
common stock on the dates we acquired DISC common stock in exchange for our
common stock, and the price paid for the shares purchased for cash. As of July
31, 2007 we held approximately 13% of the outstanding common stock of DISC. Net
sales for the nine-month periods ended July 31, 2007 and 2006 included billings
to DISC for engineering services of $180,000 and $95,000 respectively. Net sales
for the three-month periods ended July 31, 2007 and 2006 included billings to
DISC for engineering services of $60,000 and $45,000, respectively. Accounts
receivable at July 31, 2007 include $60,000 from DISC.

                                       15
<PAGE>

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

     Inventories consist of the following as of:
                                                    July 31,      October 31,
                                                      2007           2006
                                                   ----------     -----------
         Component parts                           $ 113,531      $  117,040
         Work-in-process                              26,387          43,135
         Finished products                            74,571         100,648
                                                   ----------     -----------
                                                   $ 214,489      $  260,823
                                                   ==========     ===========

7.   NET 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 loss per common share
("Basic EPS") is computed by dividing net loss by the weighted average number of
common shares outstanding. Diluted net loss per common share ("Diluted EPS") is
computed by dividing net loss by the weighted average number of common shares
and dilutive common share equivalents and convertible securities then
outstanding. Diluted EPS for all periods presented is the same as Basic EPS, as
the inclusion of the effect of common stock equivalents then outstanding would
be anti-dilutive. For this reason, excluded from the calculation of Diluted EPS
for the nine-month and three-month periods ended July 31, 2007 and 2006, were
options to purchase 20,857,711 shares and 22,597,941 shares, respectively.

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

     In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes," an interpretation of FASB Statement No. 109 ("FIN
48"). FIN 48 clarifies the accounting for uncertainties in income taxes
recognized in an enterprise's financial statements. The interpretation requires
that the Company determine whether it is more likely than not that a tax
position will be sustained upon examination by the appropriate taxing authority.
If a tax position meets the more likely than not recognition criteria, FIN 48
requires the tax position be measured at the largest amount of benefit greater
than 50 percent likely of being realized upon ultimate settlement. FIN 48 is
effective for fiscal years beginning after December 15, 2006. We are currently
evaluating the effect, if any, that the adoption of FIN 48 will have on our
financial statements.

     In September 2006, the Securities and Exchange Commission ("SEC") released
Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year
Misstatements When Quantifying Misstatements in Current Year Financial
Statements" ("SAB No. 108"). SAB No. 108 provides interpretative guidance on how
public companies are to quantify financial statement misstatements. There have
been two common approaches used to quantify such errors. Under an income
statement approach (the "roll-over" method) the error is quantified as the
amount by which the current year income statement is misstated. Alternatively,
under a balance sheet approach (the "iron curtain" method) the error is
quantified as the cumulative amount by which the current year balance sheet is
misstated. In SAB No. 108, the SEC established an approach that requires
quantification of financial statement misstatements based on the effects of the
misstatements on each of the company's financial statements and the related
financial statement disclosures. This model is commonly referred to as a "dual
approach" because it requires quantification of errors under both the roll-over
and iron curtain methods. SAB No. 108 is effective for annual financial
statements covering the first fiscal year ending after November 15, 2006. The
adoption of SAB No. 108 is not expected to have a material effect on our
financial statements.

                                       16
<PAGE>

     In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles, and expands disclosures
about fair value measurements. SFAS 157 applies to other accounting
pronouncements that require or permit fair value measurements. The provisions of
SFAS 157 are effective for fiscal years beginning after November 15, 2007. The
adoption of SFAS 157 is not expected to have a material effect on our financial
statements.

     In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 expands
opportunities to use fair value measurement in financial reporting and permits
entities to choose to measure many financial instruments and certain other items
at fair value. SFAS 159 is effective for fiscal years beginning after November
15, 2007. We are currently evaluating the effect, if any, that the adoption of
SFAS 159 will have on our financial statements.

