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 January 31, 2006

                         Commission file number 0-11254


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


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




               900 Walt Whitman Road
                   Melville, NY                               11747
--------------------------------------------------------------------------------
     (Address of principal 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 March 7, 2006, the registrant had outstanding 94,135,771 shares of Common
Stock, par value $.01 per share, which is the registrant's only class of common
stock.


<PAGE>

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


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

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

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

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

          Notes to Condensed Financial Statements (Unaudited)             6 - 15

Item 2. Management's Discussion and Analysis of Financial
        Condition and Results of Operations.                             16 - 29

Item 3. Quantitative and Qualitative Disclosures About Market Risk.           29

Item 4. Controls and Procedures.                                              29


PART II. OTHER INFORMATION

Item 6. Exhibits.                                                             30

          SIGNATURES                                                          30



                                        2

<PAGE>

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

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

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

                                              (Unaudited)
                                             -------------
                                               January 31,   October 31,
        ASSETS                                    2006          2005*
        ------                               ------------- -------------

CURRENT ASSETS:
   Cash and cash equivalents                 $    809,064  $    506,517
   Short-term investments                         403,178       400,776
   Accounts receivable                                315        32,117
   Other receivables, net                          30,000        30,000
   Inventories                                    330,023       384,996
   Prepaid expenses and other current assets       37,935        79,829
                                              ------------  ------------
          Total current assets                  1,610,515     1,434,235

PROPERTY AND EQUIPMENT, net                        30,631        27,131

OTHER ASSETS                                        4,887         4,887
                                              ------------  ------------
                                             $  1,646,033  $  1,466,253
                                              ============  ============

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

CURRENT LIABILITIES:
   Accounts payable                          $    404,147  $    270,806
   Accrued liabilities                             68,245        77,424
                                              ------------  ------------
          Total current liabilities               472,392       348,230

SHAREHOLDERS' EQUITY:
   Preferred stock, par value $100 per share;
    500,000 shares authorized; no
    shares issued or outstanding                        -             -
   Common stock, par value $.01 per share;
    240,000,000 shares authorized; 93,829,061
    and 91,975,538 shares issued
    and outstanding, respectively                 938,291       919,755
   Additional paid-in capital                  74,382,525    73,105,886
   Accumulated deficit                        (74,147,175)  (72,907,618)
                                              ------------  ------------
                                                1,173,641     1,118,023
                                              ------------  ------------
                                             $  1,646,033  $  1,466,253
                                              ============  ============

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

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



                                        3

<PAGE>

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

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

NET SALES                                    $   195,390  $   212,591
COST OF SALES                                     55,458       64,573
                                              -----------  -----------
         Gross profit                            139,932      148,018
                                              -----------  -----------

OPERATING EXPENSES
         Research and development expenses       656,588      589,953
         Selling, general and administrative
          expenses                               729,096      566,271
                                              -----------  -----------
                  Total operating expenses     1,385,684    1,156,224
                                              -----------  -----------
LOSS FROM OPERATIONS                          (1,245,752)  (1,008,206)
INTEREST INCOME                                    6,195        1,712
                                              -----------  -----------
NET LOSS                                     $(1,239,557) $(1,006,494)
                                              ===========  ===========
PER SHARE INFORMATION:
Net loss per share:
         Basic and Diluted                   $     (0.01) $     (0.01)
                                              ===========  ===========
Shares used in computing net loss per share:
         Basic and Diluted                    93,255,081   86,163,574
                                              ===========  ===========

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



                                        4

<PAGE>

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

                                                 For the Three Months
                                                         Ended
                                                     January 31,
                                                ----------------------
                                                     2006        2005
                                                 ---------  ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
   Payments to suppliers, employees and
    consultants                                 $(631,743) $ (538,725)
   Cash received from customers                   227,192      71,966
   Interest received                                6,195       1,712
                                                 ---------  ----------
           Net cash used in operating activities (398,356)   (465,047)
                                                 ---------  ----------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Acquisition of short-term investments
    (certificates of deposit)                      (2,402)          -
   Payments for purchases of property and
    equipment                                      (7,415)     (2,256)
                                                 ---------  ----------
           Net cash used in investing activities   (9,817)     (2,256)
                                                 ---------  ----------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from exercise of stock options        710,720     476,480
                                                 ---------  ----------
           Net cash provided by financing
            activities                            710,720     476,480
                                                 ---------  ----------

NET INCREASE IN CASH AND CASH EQUIVALENTS         302,547       9,177

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

CASH AND CASH EQUIVALENTS AT  END OF PERIOD     $ 809,064  $1,011,954
                                                 =========  ==========

RECONCILIATION OF NET LOSS TO NET CASH USED
 IN OPERATING ACTIVITIES:
   Net loss                                  $(1,239,557) $(1,006,494)
   Stock option compensation to employees        115,681            -
   Stock option compensation to consultants            -        5,009
   Stock awards granted to employees and
    consultants pursuant to stock
      incentive plans                            468,774      461,272
   Provision for doubtful accounts                 6,286            -
   Depreciation and amortization                   3,915        3,631
   Change in operating assets and
    liabilities:
      Accounts receivable and other
       receivables                                25,516     (140,625)
      Inventories                                 54,973       22,052
      Prepaid expenses and other current
       assets                                     41,894       95,435
      Accounts payable and  accrued
       liabilities                               124,162       94,673
                                              -----------  -----------
           Net cash used in operating
            activities                       $  (398,356) $  (465,047)
                                              ===========  ===========
SUPPLEMENTAL DISCLOSURE  OF NON-CASH
 FINANCING ACTIVITIES:
 Unregistered common stock issued
  to settle a liability                      $         -     $115,372
                                              ===========  ===========


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



                                       5

<PAGE>

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

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

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


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

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

     CopyTele,  Inc.  was  incorporated  on  November  5,  1982.  Our  principal
operations are the  development,  production  and marketing of  multi-functional
encryption  products  that  provide   information   security  for  domestic  and
international   users  over  virtually  every   communications   media  and  the
development,  production and marketing of thin, high-brightness,  flat panel CRT
displays.

     The condensed  financial  statements  have been prepared in accordance with
accounting  principles  generally  accepted in the United States of America ("US
GAAP") for interim financial reporting.  Accordingly, they do not include all of
the  information  and  footnotes  required  by US GAAP  for  complete  financial
statements.  The information  contained  herein is for the  three-month  periods
ended  January 31,  2006 and 2005.  In  management's  opinion,  all  adjustments
(consisting only of normal recurring adjustments considered necessary for a fair
presentation  of the results of operations  for such periods) have been included
herein.  Certain  prior year  amounts  have been  reclassified  to conform  with
current year presentation.

     The results of operations for interim periods may not  necessarily  reflect
the  results of  operations  for a full year.  Reference  is made to the audited
financial  statements  and notes  thereto  included in our Annual Report on Form
10-K for the fiscal year ended October 31, 2005, for more extensive  disclosures
than contained in these condensed financial statements.

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

     From our inception, we have met our liquidity and capital expenditure needs
primarily  through the proceeds from sales of common stock in our initial public
offering, in private placements,  upon exercise of warrants issued in connection
with the private placements and public offering,  and upon the exercise of stock
options.  In  2001  and  2002,  we also  received  payments  under a  technology
development agreement.  In addition,  commencing in the fourth quarter of fiscal
1999, we have generated cash flows from sales of our encryption products.

