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, 2005

                         Commission file number 0-11254


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


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


900 Walt Whitman Road
    Melville, NY                                                11747
-------------------------------------------------------------------------------
(Address of principal executive offices)                      (Zip Code)


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


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

                        Yes   X           No
                            -----           -----

Indicate  by check mark  whether  the  registrant  is an  accelerated  filer (as
defined in Rule 12b-2 of the Exchange Act).

                        Yes   X          No
                            -----           -----


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, 2005, the registrant had outstanding 87,069,188 shares of Common
Stock, par value $.01 per share, which is the registrant's only class of common
stock.



<PAGE>

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

<TABLE>
<CAPTION>

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements.
<S>                  <C> <C>                                                         <C>
          Condensed Balance Sheets as of January 31, 2005 (Unaudited) and
             October 31, 2004                                                        3

         Condensed Statements of Operations (Unaudited) for the three months
            ended January 31, 2005 and 2004                                          4

          Condensed Statements of Cash Flows (Unaudited) for the three months
            ended January 31, 2005 and 2004                                          5

         Notes to Condensed Financial Statements (Unaudited)                         6 - 11

Item 2.  Management's Discussion and Analysis of Financial Condition and
             Results of Operations.                                                  12 - 24

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.                 24

Item 4.  Controls and Procedures.                                                    25 - 26


PART II.  OTHER INFORMATION

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.                27

Item 6.   Exhibits.                                                                  27

          SIGNATURES                                                                 28

</TABLE>


                                       2
<PAGE>

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

Item 1.  Financial Statements.
         ---------------------
<TABLE>
<CAPTION>

                                 COPYTELE, INC.
                            CONDENSED BALANCE SHEETS


                                                                                             (Unaudited)
                                                                                          ------------------
                                                                                             January 31,           October 31,
                                         ASSETS                                                 2005                  2004*
                                         ------                                         ------------------    ------------------
<S>                                                                                         <C>                   <C>
CURRENT ASSETS:
   Cash and cash equivalents                                                                $  1,011,954          $  1,002,777
   Accounts receivable, net of allowance for doubtful accounts of
      $149,455                                                                                   204,085                63,460
   Other receivables, net of allowance for doubtful accounts of $108,793                          84,308                84,308
   Inventories                                                                                   977,377               999,429
   Prepaid expenses and other current assets                                                      27,047               122,482
                                                                                        ------------------    ------------------
                        Total current assets                                                   2,304,771             2,272,456

PROPERTY AND EQUIPMENT, net                                                                       36,710                38,085

OTHER ASSETS                                                                                       5,509                 5,509
                                                                                        ------------------    ------------------
                                                                                            $  2,346,990          $  2,316,050
                                                                                        ==================    ==================

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

CURRENT LIABILITIES:
   Accounts payable                                                                         $    398,295          $    402,640
   Accrued liabilities                                                                            24,126                40,480
                                                                                        ------------------    ------------------
                       Total current liabilities                                                 422,421               443,120

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; 86,885,698 and 85,523,253 shares issued
      and outstanding, respectively                                                              868,857               855,233
   Additional paid-in capital                                                                 70,518,567            69,474,058
   Accumulated deficit                                                                       (69,462,855)          (68,456,361)
                                                                                        ------------------    ------------------
                                                                                               1,924,569             1,872,930
                                                                                        ------------------    ------------------
                                                                                            $  2,346,990         $   2,316,050
                                                                                        ==================    ==================
</TABLE>



* Derived from audited balance sheet.
The accompanying notes are an integral part of these condensed balance sheets.



                                       3
<PAGE>

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

<TABLE>
<CAPTION>

                                                                                                For the Three Months Ended
                                                                                                        January 31,
                                                                                        ----------------------------------------
                                                                                                2005                  2004
                                                                                        ------------------    ------------------
<S>                                                                                         <C>                   <C>
REVENUE                                                                                     $    212,591          $     39,000

COST OF REVENUE                                                                                   64,573                14,599
                                                                                        ------------------    ------------------

         Gross profit                                                                            148,018                24,401
                                                                                        ------------------    ------------------

OPERATING EXPENSES
         Research and development expenses                                                       589,953               484,543
         Selling, general and administrative expenses                                            566,271               350,161
                                                                                        ------------------    ------------------
                  Total operating expenses                                                     1,156,224               834,704
                                                                                        ------------------    ------------------

LOSS FROM OPERATIONS                                                                          (1,008,206)             (810,303)

INTEREST INCOME                                                                                    1,712                   949
                                                                                        ------------------    ------------------

NET LOSS                                                                                    $ (1,006,494)         $   (809,354)
                                                                                        ==================    ==================

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                                                                    86,163,574            80,615,351
                                                                                        ==================    ==================