9.   SEGMENT INFORMATION
     -------------------

     We follow the provisions of SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). Reportable operating
segments are determined based on management's approach. The management approach,
as defined by SFAS No. 131, is based on the way that the chief operating
decision-maker organizes the segments within an enterprise for making operating
decisions and assessing performance. While our results of operations are
primarily reviewed on a consolidated basis, the chief operating decision-maker
also manages the enterprise in two segments: (i) Flat-panel display and (ii)
Encryption products and services. The following represents selected financial
information for our segments for the nine-month and three-month periods ended
July 31, 2007 and 2006:

                                       17
<PAGE>

                                                    Encryption
                                    Flat-Panel       Products
          Segment Data                Display      and Services      Total
---------------------------------  -------------  -------------  -------------

Nine Months Ended July 31, 2007:
   Net sales                       $          -   $    341,177   $    341,177
   Net loss                          (2,174,229)    (2,086,622)    (4,260,851)

Nine Months Ended July 31, 2006:
   Net sales                       $          -   $    397,773   $    397,773
   Net loss                          (2,772,330)    (3,027,381)    (5,799,711)

Three Months Ended July 31, 2007:
   Net sales                       $          -   $    114,000   $    114,000
   Net loss                            (578,123)      (477,398)    (1,055,521)

Three Months Ended July 31, 2006:
   Net sales                       $          -   $    130,845   $    130,845
   Net loss                          (1,070,044)    (1,077,231)    (2,147,275)

                                       18
<PAGE>

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

GENERAL
-------

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

     We have  pioneered the basic  development of an innovative new type of flat
panel display technology,  which improves on our prior display technology.  This
new  proprietary  display is a color  phosphor based display having a unique low
voltage phosphor  excitation system. As with our prior display  technology,  the
new  technology  emits light to display  color  images,  such as movies from DVD
players. In addition, we are also developing another version of our new type low
voltage  and low power  display  having a  different  matrix  configuration  and
phosphor excitation system.  These new type of displays are expected to be lower
in cost than our prior  displays.  We are now focusing our business  discussions
with  respect  to our new type of flat  panel  display  technology  with a major
consumer electronics company.

     This new technology  improves on our prior carbon  nanotube and proprietary
low  voltage  color  phosphor  display  technology.  We have  developed  various
engineering models using such prior technology, which demonstrated the display's
ability  to show  movies  from DVD  players by  controlling  the  brightness  of
selected individual pixels. The carbon nanotubes,  which are supplied to us by a
U.S.  company,  require a low voltage for electron  emission  and are  extremely
small -  approximately  10,000 times thinner than the width of a human hair. The
5.5 inch (diagonal) display we developed has 960 x 234 pixels and utilizes a new
memory-based  active  matrix  thin  film  technology  with each  pixel  phosphor
activated by electrons emitted by a proprietary  carbon nanotube network located
approximately 10 microns (1/10th of a human hair) from the pixels.  As a result,
each pixel phosphor  brightness is controlled  using a maximum of only 40 volts.
The carbon  nanotubes and proprietary  color phosphors are precisely  placed and
separated utilizing our proprietary nanotube and phosphor deposition technology.
We have developed a process of maintaining  uniform carbon  nanotube  deposition
independent of phosphor deposition. We have also developed a method of enhancing
nanotube electron emission to increase the brightness of this type of display.

     Some other characteristics of our display technology are as follows:

     o    We have developed a proprietary system which allows us to evacuate our
          display; to rapidly vacuum seal it at a low temperature to accommodate
          the matrix;  and to create  lithographic  type spacers to assemble our
          display utilizing only 0.7mm glass. We thus obtain a display thickness
          of approximately  1/16th of an inch, thinner than LCD and PDP (plasma)
          displays.

     o    The display matrix, phosphor excitation system, and drivers are all on
          one substrate.

                                       19
<PAGE>

     o    Our  display  is able to select  and  change  the  brightness  of each
          individual  pixel,  requiring  only 40 volts on each pixel phosphor to
          change the brightness from black to white.  This compares to thousands
          of volts required for other video phosphor based displays, which leads
          to inherent breakdowns and short life.

     o    Our display has no  backlight.  Because  power is only consumed when a
          pixel is turned on, low power is needed to activate the whole display.
          The display  requires less than 20% the power required by an LCD. This
          low power  consumption  could  potentially  allow use of  rechargeable
          batteries to operate TV products for wireless  applications and extend
          the battery operation time for portable devices.

     o    The same basic display  technology  could  potentially  be utilized in
          various size applications, from hand-held to TV size displays.

     o    Our  proprietary  matrix  structures  can be produced by existing mass
          production TFT LCD facilities, or portions of these facilities.

     o    Our display eliminates display flicker.

     o    Our display has an  approximately  1,000 times faster  video  response
          time than an LCD, and matches the response  time of a cathode ray tube
          (CRT).

     o    Our display can be viewed with high contrast over  approximately a 180
          degree viewing angle, in both the horizontal and vertical  directions,
          which exceeds the viewing angle of LCDs.

     o    Also like CRTs, our display is capable of operating over a temperature
          range (-40(degree)C to 85(degree)C) which exceeds the range over which
          LCDs can operate, especially under cold temperature conditions.