During the three months ended January 31, 2006,  our operating  activities  used
approximately  $398,000 in cash.  This  resulted  from  payments  to  suppliers,
employees and consultants of approximately $632,000, which was offset by cash of
approximately  $227,000 received from collections of accounts receivable related
to sales of  encryption  products and  approximately  $6,000 of interest  income
received.  In  addition,  we  received  approximately  $711,000 in cash upon the
exercise  of  stock  options,   acquired   approximately  $2,000  of  short-term




                                        6

<PAGE>

investments  consisting of certificates  of deposit and purchased  approximately
$7,000 of equipment.  As a result,  our cash, cash  equivalents,  and short-term
investments  increased  to  approximately  $1,212,000  at January  31, 2006 from
approximately $907,000 at the end of fiscal 2005.

     We believe  that our existing  cash,  short-term  investments  and accounts
receivable,  together with cash flows from expected sales of encryption products
and flat panel CRT displays,  and other potential sources of cash flows, will be
sufficient  to enable us to continue in operation  until at least the end of the
first quarter of fiscal 2007. We anticipate  that,  thereafter,  we will require
additional  funds to  continue  our  marketing,  production,  and  research  and
development  activities,  and we will require  outside funding if cash generated
from operations is insufficient to satisfy our liquidity requirements.  However,
our  projections  of future  cash needs and cash flows may  differ  from  actual
results.  If current cash and cash that may be  generated  from  operations  are
insufficient to satisfy our liquidity requirements,  we may seek to sell debt or
equity  securities  or to obtain a line of credit prior to the first  quarter of
fiscal 2007. The sale of additional  equity securities or convertible debt could
result in dilution to our  stockholders.  We currently have no arrangements with
respect to additional financing. There can be no assurance that we will generate
sufficient  revenues in the future  (through  sales or otherwise) to improve our
liquidity or sustain future operations, that our production capabilities will be
adequate,  that other products will not be produced by other companies that will
render our products obsolete, or that funds will be available to us from debt or
equity financings or that, if available, we will be able to obtain such funds on
favorable  terms and  conditions.  If we cannot obtain such funds if needed,  we
would need to curtail or cease some or all of our operations.

     The  auditor's  report on our  financial  statements as of October 31, 2005
states that the net loss incurred  during the year ended  October 31, 2005,  our
accumulated  deficit as of that date, and the other factors  described in Note 1
to the Financial  Statements  included in our Annual Report on Form 10-K for the
year ended  October  31,  2005,  raise  substantial  doubt  about our ability to
continue as a going concern.  The auditor's  report on our financial  statements
for the year ended October 31, 2004 contained a similar statement. Our financial
statements  have been prepared  assuming we will continue as a going concern and
do not  include  any  adjustments  that might  result  from the  outcome of this
uncertainty.

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

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

     Prior to November 1, 2005, we followed Financial Accounting Standards Board
("FASB")  Statement  of  Financial   Accounting   Standards  ("SFAS")  No.  148,
"Accounting for Stock-Based  Compensation-Transition  and Disclosure" ("SFAS No.
148"), which addressed financial accounting and reporting for recording expenses
for the fair value of stock options. SFAS No. 148 required prominent disclosures
in  financial  statements  about the  effects of  stock-based  compensation  and
provided  alternative  methods  of  transition  for a  voluntary  change to fair
value-based method of accounting for stock-based employee compensation. SFAS No.
123 "Accounting for Stock Based  Compensation"  ("SFAS No. 123")  encouraged but
did not require companies to record  compensation cost for stock-based  employee
compensation  plans at fair value.  During this period,  we accounted  for stock
options  granted to employees  and directors  using the  intrinsic  value method



                                        7

<PAGE>

prescribed in Accounting Principles Board ("APB") Opinion No. 25 "Accounting for
Stock  Issued  to  Employees"  ("APB  Opinion  No.  25") and  complied  with the
disclosure provisions of SFAS No. 123 and SFAS No. 148 through October 31, 2005.
Compensation  cost for stock  options  issued to  employees  and  directors  was
measured as the excess,  if any, of the quoted  market price of our stock at the
date of grant over the amount an employee  or  director  must pay to acquire the
stock.  In  accordance  with  APB  Opinion  No.  25,  we did not  recognize  any
compensation  cost for stock  options  issued to employees and directors for the
quarter  ended January 31, 2005, as all option grants to employees and directors
during such  quarter were made at the fair market value of our stock on the date
of grant.

     Had compensation  cost for stock options granted to employees and directors
been  determined at fair value,  consistent  with SFAS No. 123, our net loss and
net loss per share for the quarter ended  January 31, 2005 would have  increased
to the following adjusted amounts:

                                                                 For the Three
                                                                  Months Ended
                                                                January 31, 2005
                                                                ----------------
Net loss as reported                                             $   (1,006,494)
Add: Total stock-based employee compensation
     expense, determined under fair value based method,
     for all awards, net of related tax effect                         (326,616)
                                                                ----------------
Net loss as adjusted                                             $   (1,333,110)
                                                                ================

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


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

     Effective  November 1, 2005,  the  beginning of our first quarter of fiscal
2006, we adopted SFAS No. 123R. We have elected to use the modified  prospective
transition  method as permitted by SFAS No. 123R and  therefore,  our  financial
statements  for prior  periods  have not been  restated to  reflect,  and do not
include,  the effect of SFAS No. 123R.  Under this  transition  method,  we will
apply the  provisions  of SFAS No.  123R to new awards  and to awards  modified,



                                        8

<PAGE>

repurchased,  or cancelled  after  October 31, 2005.  We recognize  compensation
expense for stock  option  awards on a  straight-line  basis over the  requisite
service period of the grant.  Additionally,  we will recognize compensation cost
for the portion of awards  that were  outstanding,  but for which the  requisite
service had not been rendered (unvested awards),  as of October 31, 2005, as the
remaining service is rendered.  The compensation cost we record for these awards
will be based on their  grant  date fair value as  calculated  for the pro forma
disclosures required by SFAS No. 123.

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

     We recorded  approximately  $116,000 of stock-based  compensation  expense,
related to stock  options  granted to employees  and  directors,  for the fiscal
quarter  ended  January  31,  2006,  in  accordance  with  SFAS No.  123R.  Such
compensation expense is included in the accompanying statement of operations for
the fiscal  quarter  ended January 31, 2006 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  had no  material  effect on either  the basic or  diluted
earnings per share for the fiscal quarter ended January 31, 2006.

     Included in the  approximately  $116,000 of stock-based  compensation  cost
related to stock options granted to employees and directors  recorded during the
first quarter of fiscal 2006 was approximately  $5,000 of expense related to the
amortization of compensation cost for stock options granted prior to but not yet
vested as of October 31, 2005. As of January 31, 2006,  there was  approximately
$14,000  of  total   unrecognized   compensation   cost  related  to  non-vested
share-based compensation arrangements.  This unrecognized cost is expected to be
fully amortized over the remaining portion of the current fiscal year.

     We account for options granted to non-employee  consultants  using the fair
value method  required by SFAS No. 123.  During the  three-month  periods  ended
January 31, 2006 and 2005, we recognized  consulting expense for options granted
to consultants of  approximately  $0 and $5,000,  respectively.  Such consulting
expense is  included in either  research  and  development  expenses or selling,
general  and  administrative  expenses,  as  applicable,   in  the  accompanying
statements of operations.