</TABLE>


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



                                       4
<PAGE>

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

<TABLE>
<CAPTION>

                                                                                                 For the Three Months Ended
                                                                                                        January 31,
                                                                                        ----------------------------------------
                                                                                                 2005                  2004
                                                                                        ------------------    ------------------
<S>                                                                                         <C>                   <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Payments to suppliers, employees and  consultants                                        $   (538,725)         $   (332,301)
   Cash received from customers                                                                   71,966                67,650
   Interest received                                                                               1,712                   949
                                                                                        ------------------    ------------------
           Net cash used in operating activities                                                (465,047)            (263,702)
                                                                                        ------------------    ------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Payments for purchases of property and equipment                                               (2,256)               (2,499)
                                                                                        ------------------    ------------------
           Net cash used in investing activities                                                  (2,256)               (2,499)
                                                                                        ------------------    ------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from exercise of stock options                                                       476,480               110,845
                                                                                        ------------------    ------------------
           Net cash provided by financing activities                                             476,480               110,845
                                                                                        ------------------    ------------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                               9,177              (155,356)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                               1,002,777             1,023,531
                                                                                        ------------------    ------------------

CASH AND CASH EQUIVALENTS AT  END OF PERIOD                                                 $  1,011,954          $    868,175
                                                                                        ==================    ==================

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

   Net loss                                                                                 $ (1,006,494)         $   (809,354)
   Stock option compensation to consultants                                                        5,009                     -
   Stock awards granted to employees and consultants pursuant to stock
      incentive plans                                                                            461,272               457,638
   Restricted stock issued for services rendered                                                 115,372                     -
   Depreciation and amortization                                                                   3,631                 6,158
   Change in operating assets and liabilities:
      Accounts receivable and other receivables                                                 (140,625)               28,650
      Inventories                                                                                 22,052                 8,599
      Prepaid expenses and other current assets                                                   95,435                 3,052
      Other assets                                                                                     -                   500
      Accounts payable and  accrued liabilities                                                  (20,699)               41,055
                                                                                        -----------------     ------------------
           Net cash used in operating activities                                            $   (465,047)         $   (263,702)
                                                                                        =================     ==================

</TABLE>


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



                                       5
<PAGE>

                                 COPYTELE, INC.
                                 --------------
                     NOTES TO CONDENSED FINANCIAL STATEMENTS
                     ---------------------------------------
                                   (UNAUDITED)
                                   -----------

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

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

     CopyTele,  Inc.  was  incorporated  on  November  5,  1982.  Our  principal
operations are the  development,  production  and marketing of  multi-functional
hardware  and  software  based  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 video 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,  2005 and 2004.  In  management's  opinion,  all  adjustments
(consisting only of normal recurring adjustments considered necessary for a fair
presentation  of the results of operations  for such periods) have been included
herein.

     The results of operations for interim periods may not  necessarily  reflect
the  results of  operations  for a full year.  Reference  is made to the audited
financial  statements  and notes  thereto  included in our Annual Report on Form
10-K for the fiscal year ended October 31, 2004, for more extensive  disclosures
than contained in these condensed financial statements.

Products
--------

     We  currently  have 17  different  products  in our line of  hardware-based
encryption  solutions.  Our encryption products are  multi-functional,  hardware
based digital  encryption  systems that provide  high-grade  voice, fax and data
encryption using either the Citadel(TM) CCX encryption cryptographic chip (which
is  manufactured  by the Harris  Corporation) or the Triple DES or AES algorithm
(algorithms  available  in the  public  domain  which  are  used  by  many  U.S.
government agencies). In addition, we have developed two software-based security
products,  one of which  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 the  other of which  can
encrypt voice and data in cellular and satellite phones, scanners, and printers.
We sell our encryption  products  directly to end-users and through  dealers and
distributors.

     We are also  continuing our research and  development  work on our electron
emission  display ("Flat CRT")  technology.  We have been  developing a Flat CRT



                                       6
<PAGE>

display based on our thin film  technology  ("TFT") and have produced  prototype
Flat CRT displays containing TFT color matrix structures.

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

     From our inception we had met our liquidity and capital  expenditure  needs
primarily  through the proceeds from sales of common stock in our initial public
offering, in private placements,  upon exercise of warrants issued in connection
with the private placements and public offering,  and upon the exercise of stock
options.  Commencing in the fourth  quarter of fiscal 1999, we began to generate
cash flows from sales of our encryption products.

     During the three months ended January 31, 2005,  our  operating  activities
used  approximately  $465,000 in cash. This resulted from payments to suppliers,
employees and consultants of approximately $539,000, which was offset by cash of
approximately  $72,000 received from collections of accounts  receivable related
to sales of  encryption  products and  approximately  $2,000 of interest  income
received.  In  addition,  we  received  approximately  $476,000 in cash upon the
exercise of stock options and purchased  approximately $2,000 of equipment. As a
result,  our cash  and  cash  equivalents  at  January  31,  2005  increased  to
approximately  $1,012,000  from  approximately  $1,003,000  at the end of fiscal
2004.

     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
2006.  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 2006.  The sale of
additional equity securities or convertible debt could result in dilution to our
stockholders.  We currently  have no  arrangements  with  respect to  additional
financing.  There can be no assurance that we will generate  sufficient revenues
in the future  (through  sales or otherwise) to improve our liquidity or sustain
future operations, that our production capabilities will be adequate, that other
products will not be produced by other  companies  that will render our products
obsolete,  or that other sources of funding would be  available,  if needed,  on
favorable terms or at all.