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

     We have continued to direct our encryption  marketing  efforts towards both
the government and commercial  security markets.  Our government market has been
primarily handled by The Boeing Company ("Boeing") and its large distributors of
the  Thuraya  satellite  phones.  As a result,  we have  provided  our  security
products to customers using the Thuraya network in the Middle East,  Europe, and
Africa.  Thuraya is scheduled to start  providing  satellite  service to the Far
East  later  this  year,  which  could   potentially   create  larger  marketing
opportunities for our encryption products. Our security products for the Thuraya
network are being used by  government  agencies,  the  military and domestic and
international non-governmental organizations (NGOs).

                                       20
<PAGE>

     We have supplied USS-900,  DCS-1400, and DCS-1200 products to major Thuraya
distributors  for  use by  government  agencies  and  NGOs  in  Middle  Eastern,
European,  and African  countries.  We are hopeful that these  developments will
lead to larger  commitments  for our security  products.  In  addition,  we have
supplied our USS-900AF  automatic fax encryption product to a major U.S. defense
contractor  to secure its  worldwide  fax  communications  and have supplied our
encryption   solution  to  a  major  U.S.   company  to  secure  its   executive
teleconferencing system.

     We have recently entered into a new three year agreement with Boeing, under
which Boeing distributes certain of our encryption  products.  This replaces our
prior agreement with Boeing, which had expired. Boeing now distributes 13 of our
products,  including our DCS-1400D  (docker voice encryption  device),  USS-900T
(satellite  fax  encryption  device),   USS-900TL  (landline  to  satellite  fax
encryption  device),  USS-900WF  (satellite and cellular fax encryption device),
USS-900WFL  (landline to  satellite  and  cellular  fax  encryption  device) and
USS-900TC   (satellite  fax  encryption  to  computer)   products,   which  were
specifically designed for the Thuraya network. Boeing sells these products under
the brand name of Thuraya.  We have also developed for Boeing a voice product to
operate over the Thuraya network having a higher level of security.

     We are cooperating with Asia Pacific  Satellite  Industries  ("APSI"),  the
supplier of the next generation voice and data handsets for the Thuraya network,
and with Boeing to integrate our encryption  solution into APSI's handset.  As a
first step, we are producing and are selling an interconnect cable incorporating
active  circuits  which provide  compatibility  between  APSI's next  generation
satellite  telephone  (the  "SO-2510")  and our current  DCS-1200,  DCS-1400 and
USS-900T models.  This solution has been field tested by APSI and by Boeing over
the Thuraya  network and is currently  being marketed to consumers by Boeing and
Thuraya  distributors.  In addition,  the new APSI FDU-3500 docking unit for the
SO-2510 phone is now available on the market from APSI.  The docking unit allows
for outdoor and indoor  operation of the satellite phone on the Thuraya network.
We are producing and have received orders for the CopyTele  PA-3500 and PA-3500T
products that allow  compatibility  between our DCS-1200,  DCS-1400 and USS-900T
encryption devices and the APSI FDU-3500 docking unit.

     We also are developing,  together with APSI and Boeing,  a small voice-only
encryption  device that will directly connect to the satellite  phone,  offering
simplified  operation in a highly convenient  package.  We have built samples of
our design  which are now being  evaluated  and tested by APSI.  We believe that
this  enhanced  offering  will be  useful  by  Thuraya  customers  that  require
confidential and secure communications.  The new device is designed to provide a
better customer interface in a smaller more portable size.

     In connection with our agreement with Boeing,  Boeing  authorized us to use
its name on our website. Accordingly,  customers desiring to purchase certain of
our  encryption  products can find  authorized  Boeing sales  information on the
"Encryption  Products"  page  of  our  website  or on  the  Thuraya  website  at
http://www.thuraya.com/content/thuraya-products-boe.html.  Boeing is  continuing
to demonstrate our encryption  products to Thuraya  service  providers at annual
Service Providers Conferences in the United Arab Emirates and elsewhere.

                                       21
<PAGE>

     Our  encryption  products  also  can be  used  to  encrypt  data  over  the
Globalstar  network.  Globalstar  provides  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.   These  same  products
offer voice and data  encryption  compatibility  with the  Iridium and  Inmarsat
satellite networks.