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

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

     Upon the adoption of SFAS No. 123R, we separated the  individuals  we grant
stock options to into three relatively  homogenous groups, based on exercise and
post-vesting employment termination behaviors. To determine the weighted average
fair value of stock options granted to employees on the date of grant, we take a
weighted  average of the assumptions  used for each of these groups.  All of the



                                        9

<PAGE>

stock options we granted  during the fiscal  quarter ended January 31, 2006 were
within a single group,  consisting of awards of options with 10-year terms which
vested immediately.

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

                                                                  For the Three
                                          For the Three           Months Ended
                                          Months Ended          January 31, 2005
                                         January 31, 2006          (pro forma)
                                         ----------------       ----------------
Expected term (in years)                       1.2                     2.5
Volatility                                      81%                    122%
Risk-free interest rate                       4.25%                   2.75%
Dividend yield                                   0                       0
Weighted average fair value
 at grant date                               $0.22                   $0.50

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

     The expected term of stock options  represents the weighted  average period
the stock  options are expected to remain  outstanding.  Because we consider our
options to be "plain  vanilla",  we estimated the expected term using a modified
version of the simplified  method of calculation,  as prescribed by SAB No. 107.
This  modified  calculation  uses the  actual  life for  options  that have been
settled,   and  a  uniform   distribution   assumption  for  the  options  still
outstanding.  Under SAB No. 107, options are considered to be "plain vanilla" if
they  have  the  following  basic   characteristics:   granted   "at-the-money";
exercisability is conditioned upon service through the vesting date; termination
of service  prior to vesting  results in  forfeiture;  limited  exercise  period
following   termination  of  service;   and  options  are  non-transferable  and
non-hedgeable.

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

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

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

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



                                       10

<PAGE>

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

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

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

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

     During the fiscal  quarters  ended January 31, 2006 and 2005, we granted to
employees and consultants options to purchase 500,000 shares and 640,000 shares,
respectively,  of common stock at an exercise  price of $.62 and $.74 per share,
respectively,  pursuant to the  CopyTele,  Inc. 2003 Share  Incentive  Plan (the
"2003 Share Plan").  During the fiscal quarters ended January 31, 2006 and 2005,
stock options to purchase 1,275,000 shares and 637,500 shares, respectively,  of
common stock were exercised with aggregate  proceeds of  approximately  $711,000
and $476,000, respectively.

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

     As of January 31, 2006,  we have three stock option  plans:  the  CopyTele,
Inc.  1993 Stock Option Plan (the "1993 Plan"),  the  CopyTele,  Inc. 2000 Share
Incentive  Plan (the "2000  Share  Plan") and the 2003  Share  Plan,  which were
adopted by our Board of Directors  on April 28, 1993,  May 8, 2000 and April 21,
2003, respectively.

     Information regarding the 1993 Plan for the first quarter ended January 31,
2006 is as follows:
<TABLE>
<CAPTION>
<S>                                                                <C>                  <C>                  <C>
                                                                                Current Weighted
                                                                                Average Exercise         Aggregate
                                                                 Shares          Price Per Share     Intrinsic Value
                                                             ---------------------------------------------------------
Shares Under Option at October 31, 2005                          6,718,580            $3.86
Cancelled                                                         (120,000)           $4.75
                                                             --------------
Shares Under Option and Exercisable at January 31, 2006
                                                                 6,598,580            $3.84                 $-0-
                                                             ==============
</TABLE>




                                       11

<PAGE>

     The following table summarizes  information about stock options outstanding
under the 1993 Plan as of January 31, 2006:

<TABLE>
<CAPTION>

                                              Options Outstanding                             Options Exercisable
                             -------------------------------------------------------    --------------------------------
                                                                       Weighted                             Weighted
                                 Number        Weighted Average         Average             Number          Average
        Range of              Outstanding          Remaining        Exercise Price      Exercisable at   Exercise Price
    Exercise Prices            at 1/31/06      Contractual Life                             1/31/06
-------------------------    --------------- ---------------------- ----------------    ---------------- ---------------
<S>                               <C>                <C>                 <C>                 <C>             <C>
      .84 to $1.56                784,000            3.79                $1.10               784,000         $1.10
         $2.28                    855,000            2.45                $2.28               855,000         $2.28
     $3.38 to $4.81            4,564,580              .79                $4.39             4,564,580         $4.39
         $6.38                    395,000             .63                $6.38               395,000         $6.38
</TABLE>

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

     Information regarding the 2000 Share Plan for the quarter ended January 31,
2006 is as follows:
<TABLE>
<CAPTION>
<S>                                                              <C>                 <C>                     <C>
                                                                                Current Weighted
                                                                                Average Exercise         Aggregate
                                                                 Shares          Price Per Share      Intrinsic Value
                                                             -----------------------------------------------------------
Shares Under Option at October 31, 2005                         2,788,466             $0.73
Exercised                                                         (55,000)            $0.48               $  17,880
                                                             --------------
Shares Under Option and Exercisable at January 31, 2006
                                                                2,733,466             $0.74               $ 551,109
                                                             ==============
</TABLE>

     The following table summarizes  information about stock options outstanding
under the 2000 Share Plan as of January 31, 2006:
<TABLE>
<CAPTION>
<S>                             <C>                     <C>               <C>                   <C>             <C>
                                              Options Outstanding                             Options Exercisable
                             -------------------------------------------------------    --------------------------------
                                                                       Weighted                             Weighted
                                 Number        Weighted Average        Average               Number         Average
        Range of              Outstanding          Remaining           Exercise          Exercisable at     Exercise
    Exercise Prices            at 1/31/06      Contractual Life         Price               1/31/06          Price
-------------------------    --------------- ---------------------- ----------------    ---------------- ---------------
     $0.34 - $0.40                921,000            5.39                $0.40               921,000         $0.40
     $0.44 - $0.74                710,466            4.67                $0.68               710,466         $0.68
     $0.94 - $1.09              1,102,000            4.68                $1.06             1,102,000         $1.06
</TABLE>

     The exercise price of all of the options  granted under the 2000 Share Plan
since its inception, was equal to the fair market value of the underlying common
stock at the grant date. As of January 31, 2006,  45,773  shares were  available
for future grants under the 2000 Share Plan.



                                       12

<PAGE>

     Information regarding the 2003 Share Plan for the quarter ended January 31,
2006 is as follows:
<TABLE>
<CAPTION>
<S>                                                                 <C>                 <C>                    <C>
                                                                                  Current Weighted
                                                                                  Average Exercise         Aggregate
                                                                   Shares          Price Per Share      Intrinsic Value
                                                              ----------------- ---------------------- ------------------
Shares Under Option at October 31, 2005                        12,505,200               $0.61
Granted                                                           500,000               $0.62
Exercised                                                      (1,220,000)              $0.56             $    38,950
                                                              ------------
Shares Under Option at January 31, 2006                        11,785,200               $0.62             $ 3,810,048
                                                              ============
Shares Under Exercisable at January 31, 2006                   11,700,200               $0.62             $ 3,780,598
                                                              ============
</TABLE>


     The following table summarizes  information about stock options outstanding
under the 2003 Share Plan as of January 31, 2006:
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
                                                  Options Outstanding                              Options Exercisable
                                 -----------------------------------------------------     --------------------------------
                                                                            Weighted                             Weighted
                                     Number         Weighted Average        Average              Number          Average
          Range of               Outstanding at         Remaining        Exercise Price       Exercisable     Exercise Price
      Exercise Prices                1/31/06        Contractual Life                           at 1/31/06
-----------------------------    ---------------- ---------------------- --------------- -- ---------------- -----------------
       $0.25 - $0.46                3,583,000             7.53               $0.29             3,583,000          $0.29
       $0.51 - $0.77                4,891,200             8.96               $0.61             4,806,200          $0.61
       $0.81 - $1.07                3,311,000             8.52               $0.92             3,311,000          $0.92
</TABLE>


     The exercise price of all of the options  granted under the 2003 Share Plan
since its inception, was equal to the fair market value of the underlying common
stock at the grant date. As of January 31, 2006,  143,121  shares were available
for future  grants  under the 2003 Share Plan.  In February  2006,  our Board of
Directors  adopted an amendment to the 2003 Share Plan authorizing an additional
15,000,000 shares, which are available for future grants.