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



                                       7
<PAGE>

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

     Financial  Accounting  Standards  Board  ("FASB")  Statement  of  Financial
Accounting   Standards   ("SFAS")   No.   148,   "Accounting   for   Stock-Based
Compensation-Transition  and Disclosure" ("SFAS No. 148"),  addresses  financial
accounting  and  reporting  for  recording  expenses for the fair value of stock
options.  SFAS No. 148 requires  prominent  disclosures in financial  statements
about the effects of stock-based  compensation and provides  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")  encourages  but does not require  companies to
record  compensation cost for stock-based  employee  compensation  plans at fair
value.  We account for stock  options  granted to employees  using the intrinsic
value method  prescribed in Accounting  Principles  Board ("APB") Opinion No. 25
"Accounting  for Stock Issued to  Employees"  ("APB  Opinion No. 25") and comply
with the  disclosure  provisions of SFAS No. 123 and SFAS No. 148.  Compensation
cost for stock  options  issued to  employees  and  directors is measured as the
excess,  if any,  of the quoted  market  price of our stock at the date of grant
over the  amount an  employee  or  director  must pay to acquire  the stock.  In
accordance  with APB Opinion  No. 25, we have not  recognized  any  compensation
cost, as all option grants to employees and directors have been made at the fair
market value of our stock on the date of grant.

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


                                                    For the Three Months Ended
                                                             January 31,
                                                   ----------------------------
                                                       2005           2004
                                                   ------------    ------------
Net loss as reported                               $ (1,006,494)   $  (809,354)
Add: Total stock-based employee
   compensation expense, determined under
   fair value based method, for all                    (326,616)      (184,123)
   awards, net of related tax effect               -------------   ------------
Net loss as adjusted                               $ (1,333,110)   $  (993,477)
                                                   =============   ============

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

     The fair value of each option grant is estimated at the date of grant using
the   Black-Scholes   option  pricing  model.  The  following   weighted-average
assumptions  were used for grants during the three months ended January 31, 2005
and 2004: risk free interest rates of 2.75% and 2.02%;  expected dividend yields
of 0% for both  periods;  expected  lives of 2.50  years  and  2.37  years;  and
expected  stock price  volatility  of 122% and 128%.  The weighted  average fair
value of options  granted  under SFAS No. 123 for the three months ended January
31, 2005 and 2004 was $0.50 and $0.30.



<PAGE>

     During the three-month  periods ended January 31, 2005 and 2004, we granted
to employees  and  consultants  options to purchase  640,000  shares and 610,000
shares,  respectively,  pursuant to the CopyTele, Inc. 2003 Share Incentive Plan
(the "2003 Share Plan").  During the three-month  periods ended January 31, 2005
and  2004,  stock  options  to  purchase  637,500  shares  and  219,500  shares,
respectively,  were exercised, with aggregate proceeds of approximately $476,000
and $111,000, respectively.

     We account for options granted to non-employee  consultants  using the fair
value method  required by SFAS No. 123.  Compensation  expense for  consultants,
recognized   during  the   three-month   period  ended  January  31,  2005,  was
approximately $5,000. We recognized no such compensation expense for consultants
during the three-month period ended January 31, 2004. Such compensation  expense
was  recognized in accordance  with Emerging  Issues Task Force Issue No. 00-08,
"Accounting by a Grantee for an Equity  Instrument to be Received in Conjunction
with  Providing  Goods  or  Services"  and  No.  96-18  "Accounting  for  Equity
Instruments  That Are  Issued  to Other  Than  Employees  for  Acquiring,  or in
Conjunction with Selling, Goods or Services," and is included in either research
and development  expenses or selling,  general and administrative  expenses,  as
applicable, in the accompanying statements of operations.

     During the  three-month  periods ended January 31, 2005 and 2004, we issued
530,945  shares and 694,630  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  costs  for the
three-month  periods ended January 31, 2005 and 2004 of  approximately  $449,000
and $331,000,  respectively, for the shares of common stock issued to employees.
In addition,  during the three-month periods ended January 31, 2005 and 2004, we
issued  15,000  shares and  267,330  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, 2005 and 2004,
of approximately  $13,000 and $127,000,  respectively,  for the shares of common
stock issued to consultants.

     As of January 31, 2005, 11,420,184 shares and 25,773 shares,  respectively,
were  available  for future  grants under the 2003 Share Plan and the  CopyTele,
Inc. 2000 Share Incentive Plan.

     During the  three-month  period ended January 31, 2005,  we issued  179,000
shares of restricted  common stock to our outside legal counsel in  satisfaction
of  outstanding  bills for  services  rendered  in the  amount of  approximately
$115,000.

     In  December  2004,  the FASB  issued  SFAS  No.  123(R),  "Accounting  for
Stock-Based  Compensation"  ("SFAS No.  123(R)").  SFAS No.  123(R)  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. 123(R) 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. 123(R), only
certain pro forma  disclosures  of fair value were  required.  The provisions of
this Statement are effective for the first interim  reporting period that begins
after June 15, 2005. Accordingly,  we will adopt SFAS No. 123(R) commencing with



                                        9
<PAGE>

the quarter ending  October 31, 2005. We are currently  evaluating the impact of
SFAS No. 123(R).  The adoption of SFAS No. 123(R) is expected to have a material
effect on our financial statements.