     Our products provide secure  communications  with many different  satellite
phones,  including the Thuraya 7100/7101 and SO-2510 handheld terminals ("HHT"),
Globalstar GSP-1600 HHT, Telit SAT-550/600 HHT,  Globalstar  GSP-2800/2900 fixed
phone,  Iridium  9500/9505/9505A  HHT,  Inmarsat  M4 and Mini "M" HHT units from
Thrane & Thrane and Nera. Through the use of our products,  encrypted  satellite
communications   are  available  for  many  Thuraya  docking  units,   including
Teknobil's Next Thuraya Docker, Thuraya's Fixed Docking Adapter, APSI's FDU-2500
and FDU-3500 Fixed Docking Units,  and Sattrans's  SAT-OFFICE Fixed Docking Unit
and SAT-VDA  Hands-Free Car Kit. We are currently  advising APSI and Sattrans on
their development of new docking units for the Thuraya handsets which will allow
greater flexibility and usage of our encryption products.

     We are continuing to pursue commercial  security  opportunities  created by
the  Health  Insurance   Portability  and  Accountability  Act  ("HIPAA"),   the
Sarbanes-Oxley Act, the  Gramm-Leach-Bliley  Act and other corporate  governance
requirements.

     In February 2006, we licensed to Digital Info Security Co Inc. ("DISC"), an
encrypted  system for e-mail that  integrates into DISC's e-mail  services.  The
system, our DCS-2200,  allows companies to encrypt all e-mail  transactions in a
manner  transparent to the individual user. DISC is adding our e-mail encryption
system to their suite of management products and services, which includes e-mail
compliance  and  archiving,  remote  backup,  recovery,  and spam and  antivirus
protection  functions.  DISC has recently  opened an office in Singapore,  which
will serve as its headquarters for the Asia-Pacific region, and will purse sales
to government  entities and other  parties in the region.  DISC is now marketing
this system through  presentations to commercial  customers directly and through
trade shows. These efforts have led to customer commitments.

     CopyTele has been working  closely with DISC personnel and their  potential
clients to improve  the look and feel of our  DCS-2200  system as well as adding
new  features   which  make  the  system  even  more   flexible.   The  DCS-2200
Encrypting/Decrypting system has been integrated to work with Microsoft Exchange
Server email server program. Integrating use with Microsoft Exchange Server, one
of the most popular business e-mail systems,  allows corporate users an array of
features available in the Microsoft platform

     The CopyTele  DCS-2200 e-mail system  consists of an  encryption/decryption
software  module,  which is used within  Microsoft  Outlook(R) to  transparently
encrypt   and   decrypt   e-mails   at  the  source  or   destination,   and  an
Encrypting/Decrypting  e-mail  server  program,  which  receives  clear  text or
encrypted  e-mail  communication  and  re-encrypts  it  for  forwarding  to  the
recipient if required. Copies of e-mails can also be archived in accordance with
the  tracking  and  monitoring   requirements  of  the  Sarbanes-Oxley  Act  and
Gramm-Leach-Bliley  Act and  monitored  for  compliance  with  other  regulatory
requirements  and with  corporate  e-mail  policies.  In  addition,  the  system
notifies  corporate  administrators  when e-mails  violate such  requirements or
corporate  e-mail policies.  In furtherance of the  relationship  between us and
DISC,  at the time we licensed our  technology  to DISC,  we acquired  5,000,000
shares of DISC's  common  stock in  exchange  for  100,000  shares of our common
stock.  Since then, we have acquired an  additional  7,200,000  shares of DISC's
common stock, in the aggregate, for cash and an additional 300,000 shares of our
common stock.  Accordingly,  as of July 31, 2007, we held  12,200,000  shares of
DISC's  common stock,  all of which were  restricted  securities.  DISC's common
stock is not registered under the Securities Exchange Act of 1934, but is quoted
on the  Pink  Sheets.  As of July 31,  2007,  we held  approximately  13% of the
outstanding common stock of DISC.

                                       22
<PAGE>

     Our  operations  and  the  achievement  of  our  objectives  in  marketing,
production,  and research and  development  are dependent  upon an adequate cash
flow.  Accordingly,   in  monitoring  our  financial  position  and  results  of
operations,  particular  attention  is  given to cash  and  accounts  receivable
balances and cash flows from operations.  Since our initial public offering, our
cash flows have been  primarily  generated  through the sales of common stock in
private  placements and upon exercise of stock options.  Since 1999 we have also
generated cash flows from sales of our encryption products. During the past year
we have continued to direct our encryption  marketing  efforts to participate in
the security  opportunities created by the U.S. Department of Homeland Security,
the  Defense  Department,   and  the  enactment  of  laws  such  as  HIPAA,  the
Sarbanes-Oxley  Act, and  Gramm-Leach-Bliley  Act, which mandate that government
and private  sector  firms  provide  higher  levels of  information  privacy and
security. We are continuing to pursue marketing and licensing  opportunities for
our display technology.  We anticipate that current cash on hand, cash generated
from  operations,  and cash generated from the exercise of employee options will
be adequate to fund our operations at least through the end of the third quarter
of fiscal 2008.