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

     We account for stock awards granted to employees and  consultants  based on
their grant date fair value.  During the  three-month  periods ended January 31,
2006 and 2005, we issued 460,860  shares and 530,945  shares,  respectively,  of
common stock to certain employees for services rendered,  principally in lieu of
cash  compensation,  pursuant to the 2003 Share Plan.  We recorded  compensation
expense  for  the  three-month  periods  ended  January  31,  2006  and  2005 of
approximately  $376,000  and  $449,000,  respectively,  for the shares of common
stock issued to employees.  In addition,  during the  three-month  periods ended
January  31,  2006 and  2005,  we  issued  117,663  shares  and  15,000  shares,
respectively,  of common stock to consultants for services  rendered pursuant to
the 2003 Share Plan. We recorded  consulting expense for the three-month periods
ended  January  31,  2006  and  2005  of  approximately   $92,000  and  $13,000,
respectively, for the shares of common stock issued to consultants.



                                       13

<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 three months ended January 31,
2006, one customer in the Encryption  Products and Services Segment  represented
84% of total net sales.  During the three  months ended  January 31,  2005,  one
customer in the  Encryption  Products and Services  Segment  represented  94% of
total net sales.  At January 31, 2006, one customer in the  Encryption  Products
and Services Segment  represented 100% of net accounts receivable and at October
31,  2005,  one  customer  in  the  Encryption  Products  and  Services  Segment
represented 100% of net accounts receivable.

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

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

5.   INVENTORIES
     -----------

     Inventories consist of the following as of:
                                                  January 31,        October 31,
                                                     2006               2005
                                                 ------------       ------------
     Component parts                               $133,842            $134,084
     Work-in-process                                  39,787             41,379
     Finished products                               156,394            209,533
                                                 ------------       ------------
                                                   $330,023            $384,996
                                                 ============      =============

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

     We comply with the provisions of SFAS No. 128,  "Earnings Per Share" ("SFAS
No. 128").  In accordance  with SFAS No. 128, basic net income (loss) per common
share  ("Basic  EPS") is computed by dividing net income  (loss) by the weighted
average  number of common  shares  outstanding.  Diluted  net income  (loss) per
common share  ("Diluted  EPS") is computed by dividing net income  (loss) by the
weighted  average number of common shares and dilutive common share  equivalents
and  convertible  securities  then  outstanding.  Diluted  EPS for  all  periods
presented  is the same as Basic EPS,  as the  inclusion  of the effect of common
stock  equivalents then  outstanding  would be  anti-dilutive.  For this reason,
excluded from the calculation of Diluted EPS for the  three-month  periods ended
January  31,  2006 and 2005,  were  options to  purchase  21,117,246  shares and
17,819,546 shares, respectively.




                                       14

<PAGE>

7.   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 three-month  periods ended January 31, 2006
and 2005:
<TABLE>
<CAPTION>
<S>                                                     <C>                     <C>                     <C>
                                                                     Encryption Products
               Segment Data                Flat-Panel Display           and Services                 Total
--------------------------------------    ---------------------     ----------------------    ---------------------

Three Months Ended January 31, 2006:
   Net sales                                $            -            $      195,390            $     195,390
   Net loss                                       (664,756)                 (574,801)              (1,239,557)

Three Months Ended January 31, 2005:
   Net sales                                $            -            $      212,591            $     212,591
   Net loss                                       (517,239)                 (489,255)              (1,006,494)
</TABLE>


8.   DIGITAL INFO SECURITY CO. AGREEMENTS

     In February  2006,  we entered  into a Software  License  and  Distribution
Agreement  (the  "License  Agreement")  to license to Digital Info Security Co.,
Inc.  ("DISC"),  a  privately  held  corporation,   an  encryption  system  that
integrates our encryption  technology  into DISC's secure e-mail  services.  The
system is intended to allow  companies to encrypt all e-mail  transactions  in a
manner  transparent to the individual user. We developed the system jointly with
DISC.  Concurrently  with  entering  into the License  Agreement  with DISC,  we
entered into an Exchange  Agreement  whereby we acquired a minority  interest in
DISC by exchanging  100,000  shares of our common stock for 5,000,000  shares of
DISC's  common  stock.  As of the date of the  agreements,  DISC had  63,233,300
shares of common stock outstanding, including the shares we received.



                                       15

<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, high-brightness,  flat panel CRT displays, and the development, production
and marketing of  multi-functional  encryption products that provide information
security  for   domestic   and   international   users  over   virtually   every
communications media.

     After more than eight years of developing our  high-brightness,  thin, flat
panel CRT display  technology,  we have  achieved  our goal of  producing a flat
panel display  ("Flat Panel CRT") that not only preserves many of the beneficial
characteristics  of a cathode ray tube  ("CRT")  but is thin,  operates at a low
voltage and consumes  less power.  Our Flat Panel CRT display  operates at a low
voltage of 40 volts as compared to voltages up to 10,000 volts for CRT and field
emission  displays.  We  achieved  this  goal  by  creating  a  TFT  (thin  film
technology)  based pixel  matrix  electron  control  system  ("PMECS")  that can
operate with virtually any electron emission system. We have begun to market our
Flat Panel CRT by demonstrating it at flat panel display  exhibitions and we are
presently  involved in discussions  with potential  customers and licensees.  We
have produced models of full color thin Flat Panel CRT displays that are able to
show TV programs  and can be  connected  to a DVD or VCR player to show color or
black and white movies.

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

     The PMECS, which is located on one of the substrates,  is being exclusively
produced for us by an Asian  company  utilizing its mass  production  TFT liquid
crystal display ("LCD") facilities. Our supplier has incorporated the PMECS into
5.5 inch (diagonal) TFT color matrix  structures  with 960 x 234 pixels.  We are
now  producing,  with the  assistance  of Volga Svet Ltd.  ("Volga"),  a Russian
display  company that we have been  working with for more than eight years,  our
CTVD-201  monochrome  and CTVD-202  color  displays  using these  structures  in
combination with our proprietary electron emission technologies.  These emission
technologies, which include carbon nanotubes, both reflective and non-reflective
planar  edge,  and  thin  filaments,  are  suitable  for a  variety  of  display
applications.  In particular, we are incorporating our low voltage and low power
carbon  nanotube  electron  emission  system  into our  displays.  These  carbon



                                       16

<PAGE>

nanotubes  are  extremely  small  carbon  elements,  approximately  10,000 times
thinner than the width of a human hair, that emit electrons  under  controllable
conditions. We are working with one of our sources of nanotubes, a U.S. company,
to  incorporate  its  carbon  nanotubes  into our 5.5 inch  diagonal  color  and
monochrome displays.