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.  At January 31, 2005, one customer in the
Encryption  Products  and  Services  Segment  represented  98% of  net  accounts
receivable.  At October 31, 2004, two customers in the  Encryption  Products and
Services  Segment  represented  48%  and  44%,  respectively,  of  net  accounts
receivable.  During the three months ended January 31, 2005, one customer in the
Encryption  Products and Services Segment represented 94% of total net revenues.
During the three months ended January 31, 2004,  two customers in the Encryption
Products and Services Segment  represented 67% and 33%,  respectively,  of total
net revenues.

4.       OTHER RECEIVABLES
         -----------------

     In May and June 2002, we received  restricted  common stock from a customer
in connection with an outstanding accounts receivable of approximately  $323,000
and anticipated  settling this accounts  receivable through the ultimate sale of
the  common  stock.  This  customer  has agreed  with us to cure any  deficiency
between the  proceeds  from the sale of the common  stock and the balance of the
outstanding   accounts  receivable.   In  addition,   the  customer's  principal
shareholder  has personally  agreed to cure any deficiency in the event that the
customer defaults on its agreement to cure such deficiency,  up to $292,000.  As
of January 31, 2005, we hold 240,000 shares of such common stock,  subject to no
restrictions,  with a fair value of approximately $60,000, and we intend to sell
the  remaining  portion  of such  stock  during  the next  twelve  months.  This
receivable is stated at management's estimate of its net realizable value.

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

Inventories consist of the following as of:
                                                   January 31,     October 31,
                                                      2005             2004
                                                   ------------    ------------
             Component parts                       $    296,144    $   304,862
             Work-in-process                             97,600        114,075
             Finished products                          583,633        580,492
                                                   ------------    ------------
                                                   $    977,377    $   999,429
                                                   ============    ============


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



                                       10
<PAGE>

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,  2005 and 2004,  were  options to  purchase  17,819,546  shares and
15,853,546 shares, respectively.

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, 2005
and 2004:

<TABLE>
<CAPTION>

                                                                         Encryption Products
               Segment Data                     Flat-Panel Display           and Services                 Total
-------------------------------------------    ---------------------     ----------------------    ---------------------
<S>                                              <C>                       <C>                       <C>
Three Months Ended January 31, 2005:
   Revenue                                       $            -            $      212,591            $     212,591
   Net loss                                            (517,239)                 (489,255)              (1,006,494)

Three Months Ended January 31, 2004:
   Revenue                                       $            -            $       39,000            $      39,000
   Net loss                                            (438,068)                 (371,286)                (809,354)

</TABLE>

8.       INVESTIGATION AND RECOVERY EFFORTS REGARDING MISAPPROPRIATED FUNDS
         ------------------------------------------------------------------

     During  fiscal 2004 and the first month of fiscal 2005,  a former  employee
embezzled approximately $185,000 in cash, of which approximately $10,000 relates
to the first quarter of fiscal 2005. During the first quarter of fiscal 2005, we
recovered  approximately  $110,000 of such loss through insurance  proceeds.  Of
such recovery,  $10,000 was applied toward the first quarter of fiscal 2005, and
the remaining $100,000 was applied toward fiscal 2004. Accordingly,  we recorded
a charge to  expense in fiscal  2004 of  approximately  $75,000  related to this
matter,  but no charge in the first  quarter of fiscal 2005.  During fiscal 2003
and  2002  the  former  employee  committed  additional   fraudulent  activities
aggregating  approximately  $25,000,  which were  expensed  during  such  fiscal
periods. We will seek additional  recoveries from other parties which, if we are
successful in recovering  additional amounts,  will be recorded as recoveries in
the period received.



                                       11
<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
multi-functional  hardware and software based  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 video displays ("Flat CRT").

     We  currently  have 17  different  products  in our line of  hardware-based
encryption  solutions.  Our encryption products are  multi-functional,  hardware
based digital  encryption  systems that provide  high-grade  voice, fax and data
encryption using either the Citadel(TM) CCX encryption cryptographic chip (which
is  manufactured  by the Harris  Corporation) or the Triple DES or AES algorithm
(algorithms  available  in the  public  domain  which  are  used  by  many  U.S.
government agencies). In addition, we have developed two software-based security
products,  one of which  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 the  other of which  can
encrypt voice and data in cellular and satellite phones, scanners, and printers.
We sell our encryption  products  directly to end-users and through  dealers and
distributors.

     We have  developed  modifications  of our  standard  products  for specific
applications.  We have developed and are producing several products for use with
the satellite  communications  network of Thuraya  Satellite  Telecommunications
Company  ("Thuraya"),   a  network  built  by  Boeing  Satellite  Systems,  Inc.
("Boeing") that provides  communication in Europe,  Africa,  Russia,  the Middle
East and Asia.  Our products can encrypt  voice  communication,  using a compact
encrypted module attached to the Thuraya handset, and automatically  encrypt fax
communications  over the Thuraya  network.  Our products thus enable the Thuraya
network to provide  encrypted  communications  between  satellite  phones,  from
satellite  phones  to  desk-based   phones,   or  between   desk-based   phones.
Additionally, we have developed three products to provide satellite and cellular
fax encryption between fax machines and between computers and fax machines.

     In April  2004,  we entered  into an  agreement  with Boeing to provide our
encryption  products for use over the Thuraya  network.  Under a September  2004
modification to the agreement,  Boeing is the exclusive  distributor of eight of
our products.