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, 2006.

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.

                                       23
<PAGE>

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

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

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

     We  account  for  stock  options   granted  to  employees,   directors  and
consultants  using SFAS No. 123R.  We recognize  compensation  expense for stock
option awards on a straight-line  basis over the requisite service period of the
grant.  Determining  the  appropriate  fair value model and calculating the fair
value of stock-based awards requires judgment,  including estimating stock price
volatility,  forfeiture rates and expected life. If factors change and we employ
different assumptions in the application of SFAS No. 123R in future periods, the
compensation expense that we record under SFAS No. 123R may differ significantly
from what we have recorded in the current period.

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

Nine months ended July 31, 2007 compared with nine months ended July 31, 2006
-----------------------------------------------------------------------------

     Net Sales and Gross Profit

     Net Sales. Net sales decreased by  approximately  $57,000 in the nine-month
period  ended  July  31,  2007,  to  approximately   $341,000,  as  compared  to
approximately  $398,000 in the comparable  prior-year period. All revenue during
both  periods was from  encryption  products and  services.  The decrease in net
sales  resulted  from a reduction in unit sales of  approximately  $142,000,  to
approximately  $161,000, as compared to approximately $303,000 in the comparable
prior-year period,  offset by an increase in revenue from encryption services of
$85,000,  to  $180,000,  as  compared  to $95,000 in the  comparable  prior-year
period.  The revenue from encryption  services in the both periods 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
decreased by approximately $50,000 in the nine-month period ended July 31, 2007,
to  approximately  $227,000,  as  compared  to a gross  profit of  approximately
$277,000 in the comparable  prior-year  period.  The decrease in gross profit is
primarily  due to the decrease in sales.  Gross profit as a percent of net sales
in the nine-month period ended July 31, 2007 was approximately  67%, as compared
to approximately 70% in the comparable prior-year period. Because of the limited
number of transactions during each of the periods,  gross profit percentages are
sensitive to individual transactions.

                                       24
<PAGE>

     Research and Development Expenses

     Research and development  expenses  decreased by approximately  $993,000 in
the nine-month  period ended July 31, 2007, to  approximately  $2,590,000,  from
approximately  $3,583,000 in the comparable  prior-year  period. The decrease in
research and development  expenses was principally due to a decrease in employee
stock option  compensation  expense of  approximately  $1,105,000,  offset by an
increase in employee compensation,  other than stock option expense, and related
costs of approximately  $66,000,  primarily resulting from the grant of employee
bonuses,  and an  increase  in  outside  research  and  development  expense  of
approximately $55,000.

     Selling, General and Administrative Expenses

     Selling,  general and  administrative  expenses  decreased by approximately
$591,000 to  approximately  $1,923,000 in the  nine-month  period ended July 31,
2007, from  approximately  $2,514,000 in the comparable  prior-year  period. The
decrease in selling,  general and administrative expenses was principally due to
a decrease  in  employee  stock  option  compensation  expense of  approximately
$291,000, a decrease in professional fees of approximately  $227,000, a decrease
in consultant stock option expense of  approximately  $119,000 and a decrease in
advertising expense of approximately $25,000,  offset by an increase in employee
compensation,   other  than  stock  option   expense,   and  related   costs  of
approximately $72,000, primarily resulting from the grant of employee bonuses.

     Interest Income

     Interest income was  approximately  $25,000 in the nine-month  period ended
July 31, 2007,  compared to approximately  $20,000 in the comparable  prior-year
period.  The  increase  in  interest  income  was  principally  the result of an
increase prevailing interest rates.

Three months ended July 31, 2007 compared with three months ended July 31, 2006
-------------------------------------------------------------------------------

     Net Sales and Gross Profit

     Net Sales. Net sales decreased by approximately  $17,000 in the three-month
period  ended  July  31,  2007,  to  approximately   $114,000,  as  compared  to
approximately  $131,000 in the comparable  prior-year period. All revenue during
both  periods was from  encryption  products and  services.  The decrease in net
sales  resulted  from a decrease  in unit  sales of  approximately  $32,000,  to
approximately  $54,000,  as compared to approximately  $86,000 in the comparable
prior-year period,  offset by an increase in revenue from encryption services of
$15,000, to $60,000, as compared to $45,000 in the comparable prior-year period.
The  revenue  from  encryption  services  in  the  both  periods  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.