     We have  successfully  tested our Flat  Panel CRT  displays  under  various
environmental  conditions.  This  included  subjecting  our  displays  to shock,
vibration,  and operating  temperatures  from  -40(degree)C to 85(degree)C.  Our
displays are capable of operating under both sunlight and nighttime  conditions.
As a result, we believe that our displays can meet performance  requirements for
both outdoor and indoor applications. We have also reduced the operating voltage
requirements  of our displays to further  improve the reliability and extend the
life of our displays.

     There can be no assurance that we can produce  commercial quality displays,
that  we can  produce  such  displays  in  commercial  quantities,  that  we can
successfully  market our displays,  or of the revenue we might derive from sales
of our displays. See "General Risks and Uncertainties" below.

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

     Our line of encryption  products  consists mainly of our  multi-functional,
hardware-based digital encryption systems that provide high-grade voice, fax and
data encryption using either the Citadel(TM) CCX encryption  cryptographic  chip
(which is  manufactured  by the  Harris  Corporation)  or the  Triple DES or AES
algorithm (algorithms available in the public domain which are used by many U.S.
government agencies). In addition, we have developed two software-based security
products - one that uses either the Triple DES or the AES  algorithm  to encrypt
data files and e-mail attachments in both desktop and laptop computers utilizing
Microsoft  Windows  operating  systems and another that is able to encrypt voice
and data  transmitted  between  cellular and satellite phones and among servers,
scanners,  and printers.  We sell our encryption  products directly to end-users
and through dealers and distributors.

     We  have  expanded  our  encryption  product  line  and  currently  have 18
different  products  in our  product  line.  We have  continued  to  direct  our
marketing efforts toward participation in the security  opportunities created by
the U.S.  Department of Homeland  Security,  the U.S.  Defense  Department,  the
Health   Insurance   Portability   and   Accountability   Act   ("HIPAA"),   the
Sarbanes-Oxley  Act,  and  the  Gramm-Leach-Bliley  Act.  We have  entered  into
agreements  with three major U.S.  companies to supply them with our  encryption
equipment,  which is capable of securing fax, voice,  and data  information over
satellite,  digital, and analog communication networks. We are also working with
two companies to secure information between corporate servers and printers,  and
between users and high speed networks.



                                       17

<PAGE>

     In February 2006, we licensed to Digital Info Security Co., Inc.  ("DISC"),
an encryption  system that  integrates  our  encryption  technology  into DISC's
secure e-mail services. The system, our DCS-2200, is intended to allow companies
to encrypt all e-mail  transactions  in a manner  transparent  to the individual
user. We developed the system jointly with DISC. With this product, DISC is able
to differentiate itself from other e-mail compliance  companies.  In furtherance
of the relationship  between the two companies,  we exchanged  100,000 shares of
our common stock for 5,000,000  shares of DISC's common stock. As of the date of
the  agreements,  DISC  had  63,233,300  shares  of  common  stock  outstanding,
including the shares we received.

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

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

     Under our agreement with Boeing, Boeing is the exclusive distributor of our
DCS-1400-D (docker voice encryption device),  USS-900T (satellite fax encryption
device),  USS-900TL  (landline to satellite fax  encryption  device),  USS-900WF
(satellite  and  cellular  fax  encryption  device),   USS-900WFL  (landline  to
satellite  and cellular fax  encryption  device) and  USS-900TC  (satellite  fax
encryption  to  computer)  products.  We have  expanded  our  line  of  products
distributed by Boeing, which now consists of 13 products. These products contain
the brand name of Thuraya and have  operating  controls  in Arabic.  We are also
developing  for Boeing,  a voice  product to operate  over the  Thuraya  network
having a higher level of security.  We are also  developing  and have produced a
prototype  of a product to encrypt the next  generation  voice and data  handset
over the Thuraya  network and are working  with the  supplier of the handsets to
integrate our encryption solution with the new handset.

     In connection with Boeing becoming the exclusive  distributor of certain of
our products, Boeing authorized us to use its name on our website.  Accordingly,
customers  desiring to purchase these  encryption  products can find  authorized



                                       18

<PAGE>

Boeing sales  information on the "Encryption  Products" page of our website.  In
January 2005, Boeing  introduced,  demonstrated  (with our assistance) and began
marketing our encryption  products to more than 100 world-wide  Thuraya  service
providers.

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

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

     Our products provide secure  communications  with many different  satellite
phones,  including the Thuraya 7100/7101  handheld terminal ("HHT"),  Globalstar
GPS-1600 HHT,  Telit  SAT-550/600  HHT,  Globalstar  GPS-2800/2900  fixed phone,
Iridium  9500/9505 HHT,  Inmarsat M4 and Mini "M" HHT units from Thrane & Thrane
and Nera. Through the use of our products,  encrypted  satellite  communications
are available for many Thuraya docking units,  including Teknobil's Next Thuraya
Docker, Thuraya's Fixed Docking Adapter, APsi's FDU-2500 Fixed Docking Unit, and
Sattrans's SAT-OFFICE Fixed Docking Unit and SAT-VDA Hands-Free Car Kit.

     We have also developed  modifications  of our standard  equipment for other
applications.  We have  provided  modifications  of our  hardware  and  software
encryption  solutions to several large  organizations  which are  evaluating our
products in connection  with their security  requirements.  We are supplying our
USS-900AF automatic fax encryption product to a major U.S. defense contractor to
secure its worldwide fax  communication.  We have entered into an agreement with
another major U.S.  company and supplied an initial proof of concept  encryption
solution utilizing another of our products that has been configured to interface
with  that  company's  satellite  global  positioning  system  ("GPS")  and data
communication fleet management network.

     We are supplying  another  major U.S.  company with our USS-900AF to secure
fax  communication  of  personal  medical  records.  We are also  providing  our
DCS-1700 to several U.S.  companies  to encrypt the network  data  communication
links  between  corporate   servers,   scanners,   and  printers   contained  in
multi-functional  products.  The TCP/IP  encryption  provided by our DCS-1700 is
also being  evaluated  by firms that  require  secure data backup to meet HIPAA,
Sarbanes-Oxley, Gramm-Leach-Bliley and other corporate governance requirements.

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

     Our  operations  and  the  achievement  of  our  objectives  in  marketing,
production,  and research and  development  are dependent  upon an adequate cash
flow.  Accordingly,   in  monitoring  our  financial  position  and  results  of
operations,  particular  attention  is  given to cash  and  accounts  receivable




                                       19

<PAGE>

balances and cash flows from operations.  Since our initial public offering, our
cash flows have been  primarily  generated  through the sales of common stock in
private  placements and upon exercise of stock options.  Since 1999 we have also
generated  cash  flows from sales of our  encryption  products.  In an effort to
generate  sales, we have marketed our encryption  products  directly to U.S. and
international  distributors,  dealers and original equipment  manufacturers that
market our encryption products and to end-users.  We have also been working with
several large  organizations to provide them with both our hardware and software
encryption  solutions  for them to  evaluate  whether the  solutions  meet their
security requirements and have begun supplying several major U.S. companies with
our  encryption  products.  We have also begun to market  our flat  panel  video
display products to potential  purchasers for incorporation into their products.
We anticipate  that current cash on hand,  cash generated from  operations,  and
cash  generated  from the exercise of employee  options will be adequate to fund
our operations at least through the end of the first quarter of fiscal 2007.