     In connection with Boeing becoming the exclusive distributor of some of our
products,  Boeing  authorized  us to use its name on our  website.  Accordingly,
customers  desiring to purchase such products can find  authorized  Boeing sales
information on the "Encryption  Products" page of our website.  In January 2005,
Boeing introduced,  demonstrated and began marketing our encryption  products to
more  than  100  Thuraya  service  providers.   We  assisted  Boeing  with  such
demonstrations.  The products  introduced  included two new encryption  products
that we are selling to Boeing, the Thuraya DCS-1400 for voice encryption and the
Thuraya  USS-900T for fax encryption.  These products  contain the brand name of
Thuraya and their operating controls are in the Arabic language.



                                       12
<PAGE>

     We have also  developed  a method  for  encrypting  Short  Message  Service
("SMS"), an inexpensive text message communication protocol that is used in many
cellular and  satellite  phones.  We will utilize  this  encryption  solution in
conjunction with the Thuraya handsets.

     Our wireless encryption  products are providing 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
Teknobli's Next Thuraya Docker,  Thuraya Fixed Docking Adapter,  APsi's FDU-2500
Fixed  Docking  Unit,  Sattrans'  SAT-OFFICE  Fixed  Docking  Unit  and  SAT-VDA
Hands-Free Car Kit.

     We also have 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 to a
major U.S. defense contractor our USS-900AF  automatic fax encryption product 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 have supplied  another major U.S. company our USS-900AF and our DCS-1700
products.  The  DCS-1700  secures  data links  between  scanners and printers in
multi-functional  products.  That  company is in the process of  evaluating  the
market  potential for these products for the health care  industry.  We are also
marketing   the  DCS-1700  to  other  major   companies  to  meet  the  security
requirements of their products.

     We are also  continuing our research and  development  work on our Flat CRT
electron emission display  technology.  We have provided our model CTVD-101 Flat
CRT display to a potential customer for evaluation of the display's  performance
in a product  which must  operate over a wide  ambient  temperature  range in an
outdoor  environment.  After  successfully  testing our  display,  the  customer
ordered a seed quantity of modules  containing  our display,  to replace  liquid
crystal  display ("LCD")  modules in our customer's  product.  We have initially
supplied the customer with model CTVD-101  displays.  To be able to supply large
quantities of displays to this customer and other potential customers,  however,
we are planning to produce our CTVD-201 and CTVD-202  Flat CRT  displays,  which
are based on our more  current  thin film  technology  ("TFT"),  rather than the
CTVD-101.  We are planning to replace the CTVD-101 displays  previously provided
to our customer with CTVD-201 displays for our customer's evaluation.

     We entered into an agreement,  in June 2004,  with an Asian company,  which
currently mass produces TFT LCDs, to jointly produce  prototypes of two modified
TFT color matrix  pixel  structures  for our Flat CRT display  based on our high
brightness technology. The two color matrix structures,  which are components of
our  displays,  are a 7-inch  (diagonal)  with 1440 x 234  pixels and a 5.5 inch



                                       13
<PAGE>

(diagonal) with 960 x 234 pixels.  As part of our TFT color matrix design,  each
pixel contains  memory to achieve high brightness at video rates. We have funded
the development of these prototypes,  and may enter into a further agreement for
commercial  production of the  structures or the complete  color  displays.  The
company has agreed to produce such structures only for us.

     We have  developed,  with the  assistance of Volga Svet Ltd.  ("Volga"),  a
Russian  display  company  that we have been  working with for over seven years,
prototypes of our Model CTDV-201 and Model CTDV-202,  which contain the modified
TFT color  matrix  structures  we received  under our  agreement  with the Asian
company.  The  prototype  Model  CTDV-201  display  is  a  5.5  inch  (diagonal)
monochrome  display with 320 x 234 pixels and the prototype  Model CTDV-202 is a
5.5 inch (diagonal) color display with 960 x 234 pixels.  We are also completing
the assembly of a 7.0 inch  (diagonal)  prototype  color display  containing the
modified TFT color matrix structures with 1,440 x 234 pixels.  The Asian company
has recently supplied  additional  quantities of the TFT color matrix structures
for the CTVD-201 and CTVD-202.  We are utilizing these additional quantities for
a  reliability  evaluation  of our  displays.  Also,  we have modified the color
matrix structures to incorporate chip on glass ("COG")  technology which will be
utilized  for  production  of  these  displays.   As  part  of  our  reliability
evaluation, we are using both the CTVD-201 and CTDV-202 color Flat CRT displays.
Upon the completion of our evaluation of the  structures,  we believe that Volga
will be able to supply a limited production capability.  We anticipate utilizing
either the Asian company or other TFT LCD  production  companies to mass produce
the display  for  potential  users.  However,  we have not yet entered  into any
agreement for such  production,  and there can be no assurance that we can do so
on commercially acceptable terms or at all.

     To activate the red, green and blue phosphors contained in the modified TFT
color matrix pixel structure in our displays,  we are using our current electron
emission  technology  and are  developing a new electron  emission  system using
nanotube  technology in  cooperation  with a U.S.  company.  The new  technology
consists of a unique array of low voltage  controllable  nanotubes  for electron
emission.  These  nanotubes are extremely small carbon  elements,  approximately
2,500 times thinner than the width of a human hair,  that emit  electrons  under
controllable conditions.  In cooperation with that company, we are continuing to
produce  experimental   nanotube  design   configurations  to  meet  our  design
requirements.  We have  the  exclusive  right  to use  this  company's  nanotube
technology for display applications.