                                       25
<PAGE>

     Gross Profit.  Gross profit from sales of encryption  products and services
decreased  by  approximately  $15,000 in the  three-month  period ended July 31,
2007, to approximately  $77,000,  as compared to a gross profit of approximately
$92,000 in the  comparable  prior-year  period.  The decrease in gross profit is
primarily  due to the decrease in sales.  Gross profit as a percent of net sales
in the three-month period ended July 31, 2007 was approximately 68%, as compared
to approximately 70% in the comparable prior-year period. Because of the limited
number of transactions during each of the periods,  gross profit percentages are
sensitive to individual transactions.

     Research and Development Expenses

     Research and development  expenses  decreased by approximately  $641,000 in
the  three-month  period ended July 31, 2007, to  approximately  $671,000,  from
approximately  $1,312,000 in the comparable  prior-year  period. The decrease in
research and development  expenses was principally due to a decrease in employee
stock option  compensation  expense of approximately  $559,000 and a decrease in
employee  compensation,  other than stock option  expense,  and related costs of
approximately   $160,000,   offset  by  an  increase  in  outside  research  and
development expense of approximately $76,000.

     Selling, General and Administrative Expenses

     Selling,  general and  administrative  expenses  decreased by approximately
$465,000 to  approximately  $469,000 in the  three-month  period  ended July 31,
2007,  from  approximately  $934,000 in the comparable  prior-year  period.  The
decrease in selling,  general and administrative expenses was principally due to
a decrease  in  employee  stock  option  compensation  expense of  approximately
$305,000, a decrease in consultant stock option expense of approximately $97,000
and a decrease in employee  compensation,  other than stock option expense,  and
related costs of approximately $76,000.

     Interest Income

     Interest income was approximately $7,000 in both of the three-month periods
ended July 31, 2007 and 2006.

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 fiscal 1999, we have generated
cash flows from sales of our encryption products.

     During the nine  months  ended July 31,  2007,  our cash used in  operating
activities  was  approximately  $1,866,000.   This  resulted  from  payments  to
suppliers,  employees and  consultants of  approximately  $2,182,000,  which was
offset by cash of approximately  $291,000  received from collections of accounts
receivable   related  to  sales  of  encryption   products  and  services,   and
approximately  $25,000 of interest income  received.  Our cash used in investing
activities  during  the  nine  months  ended  July 31,  2007  was  approximately
$371,000,  which resulted from purchases of short-term investments consisting of
certificates of deposit of approximately $825,000 and purchases of approximately
$9,000 of equipment,  offset by approximately  $463,000 received upon maturities
of  short-term  investments  consisting  of  certificates  of deposit.  Our cash
provided by financing  activities  during the nine months ended July 31, 2007 of
approximately  $1,607,000 resulted from cash received upon the exercise of stock
options.  Accordingly,  during the nine months ended July 31, 2007, our cash and
cash  equivalents  decreased  by  approximately   $629,000  and  our  short-term
investments  increased by approximately  $362,000.  As a result,  our cash, cash
equivalents,   and  short-term  investments,  at  July  31,  2007  decreased  to
approximately  $1,053,000  from  approximately  $1,320,000  at the end of fiscal
2006.

                                       26
<PAGE>

     Accounts receivable  increased by approximately  $50,000 from approximately
$10,000 at the end of fiscal 2006 to approximately $60,000 at July 31, 2007. The
increase  in  accounts  receivable  is a result of the  timing  of  collections.
Inventories  decreased  approximately  $47,000  from  approximately  $261,000 at
October 31, 2006 to  approximately  $214,000 at July 31,  2007,  primarily  as a
result of the timing of shipments and production  schedules.  Investment at cost
increased to $417,000 at July 31, 2007 compared to $207,000 at October 31, 2006,
due to an additional  non-cash  investment in DISC. Accounts payable and accrued
liabilities decreased by approximately  $262,000 from approximately  $582,000 at
the end of fiscal 2006 to  approximately  $320,000 at July 31, 2007, as a result
the timing of payments.

     As a result of these changes, working capital at July 31, 2007 increased to
approximately  $1,048,000  from  approximately  $1,041,000  at the end of fiscal
2006.