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

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

     We  believe  the  following  critical  accounting  polices  affect the more
significant  judgments and estimates  used in the  preparation  of our financial
statements.  For  additional  discussion on the  application  of these and other
accounting polices, refer to the financial statements and notes thereto included
in our Annual Report on Form 10-K for the year ended October 31, 2005.

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

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

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

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



                                       20

<PAGE>

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

     Prior to  November  1, 2005,  we  accounted  for stock  options  granted to
employees  and  directors  using  the  intrinsic  value  method   prescribed  in
Accounting  Principles Board ("APB") Opinion No. 25 "Accounting for Stock Issued
to Employees" ("APB Opinion No. 25") and complied with the disclosure  provision
of Statement of Financial  Accounting Standards ("SFAS") No. 123 "Accounting for
Stock  Based  Compensation"  and  SFAS  No.  148  "Accounting  for  Stock  Based
Compensation  - Transition  and  Disclosure,  an amendment of SFAS No. 123".  In
December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No.
123 (revised 2004), "Share-Based Payment" ("SFAS No. 123R"), which addresses the
accounting for  share-based  payment  transactions  in which a company  receives
employee  services in exchange for either equity  instruments  of the company or
liabilities that are based on the fair value of the company's equity instruments
or that may be settled by the issuance of such equity instruments. SFAS No. 123R
eliminates  the ability to account  for  share-based  compensation  transactions
using  the  intrinsic  value  method  and  requires  that such  transactions  be
accounted for using a  fair-value-based  method and recognized as expense in the
statement of operations.

     Effective  November 1, 2005, we adopted SFAS No. 123R. Under the fair value
recognition  provisions  of SFAS  No.  123R,  stock-based  compensation  cost is
estimated  at the  grant  date  based on the  fair  value  of the  award  and is
recognized as expense ratably over the requisite service period of the award. We
recorded  for the  three-month  period  ended  January  31,  2006  approximately
$116,000 of stock-based compensation expense related to stock options granted to
employees  and  directors.  Under the  accounting  method we  followed  prior to
November 1, 2005, we did not record any stock-based compensation expense related
to stock options granted to employees and directors for the  three-month  period
ended  January 31, 2005.  If we had  included the cost of employee  stock option
compensation  in the  financial  statements  for the  three-month  period  ended
January 31, 2005, our net loss would have increased by  approximately  $327,000,
based on the fair value of the stock options granted to employees. See Note 2 to
the Financial Statements for additional information.

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

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

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

     Net Sales and Gross Profit

     Net Sales. Net sales decreased by approximately  $18,000 in the three-month
period  ended  January  31,  2006,  to  approximately  $195,000,  as compared to
approximately  $213,000 in the comparable  prior-year period. All revenue during
both  periods was from  encryption  products and  services.  The decrease in net




                                       21

<PAGE>

sales  was  principally  due to a  decrease  in  unit  sales  of our  encryption
products. Our encryption sales have been limited and are sensitive to individual
large  transactions.  We believe that changes in 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  $8,000 in the three-month  period ended January 31,
2006, to approximately  $140,000,  as compared to approximately  $148,000 in the
comparable  prior-year period. The decrease in gross profit was primarily due to
the decrease in sales. Gross profit as a percent of net sales in the three-month
period ended January 31, 2006 was  approximately  72%. Gross profit as a percent
of revenue in the  three-month  period ended January 31, 2005 was  approximately
70%.  Because of the limited number of transactions  during each of the periods,
gross profit percentages are sensitive to individual transactions.


     Research and Development Expenses

     Research and development expenses increased by approximately $67,000 in the
three-month  period ended  January 31, 2006,  to  approximately  $657,000,  from
approximately  $590,000 in the  comparable  prior-year  period.  The increase in
research  and   development   expenses  was  principally  due  to  stock  option
compensation expense of approximately  $44,000 in the current period compared to
$0 in the prior-year  period and an increase in outside research and development
expense of approximately $27,000. The stock option compensation expense included
in our financial  statements  in the current  period is a result of our adopting
SFAS No. 123R, effective November 1, 2005.

     Selling, General and Administrative Expenses

     Selling,  general and  administrative  expenses  increased by approximately
$163,000 to approximately  $729,000 in the three-month  period ended January 31,
2006,  from  approximately  $566,000 in the comparable  prior-year  period.  The
increase in selling,  general and administrative expenses was principally due to
an increase  in  professional  fees of  approximately  $92,000 and stock  option
compensation expense of approximately  $71,000 in the current period compared to
$0 in the prior-year period.

     Interest Income

     Interest  income  was  approximately  $6,000 in  three-month  period  ended
January 31, 2006, compared to approximately $2,000 in the comparable  prior-year
period. The increase in interest income was the result of an increase in average
funds available for investment and an increase in prevailing interest rates.

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

     From our inception, we have met our liquidity and capital expenditure needs
primarily  through the proceeds from sales of common stock in our initial public
offering, in private placements,  upon exercise of warrants issued in connection
with the private placements and public offering,  and upon the exercise of stock
options.  In  2001  and  2002,  we also  received  payments  under a  technology



                                       22

<PAGE>

development agreement.  In addition,  commencing in the fourth quarter of fiscal
1999, we began to generate cash flows from sales of our encryption products.

     During the three months ended January 31, 2006,  our  operating  activities
used  approximately  $398,000 in cash. This resulted from payments to suppliers,
employees and consultants of approximately $632,000, which was offset by cash of
approximately  $227,000 received from collections of accounts receivable related
to sales of  encryption  products and  approximately  $6,000 of interest  income
received.  In  addition,  we  received  approximately  $711,000 in cash upon the
exercise  of  stock  options,   acquired   approximately  $2,000  of  short-term
investments  consisting of certificates  of deposit and purchased  approximately
$7,000 of equipment.  As a result,  our cash, cash  equivalents,  and short-term
investments  increased  to  approximately  $1,212,000  at January  31, 2006 from
approximately $907,000 at the end of fiscal 2005.

     Accounts receivable  decreased by approximately  $32,000 from approximately
$32,000 at the end of fiscal 2005 to  approximately  $0 at January 31, 2006. The
decrease in accounts receivable is a result of the timing of collections.  Other
receivables were  approximately  $30,000 at both January 31, 2006 and at the end
of fiscal 2005.  Inventories decreased  approximately $55,000 from approximately
$385,000 at October 31, 2005 to  approximately  $330,000 at July 31, 2005,  as a
result of the timing of shipments and production schedules. Prepaid expenses and
other  current  assets  decreased by  approximately  $42,000 from  approximately
$80,000 at the end of fiscal 2005 to approximately  $38,000 at January 31, 2006.
The decrease in prepaid  expenses and other current  assets  resulted  primarily
from  a  prepaid  payment  of  outside  research  and  development   expense  of
approximately  $50,000 at October 31,  2005 which was charged to expense  during
the first  quarter of fiscal  2006.  Accounts  payable and  accrued  liabilities
increased by approximately  $124,000 from  approximately  $348,000 at the end of
fiscal  2005 to  approximately  $472,000 at January  31,  2006,  as a result the
timing of payments.

     As a result of these changes, working capital at January 31, 2006 increased
to approximately  $1,138,000 from approximately  $1,086,000 at the end of fiscal
2005.

     Our working capital includes inventory of approximately $330,000 at January
31, 2006.  Management  has  recorded  our  inventory at the lower of cost or our
current best estimate of net realizable  value.  To date,  sales of our products
have been limited.  Accordingly,  there can be no assurance  that we will not be
required to reduce the selling price of our inventory below our current carrying
value.