     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.

     Our  operations  and  the  achievement  of  our  objectives  in  marketing,
production,  and research and  development  are dependent  upon an adequate cash
flow.  Accordingly,   in  monitoring  our  financial  position  and  results  of
operations,  particular  attention  is  given to cash  and  accounts  receivable
balances and cash flows from operations.  Since our initial public offering, our
cash flows have been  primarily  generated  through the sales of common stock in
private  placements  and upon exercise of stock  options.  We also generate 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



                                       14
<PAGE>

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 2006.

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, 2004.

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

         Sales
         -----

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

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

          Revenues are recorded net of estimated sales returns.

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

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



                                       15
<PAGE>

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

     We account for stock options  granted to employees and directors  using the
intrinsic  value method  prescribed in APB Opinion No. 25 "Accounting  for Stock
Issued to Employees"  and comply with the  disclosure  provision of SFAS No. 123
"Accounting for Stock Based Compensation" and SFAS No. 148 "Accounting for Stock
Based  Compensation - Transition and Disclosure,  an amendment of SFAS No. 123".
If we were to include  the cost of employee  stock  option  compensation  in the
financial statements, our net loss for the three-month periods ended January 31,
2005 and 2004 would have  increased  by  approximately  $327,000  and  $184,000,
respectively, based on the fair value of the stock options granted to employees.
See "-Impact of Recent Accounting Pronouncements."

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

Three months ended January 31, 2005 compared with three months ended January 31,
--------------------------------------------------------------------------------
2004
----

     Sales

     Revenue.  Revenue  from sales  increased by  approximately  $174,000 in the
three-month  period  ended  January 31,  2005,  to  approximately  $213,000,  as
compared to  approximately  $39,000 in the  comparable  prior-year  period.  All
revenue  during both  periods was from  encryption  products and  services.  The
increase  in sales  was  principally  due to an  increase  in unit  sales of our
encryption products. Our encryption sales have been limited and are sensitive to
individual large transactions.  We believe that changes in sales between periods
generally  represent  the  nature of the early  stage of our  product  and sales
channel development.


     Gross Profit.  Gross profit from sales of encryption  products and services
increased by approximately  $124,000 in the three-month period ended January 31,
2005, to approximately  $148,000,  as compared to  approximately  $24,000 in the
comparable  prior-year period. The increase in gross profit was primarily due to
the  increase  in revenue.  Gross  profit as a percent of revenue  increased  to
approximately 70% in the three-month  period ended January 31, 2005, as compared
to approximately 63% in the comparable prior-year period. Because of the limited
number of transactions during each of the periods,  gross profit percentages are
sensitive to individual transactions.


     Research and Development Expenses

     Research and development  expenses  increased by approximately  $105,000 in
the three-month period ended January 31, 2005, to approximately  $590,000,  from
approximately  $485,000 in the  comparable  prior-year  period.  The increase in
research and development expenses was principally due to an increase in employee
compensation and related costs of approximately $114,000.



                                       16
<PAGE>

     Selling, General and Administrative Expenses

     Selling,  general and  administrative  expenses  increased by approximately
$216,000 to approximately  $566,000 in the three-month  period ended January 31,
2005,  from  approximately  $350,000 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  $167,000,  approximately
$50,000 of which was incurred with respect to a theft by a former  employee (see
"-Investigation and Recovery Efforts Regarding  Misappropriated  Funds"), and an
increase in employee compensation and related costs of approximately $40,000.

     Interest Income

     Interest  income  was  approximately  $2,000 in  three-month  period  ended
January 31, 2005, compared to approximately $1,000 in the comparable  prior-year
period.

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

     From our  inception  through June 2001,  we met our  liquidity  and capital
expenditure  needs primarily  through the proceeds from sales of common stock in
our initial public offering,  in private  placements,  upon exercise of warrants
issued in connection with the private  placements and public offering,  and upon
the exercise of stock options.  Commencing in the fourth quarter of fiscal 1999,
we also began to generate cash from sales of our encryption products,  and, from
June  2001 to  January  2002,  we  received  development  payments  from  Futaba
Corporation of Japan.

     During the three months ended January 31, 2005,  our  operating  activities
used  approximately  $465,000 in cash. This resulted from payments to suppliers,
employees and consultants of approximately $539,000, which was offset by cash of
approximately  $72,000 received from collections of accounts  receivable related
to sales of  encryption  products and  approximately  $2,000 of interest  income
received.  In  addition,  during the three months  ended  January 31,  2005,  we
received  approximately  $476,000 in cash upon the exercise of stock options and
purchased  approximately  $2,000 of  equipment.  As a result,  our cash and cash
equivalents  at January 31, 2005  increased  to  approximately  $1,012,000  from
approximately $1,003,000 at the end of fiscal 2004.