     Our working capital includes  inventory of  approximately  $214,000 at July
31, 2007.  Management  has  recorded  our  inventory at the lower of cost or our
current best estimate of net realizable  value.  To date,  sales of our products
have been limited.  Accordingly,  there can be no assurance  that we will not be
required to reduce the selling price of our inventory below our current carrying
value.

     During  the  nine-month  periods  ended July 31,  2007 and 2006,  we issued
2,191,730 shares and 1,695,050 shares, respectively,  of common stock to certain
employees  for  services  rendered,  principally  in lieu of cash  compensation,
pursuant  to  the  2003  Share  Plan  and  the  2000  Share  Plan.  We  recorded
compensation  expense for the nine-month periods ended July 31, 2007 and 2006 of
approximately $1,473,000 and $1,342,000,  respectively,  and for the three-month
periods  ended July 31, 2007 and 2006 of  approximately  $404,000 and  $583,000,
respectively,  for the shares of common stock issued to employees.  In addition,
during the  nine-month  periods ended July 31, 2007 and 2006, we issued  164,020
shares and 293,360  shares,  respectively,  of common stock to  consultants  for
services  rendered  pursuant  to the 2003 Share  Plan.  We  recorded  consulting
expense for the nine-month periods ended July 31, 2007 and 2006 of approximately
$114,000 and $245,000,  respectively, and for the three-month periods ended July
31, 2007 and 2006 of  approximately  $9,000 and $35,000,  respectively,  for the
shares of common stock issued to consultants.

                                       27
<PAGE>

     During the  nine-month  periods  ended July 31,  2007 and 2006,  we granted
options to purchase  2,880,000  shares and 5,460,000  shares,  respectively,  to
employees,  non-employee  directors and  consultants  pursuant to the 2003 Share
Plan.  We recorded  stock-based  compensation  expense  related to stock options
granted to employees,  non-employee  directors and consultants of  approximately
$1,075,000 and  $2,589,000  for the  nine-month  periods ended July 31, 2007 and
2006,  respectively,  and  of  approximately  $88,000  and  $1,050,000  for  the
three-month periods ended July 31, 2007 and 2006, respectively.

     During the nine-month period ended July 31, 2007, we acquired an additional
minority  interest  in DISC by  exchanging  300,000  unregistered  shares of our
common stock for 5,000,000 shares of DISC's common stock. DISC's common stock is
not registered  under the Securities  Exchange Act of 1934, but is quoted on the
Pink Sheets

     The  auditor's  report on our  financial  statements as of October 31, 2006
states that the net loss incurred  during the year ended  October 31, 2006,  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,  2006,  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, 2005 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, cash equivalents, short-term investments
and  accounts  receivable,  together  with cash  flows  from  expected  sales of
encryption products and flat panel displays, and other potential sources of cash
flows,  will be sufficient to enable us to continue in operation  until at least
the end of the third quarter of fiscal 2008. We anticipate that, thereafter,  we
will  require  additional  funds to  continue  our  marketing,  production,  and
research and development activities, and we will require outside funding if cash
generated from operations is insufficient to satisfy our liquidity requirements.
However,  our  projections  of future  cash needs and cash flows may differ from
actual  results.  If current cash and cash that may be generated from operations
are insufficient to satisfy our liquidity requirements, we may seek to sell debt
or equity securities or to obtain a line of credit prior to the third quarter of
fiscal 2008. 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  other  sources  of  funding  would be
available,  if needed,  on favorable  terms or at all. If we cannot  obtain such
funds  if  needed,  we  would  need  to  curtail  or  cease  some  or all of our
operations.

     We are seeking to improve our liquidity  through increased sales or license
of products and technology. In an effort to generate sales, we have marketed our
encryption products directly to U.S. and international distributors, dealers and
original  equipment  manufacturers  that market our  encryption  products and to
end-users. 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  are  also
continuing  to pursue  marketing  and  licensing  opportunities  for our display
technology.  As of July 31, 2007, we had not yet recorded any revenue from sales
or licensing of our display.  During the nine-month  period ended July 31, 2007,
we  recognized  revenue  from  sales of  encryption  products  and  services  of
approximately $341,000.