     During the  three-month  periods ended January 31, 2006 and 2005, we issued
460,860  shares and 530,945  shares,  respectively,  of common  stock to certain
employees  for  services  rendered,  principally  in lieu of cash  compensation,
pursuant  to the 2003 Share  Plan.  We  recorded  compensation  expense  for the
three-month  periods ended January 31, 2006 and 2005 of  approximately  $376,000
and $449,000,  respectively, for the shares of common stock issued to employees.
In addition,  during the three-month periods ended January 31, 2006 and 2005, we
issued  117,663  shares  and 15,000  shares,  respectively,  of common  stock to
consultants for services  rendered  pursuant to the 2003 Share Plan. We recorded
consulting  expense for the three-month  periods ended January 31, 2006 and 2005
of  approximately  $92,000 and $13,000,  respectively,  for the shares of common
stock issued to consultants.

         The auditor's report on our financial statements as of October 31, 2005
states that the net loss incurred during the year ended October 31, 2005, our
accumulated deficit as of that date, and the other factors described in Note 1
to the Financial Statements included in our Annual Report on Form 10-K for the
year ended October 31, 2005, raise substantial doubt about our ability to
continue as a going concern. The auditor's report on our financial statements
for the year ended October 31, 2004 contained a similar statement. Our financial



                                       23

<PAGE>

statements have been prepared assuming we will continue as a going concern and
do not include any adjustments that might result from the outcome of this
uncertainty

     We believe  that our existing  cash,  short-term  investments  and accounts
receivable,  together with cash flows from expected sales of encryption products
and flat panel CRT displays,  and other potential sources of cash flows, will be
sufficient  to enable us to continue in operation  until at least the end of the
first quarter of fiscal 2007. We anticipate  that,  thereafter,  we will require
additional  funds to  continue  our  marketing,  production,  and  research  and
development  activities,  and we will require  outside funding if cash generated
from operations is insufficient to satisfy our liquidity requirements.  However,
our  projections  of future  cash needs and cash flows may  differ  from  actual
results.  If current cash and cash that may be  generated  from  operations  are
insufficient to satisfy our liquidity requirements,  we may seek to sell debt or
equity  securities  or to obtain a line of credit prior to the first  quarter of
fiscal 2007. The sale of additional  equity securities or convertible debt could
result in dilution to our  stockholders.  We currently have no arrangements with
respect to additional financing. There can be no assurance that we will generate
sufficient  revenues in the future  (through  sales or otherwise) to improve our
liquidity or sustain future operations, that our production capabilities will be
adequate,  that other products will not be produced by other companies that will
render our products obsolete, or that funds will be available to us from debt or
equity financings or that, if available; we will be able to obtain such funds on
favorable  terms and  conditions.  If we cannot obtain such funds if needed,  we
would need to curtail or cease some or all of our operations.

     We are seeking to improve our liquidity  through increased sales or license
of products and technology. In an effort to generate sales, we have marketed our
encryption products directly to U.S. and international distributors, dealers and
original  equipment  manufacturers  that market our  encryption  products and to
end-users. We have been working with several large organizations to provide them
with both our hardware and software  encryption  solutions  for them to evaluate
whether the solutions meet their security  requirements and have begun supplying
several major U.S. companies with our encryption products. We have also begun to
market our flat  panel  video  display  products  to  potential  purchasers  for
incorporation  into their  products.  During the three months ended  January 31,
2006, we have recognized revenue from sales of encryption  products and services
of approximately $195,000.



                                       24

<PAGE>

     The following table presents our expected cash requirements for contractual
obligations outstanding as of January 31, 2006:
<TABLE>
<CAPTION>
<S>                             <C>              <C>              <C>               <C>           <C>
                                        Payments Due by Period
                                        ----------------------
                                 Less
Contractual                      than              1-3              4-5             After
Obligations                     1 year            years            years           5 years          Total
-------------------------    -------------    --------------    -------------     -----------    -------------
 Consulting
 Agreement                   $ 127,500                    -               -               -       $ 127,500
Noncancelable  Operating
Leases                       $ 261,000        $ 498,000                   -               -       $ 759,000
                             -------------    --------------    -------------     -----------    -------------
Total Contractual
Cash Obligations             $ 388,500        $ 498,000                   -               -       $ 886,500
                             =============    ==============    =============     ===========    =============
</TABLE>

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

     In December 2004, the FASB issued SFAS No. 123R. SFAS No. 123R  establishes
standards for the accounting for  transactions in which an entity  exchanges its
equity  instruments for goods or services.  This Statement  focuses primarily on
accounting  for  transactions  in which an entity obtains  employee  services in
share-based payment transactions.  SFAS No. 123R requires that the fair value of
such equity instruments be recognized as an expense in the historical  financial
statements as services are performed.  Prior to SFAS No. 123R,  only certain pro
forma disclosures of fair value were required.  The provisions of this Statement
were effective for the first interim  reporting  period beginning after June 15,
2005. In April 2005, the Securities and Exchange Commission announced a deferral
of the effective date of SFAS No. 123R until the first interim  reporting period
of the first fiscal year beginning after June 15, 2005. Accordingly,  we adopted
SFAS No. 123R  commencing with the quarter ending January 31, 2006. The adoption
of SFAS  No.  123R  is  expected  to have a  material  effect  on our  financial
statements.

     In May 2005,  the FASB issued SFAS No. 154,  "Accounting  Changes and Error
Corrections"  ("SFAS 154").  SFAS 154 replaces the Accounting  Principles  Board
Opinion  No. 20,  "Accounting  Changes"  and SFAS No. 3,  "Reporting  Accounting
Changes in Interim Financial  Statements," to require retrospective  application
to prior periods' financial statements of changes in accounting  principle.  The
provisions of SFAS 154 are effective for accounting changes made in fiscal years
beginning  after  December 15, 2005. The adoption of SFAS 154 is not expected to
have a material effect on our financial statements.

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

     Information  included  in this  Quarterly  Report on Form 10-Q may  contain
forward-looking   statements  within  the  meaning  of  the  Private  Securities
Litigation Reform Act of 1995.  Forward-looking statements are not statements of
historical facts, but rather reflect our current expectations  concerning future
events and results. We generally use the words "believes," "expects," "intends,"



                                       25

<PAGE>

"plans,"  "anticipates,"  "likely,"  "will" and similar  expressions to identify
forward-looking  statements.  Such forward-looking  statements,  including those
concerning our  expectations,  involve risks,  uncertainties  and other factors,
some of which are  beyond  our  control,  which may  cause our  actual  results,
performance or achievements,  or industry  results,  to be materially  different
from any future results,  performance,  or achievements  expressed or implied by
such forward-looking statements. These risks, uncertainties and factors include,
but  are not  limited  to,  those  factors  set  forth  in  "General  Risks  and
Uncertainties"  below and Note 1 to Condensed Financial  Statements.  You should
read this  discussion and analysis along with our Annual Report on Form 10-K for
the year ended October 31, 2004 and the condensed financial  statements included
in this  Report.  We undertake no  obligation  to publicly  update or revise any
forward-looking  statements,  whether  as a result  of new  information,  future
events  or   otherwise.   You  are   cautioned   not  to  unduly  rely  on  such
forward-looking  statements when  evaluating the  information  presented in this
Report.

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

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

o    We have  experienced  significant  net losses and negative  cash flows from
     operations and they may continue.