     Accounts receivable increased by approximately  $141,000 from approximately
$63,000 at the end of fiscal 2004 to approximately $204,000 at January 31, 2005.
The increase in accounts  receivable  is a result of the increase in revenue and
the timing of  collections.  Inventories  decreased  approximately  $22,000 from
approximately  $999,000 at October 31, 2004 to approximately $977,000 at January
31,  2005,  as a result of the timing of  shipments  and  production  schedules.
Prepaid  expenses and other current assets  decreased by  approximately  $95,000
from approximately  $122,000 at the end of fiscal 2004 to approximately  $27,000
at January 31,  2005.  The  decrease  in prepaid  expenses  and other  assets is
primarily  due to the receipt of a receivable  of  approximately  $100,000  from
insurance companies related to a theft by a former employee (see "-Investigation
and Recovery Efforts  Regarding  Misappropriated  Funds").  Accounts payable and
accrued  liabilities  decreased  by  approximately  $21,000  from  approximately
$443,000  at the end of fiscal  2004 to  approximately  $422,000  at January 31,
2005, as a result of the timing of payments.



                                       17
<PAGE>

     As a result of these changes, working capital at January 31, 2005 increased
to approximately  $1,882,000 from approximately  $1,829,000 at the end of fiscal
2004.

     Our working capital includes inventory of approximately $977,000 at January
31, 2005.  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, 2005 and 2004, we issued
shares of common stock to certain employees for services  rendered,  principally
in  lieu  of  cash  compensation.  We  recorded  compensation  expense  for  the
three-month  periods ended January 31, 2005 and 2004 of  approximately  $449,000
and $331,000,  respectively,  for shares of common stock issued to employees. In
addition during  three-month  periods ended January 31, 2005 and 2004, we issued
shares of  common  stock to  consultants  for  services  rendered.  We  recorded
consulting  expense for the three-month  periods ended January 31, 2005 and 2004
of approximately $13,000 and $127,000,  respectively, for shares of common stock
issued to consultants.  During the three-month period ended January 31, 2005, we
also issued  179,000  shares of  restricted  common  stock to our outside  legal
counsel in satisfaction of outstanding bills for services rendered in the amount
of approximately $115,000.

     The  auditor's  report on our  financial  statements as of October 31, 2004
states that the net loss incurred  during the year ended  October 31, 2004,  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,  2004,  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, 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
2006.  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 2006.  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



                                       18
<PAGE>

products will not be produced by other  companies  that will render our products
obsolete,  or that other sources of funding would be  available,  if needed,  on
favorable terms or at all.

     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,
2005,  we  have  recognized  revenue  from  sales  of  encryption   products  of
approximately $213,000.

     The following table presents our expected cash requirements for contractual
obligations outstanding as of January 31, 2005:

<TABLE>
<CAPTION>

                                                     Payments Due by Period
                                                     ----------------------
                                    Less
Contractual                         than              1-3             4-5           After
Obligations                        1 year            years           years         5 years              Total
----------------------------    -------------     -------------    ----------     -----------        -------------
<S>                             <C>                                                                  <C>
Consulting
Agreement                       $      70,000                -             -               -         $      70,000

Noncancelable Operating
Leases                          $     257,000     $      88,000            -               -         $     345,000
                                -------------     -------------    ----------     -----------        -------------

Total Contractual
Cash Obligations                $     327,000     $      88,000            -               -         $     415,000
                                =============     =============    ==========     ===========        =============

</TABLE>

INVESTIGATION AND RECOVERY EFFORTS REGARDING MISAPPROPRIATED FUNDS
------------------------------------------------------------------

     In December 2004, we determined that a former accounting employee embezzled
funds  from  us.  We  initially   conducted  an  internal   investigation,   and
subsequently  engaged an independent  accounting  firm to conduct an independent
investigation of this matter. Through our internal investigation,  we determined
that the amount embezzled by the employee during fiscal 2004 and the first month
of fiscal 2005 was  approximately  $189,000.  We also  discovered  approximately
$4,000 in deposits to our account during these periods that we believe were made
by the employee in an effort to conceal his fraudulent activity,  for a net loss
to us during this period of approximately  $185,000.  The independent accounting
firm agreed with this  conclusion.  The  independent  accounting firm determined
that the employee had committed  additional  fraudulent  activity  during fiscal
2003, and we subsequently conducted a further internal review of activity by the
employee since his hiring in 2001 and determined that the employee had committed



                                       19
<PAGE>

additional  fraudulent  activity in fiscal 2002 and fiscal  2001,  as well.  The
total  losses  from  such  activity  during  fiscal  2003,  2002  and  2001  was
approximately  $28,000.  The independent  accounting firm also agreed with these
conclusions.

     We have recovered  approximately  $110,000 of the losses through  insurance
proceeds.  We have applied  $100,000 of such  recovery to fiscal 2004,  and have
recorded  a  charge  to  expense  of  approximately   $75,000  in  fiscal  2004,
representing  the remainder of the fiscal 2004 loss. We have applied  $10,000 of
the recovery to the first quarter of fiscal 2005,  representing  the entire loss
identified  in such period.  The losses in fiscal 2001 through  fiscal 2003 were
the result of false  expenses  for which no  corresponding  asset was  received.
Accordingly,  such amounts were previously expensed in the years such funds were
embezzled.  We will seek  additional  recoveries from other parties which, if we
are successful in recovering  additional amounts, will be recorded as recoveries
in future periods when they are received.  Based on the amount and nature of the
embezzlement and the expected recoveries,  we do not believe that the fraudulent
activity  had a  material  effect  on  any of our  previously  issued  financial
statements.