                                       28
<PAGE>

     The following table presents our expected cash requirements for contractual
obligations outstanding as of July 31, 2007:

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

 Consulting
 Agreement         $  40,000          -        -          -    $  40,000

Noncancelable
Operating Leases   $ 274,000   $ 92,000        -          -    $ 366,000
                   ----------  ---------  -------  ---------   ----------
Total Contractual
Cash Obligations   $ 314,000   $ 92,000        -          -    $ 406,000
                   ==========  =========  =======  =========   ==========

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

     In June 2006, the FASB issued FASB  Interpretation  No. 48, "Accounting for
Uncertainty in Income Taxes," an  interpretation of FASB Statement No. 109 ("FIN
48").  FIN 48  clarifies  the  accounting  for  uncertainties  in  income  taxes
recognized in an enterprise's financial statements.  The interpretation requires
that  the  Company  determine  whether  it is more  likely  than  not that a tax
position will be sustained upon examination by the appropriate taxing authority.
If a tax position meets the more likely than not  recognition  criteria,  FIN 48
requires the tax position be measured at the largest  amount of benefit  greater
than 50 percent  likely of being  realized upon ultimate  settlement.  FIN 48 is
effective for fiscal years  beginning  after December 15, 2006. We are currently
evaluating  the  effect,  if any,  that the  adoption of FIN 48 will have on our
financial statements.

     In September 2006, the Securities and Exchange  Commission ("SEC") released
Staff  Accounting  Bulletin  No.  108,  "Considering  the  Effects of Prior Year
Misstatements   When   Quantifying   Misstatements  in  Current  Year  Financial
Statements" ("SAB No. 108"). SAB No. 108 provides interpretative guidance on how
public companies are to quantify financial statement  misstatements.  There have
been two  common  approaches  used to  quantify  such  errors.  Under an  income
statement  approach  (the  "roll-over"  method) the error is  quantified  as the
amount by which the current year income  statement is misstated.  Alternatively,
under a  balance  sheet  approach  (the  "iron  curtain"  method)  the  error is
quantified as the  cumulative  amount by which the current year balance sheet is
misstated.  In SAB No.  108,  the SEC  established  an  approach  that  requires
quantification of financial statement  misstatements based on the effects of the
misstatements  on each of the  company's  financial  statements  and the related
financial statement  disclosures.  This model is commonly referred to as a "dual
approach" because it requires  quantification of errors under both the roll-over
and  iron  curtain  methods.  SAB No.  108 is  effective  for  annual  financial
statements  covering the first fiscal year ending after  November 15, 2006.  The
adoption  of SAB No.  108 is not  expected  to  have a  material  effect  on our
financial statements.

                                       29
<PAGE>

     In September 2006, the FASB issued SFAS No. 157, "Fair Value  Measurements"
("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles,  and expands disclosures
about  fair  value   measurements.   SFAS  157   applies  to  other   accounting
pronouncements that require or permit fair value measurements. The provisions of
SFAS 157 are effective for fiscal years  beginning  after November 15, 2007. The
adoption of SFAS 157 is not expected to have a material  effect on our financial
statements.

     In February  2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial  Assets and  Financial  Liabilities"  ("SFAS  159").  SFAS 159 expands
opportunities to use fair value  measurement in financial  reporting and permits
entities to choose to measure many financial instruments and certain other items
at fair value.  SFAS 159 is effective for fiscal years  beginning after November
15, 2007. We are currently  evaluating the effect,  if any, that the adoption of
SFAS 159 will have 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 Part II, Item 1A - "Risk
Factors"  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, 2006 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.

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.

                                       30
<PAGE>

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

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

     There was no change in our internal control over financial reporting during
the quarter ended July 31, 2007 that has materially  affected,  or is reasonably
likely to materially affect, our internal control over financial reporting.

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

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

     There  have  been no  material  changes  in our  risk  factors  from  those
disclosed in our Annual Report on Form 10-K for the year ended October 31, 2006.

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

          31.1 Certification of Chief Executive Officer, pursuant to Section 302
               of the Sarbanes-Oxley Act of 2002, dated September 17, 2007.

          31.2 Certification of Chief Financial Officer, pursuant to Section 302
               of the Sarbanes-Oxley Act of 2002, dated September 17, 2007.

          32.1 Statement of Chief Executive Officer, pursuant to Section 1350 of
               Title 18 of the United States Code, dated September 17, 2007.

          32.2 Statement of Chief Financial Officer, pursuant to Section 1350 of
               Title 18 of the United States Code, dated September 17, 2007.

                                       31
<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
September 17, 2007                            (Principal Executive Officer)


                                              By: /s/ Henry P. Herms
                                                  ------------------------------
                                              Henry P. Herms
                                              Vice President - Finance and
                                              Chief Financial Officer (Principal
September 17, 2007                            Financial and Accounting Officer)

                                       32