     We have had net losses and negative cash flows from operations in each year
since our inception  and in the three months ended January 31, 2006,  and we may
continue to incur substantial  losses and experience  substantial  negative cash
flows from  operations.  We have  incurred  substantial  costs and  expenses  in
developing our encryption and flat panel display technologies and in our efforts
to produce  commercially  marketable products  incorporating our technology.  We
have had limited  sales of products to support  our  operations  from  inception
through  January 31, 2006. We have set forth below our net losses,  research and
development expenses and net cash used in operations for the three-month periods
ended January 31, 2006 and 2005, and for the fiscal years ended October 31, 2005
and 2004:
<TABLE>
<CAPTION>
<S>                                                     <C>             <C>                <C>            <C>
                                                             (Unaudited)
                                                         Three Months Ended                 Fiscal Years Ended
                                                             January 31,                        October 31,
                                                   -----------------------------       ---------------------------
                                                        2006            2005                2005           2004
                                                        ----            ----                ----           ----
Net loss                                            $ 1,239,557     $ 1,006,494        $ 4,451,257     $ 3,360,655
Research and development expenses                   $    656,588    $    589,953       $ 2,266,911     $ 2,164,427
Net cash used in operations                         $    398,356    $    465,047       $ 1,720,332     $ 1,205,122
</TABLE>

o    We may need additional  funding in the future which may not be available on
     acceptable  terms  and,  if  available,  may  result  in  dilution  to  our
     stockholders, and our auditors have issued a "going concern" audit opinion.

     We anticipate  that, if cash generated from  operations is  insufficient to
satisfy our  requirements,  we will require  additional  funding to continue our
research and  development  activities  and market our  products.  The  auditor's



                                       26

<PAGE>

report on our  financial  statements  as of October 31, 2005 states that the net
loss incurred during the year ended October 31, 2005, our accumulated deficit as
of that  date,  and  the  other  factors  described  in Note 1 to the  Financial
Statements included in our Annual Report on Form 10-K for the year ended October
31,  2005,  raise  substantial  doubt  about our  ability to continue as a going
concern.  The auditor's  report on our financial  statements for the years ended
October  31,  2004  and  2003  contained  a  similar  statement.  Our  financial
statements  have been prepared  assuming we will continue as a going concern and
do not  include  any  adjustments  that might  result  from the  outcome of this
uncertainty.

     We believe that our existing  cash and accounts  receivable,  together with
cash flows from expected sales of encryption  products and 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 first  quarter  of fiscal
2007.  We  anticipate  that,  thereafter,  we will require  additional  funds to
continue marketing,  production, and research and development activities, and we
will require  outside  funding if cash generated from operations is insufficient
to satisfy our liquidity  requirements.  However, our projections of future cash
needs and cash flows may differ from actual  results.  If current  cash and cash
that may be generated from operations are  insufficient to satisfy our liquidity
requirements,  we may seek to sell debt or equity securities or to obtain a line
of credit  prior to the first  quarter of fiscal  2007.  The sale of  additional
equity   securities  or  convertible  debt  could  result  in  dilution  to  our
stockholders. We can give no assurance that we will be able to generate adequate
funds from  operations,  that funds will be  available to us from debt or equity
financings  or that,  if  available;  we will be able to  obtain  such  funds on
favorable terms and conditions.  We currently have no arrangements  with respect
to additional financing. If we cannot obtain such funds if needed, we would need
to curtail or cease some or all of our operations.

o    We may not generate  sufficient  revenues to support our  operations in the
     future or to generate profits.

     We are engaged in two principal operations: (i) the development, production
and  marketing  of thin  high-brightness  Flat Panel CRT  displays  and (ii) the
development,  production and marketing of  multi-functional  encryption products
that provide  information  security for  domestic and  international  users over
virtually every  communications  media. We have only recently started to produce
color and monochrome versions of our high-brightness Flat Panel CRT displays and
our  encryption  products  are  only  in  their  initial  stages  of  commercial
production.  Our investments in research and development are  considerable.  Our
ability to generate  sufficient revenues to support our operations in the future
or to generate  profits  will depend upon  numerous  factors,  many of which are
beyond our control, including:

     o    our ability to  successfully  market our line of thin  high-brightness
          Flat Panel CRT displays and encryption products;
     o    the  capability  of Volga to produce  thin  high-brightness  color and
          monochrome Flat Panel CRT displays and supply them to us;
     o    our  ability to jointly  develop  with Volga and  produce a color Flat
          Panel CRT display with various electron emission systems;
     o    our production capabilities and those of our suppliers as required for
          the production of our encryption products;



                                       27

<PAGE>

     o    long-term performance of our products;
     o    the capability of our dealers and  distributors to adequately  service
          our encryption products;
     o    our ability to maintain an  acceptable  pricing level to end-users for
          both our encryption and display products;
     o    the ability of suppliers to meet our requirements and schedule;
     o    our  ability  to   successfully   develop  other  new  products  under
          development;
     o    rapidly changing consumer preferences;
     o    the possible development of competitive products that could render our
          products obsolete or unmarketable; and
     o    our future  negotiations with Volga with respect to payments and other
          arrangements under our Joint Cooperation Agreement with Volga.

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

o    We are dependent  upon a few key  executives and the loss of their services
     could adversely affect us.

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

o    The very  competitive  markets for our  encryption  products and flat panel
     display  technology  could  have  a  harmful  effect  on our  business  and
     operating results.

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

o    Our common  stock is subject to the SEC's  penny stock rules which may make
     our shares more difficult to sell.

     Our stock fits the  definition  of a penny stock.  The SEC rules  regarding
penny  stocks may have the effect of  reducing  trading  activity  in our common
stock and making it more  difficult for  investors to sell.  The rules require a



                                       28

<PAGE>

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

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

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

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

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

     There was no change in our internal control over financial reporting during
the  quarter  ended  January  31,  2006  that  has  materially  affected,  or is
reasonably  likely to materially  affect,  our internal  control over  financial
reporting.







                                       29

<PAGE>

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

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

          10.1          Amendment No. 2 to the CopyTele, Inc. 2003 Share
                        Incentive Plan.

          10.2          Amendment No. 3 to the CopyTele, Inc. 2003 Share
                        Incentive Plan.

          31.1          Certification of Chief Executive Officer, pursuant to
                        Section 302 of the Sarbanes-Oxley Act of 2002, dated
                        March 10, 2006.

          31.2          Certification of Chief Financial Officer, pursuant to
                        Section 302 of the Sarbanes-Oxley Act of 2002, dated
                        March 10, 2006.

          32.1          Statement of Chief Executive Officer, pursuant to
                        Section 1350 of Title 18 of the United States Code,
                        dated March 10, 2006.

          32.2          Statement of Chief Financial Officer, pursuant to
                        Section 1350 of Title 18 of the United States Code,
                        dated March 10, 2006.


                                   SIGNATURES
                                   ----------

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

                                                 COPYTELE, INC.


                                                 By: /s/ Denis A. Krusos
                                                    ----------------------------
                                                 Denis A. Krusos
                                                 Chairman of the Board and
                                                 Chief Executive Officer
March 10, 2006                                   (Principal Executive Officer)



                                                 By: /s/ Henry P. Herms
                                                    ----------------------------
                                                 Henry P. Herms
                                                 Vice President - Finance and
                                                 Chief Financial Officer
                                                 (Principal Financial and
March 10, 2006                                   Accounting Officer)



                                       30