     We incurred approximately $50,000 of accounting and other professional fees
related to this matter during the first quarter of fiscal 2005.

     In connection with the audit of our financial statements for the year ended
October  31,  2004,  Grant  Thornton  LLP,  our  independent  registered  public
accounting firm, advised us that there were material  weaknesses in our internal
controls  that did not allow us to prevent  or detect  earlier  such  fraudulent
activities, and that such weaknesses are "material weaknesses", as defined under
standards  established by the Public Company  Accounting  Oversight  Board. As a
result,  and in  response  also  to  recommendations  made  by  the  independent
accounting  firm that conducted the  investigation,  to help ensure against such
fraudulent  activity  in the  future  we have  implemented  changes  to our cash
processing and control  procedures.  We are also in the process of  implementing
changes to our operating bank account. See Item 4 "Controls and Procedures."

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

     In  December  2004,  the FASB  issued  SFAS  No.  123(R),  "Accounting  for
Stock-Based  Compensation"  ("SFAS No.  123(R)").  SFAS No.  123(R)  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. 123(R) 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. 123(R), only
certain pro forma  disclosures  of fair value were  required.  The provisions of
this Statement are effective for the first interim  reporting period that begins
after June 15, 2005. Accordingly,  we will adopt SFAS No. 123(R) commencing with
the quarter ending  October 31, 2005. We are currently  evaluating the impact of
SFAS No. 123(R).  The adoption of SFAS No. 123(R) is expected to have a material
effect on our financial statements.



                                       20
<PAGE>

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

     Information  included  in this  Quarterly  Report on Form 10-Q may  contain
forward-looking   statements  within  the  meaning  of  the  Private  Securities
Litigation Reform Act of 1995.  Forward-looking statements are not statements of
historical facts, but rather reflect our current expectations  concerning future
events and results. We generally use the words "believes," "expects," "intends,"
"plans,"  "anticipates,"  "likely,"  "will" and similar  expressions to identify
forward-looking  statements.  Such forward-looking  statements,  including those
concerning our  expectations,  involve risks,  uncertainties  and other factors,
some of which are  beyond  our  control,  which may  cause our  actual  results,
performance or achievements,  or industry  results,  to be materially  different
from any future results,  performance,  or achievements  expressed or implied by
such forward-looking statements. These risks, uncertainties and factors include,
but  are not  limited  to,  those  factors  set  forth  in  "General  Risks  and
Uncertainties"  below and Note 1 to Condensed Financial  Statements.  You should
read this  discussion and analysis along with our Annual Report on Form 10-K for
the year ended October 31, 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, 2005,  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, 2005. 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, 2005 and 2004, and for the fiscal years ended October 31, 2004
and 2003:

<TABLE>
<CAPTION>

                                                            (Unaudited)
                                                         Three Months Ended                 Fiscal Years Ended
                                                             January 31,                        October 31,
                                                   --------------------------------    ------------------------------
                                                        2005            2004                2004           2003
                                                        ----            ----                ----           ----
<S>                                                 <C>               <C>              <C>             <C>
Net loss                                            $ 1,006,494       $  809,354       $ 3,360,655     $ 3,114,411
Research and development expenses                   $   589,953       $  484,543       $ 2,164,427     $ 1,807,742
Net cash used in operations                         $   465,047       $  263,702       $ 1,205,122     $   958,501

</TABLE>



                                       21
<PAGE>

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

     We anticipate  that, if cash generated from  operations is  insufficient to
satisfy our  requirements,  we will require  additional  funding to continue our
research and  development  activities  and market our  products.  The  auditor's
report on our  financial  statements  as of October 31, 2004 states that the net
loss incurred during the year ended October 31, 2004, 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,  2004,  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, 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
2006.  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  2006.  The sale of  additional
equity   securities  or  convertible  debt  could  result  in  dilution  to  our
stockholders.  We can give  you no  assurance  that we will be able to  generate
adequate funds from operations,  that funds will be available to us from debt or
equity financings or that, if available, we will be able to obtain such funds on
favorable terms and conditions.  We currently have no arrangements  with respect
to additional financing.


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


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



                                       22
<PAGE>

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

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

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

o    our ability to develop and produce  displays using  controllable  nanotubes
     and modified TFT technology;

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

o    long-term performance of our products;

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

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

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

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

o    rapidly changing consumer preferences;

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

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

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

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

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

o    The small size of our  accounting  and financial  staff has exposed us, and
     may expose us in the future, to risks relating to our internal control, and
     may limit our growth.

     The small size of our  accounting  and  financial  staff has  exposed us to
risks relating to our internal control over financial reporting.  In particular,
as  discussed in our Annual  Report on Form 10-K for the year ended  October 31,



                                       23
<PAGE>

2004 under Item 9A,  Controls and  Procedures,  in December  2004, we discovered
that an employee  in our  accounting  staff had  defrauded  us of  approximately
$189,000 (of which  approximately  $4,000 we believe was replaced) during fiscal
2004 and the first month of fiscal  2005 and  approximately  $28,000  during the
period  from  fiscal  2001  through   fiscal  2003.   While  we  have  recovered
approximately  $110,000 of such loss  through  insurance  proceeds and will seek
additional recoveries from other parties, and we have taken steps to improve our
internal  controls  to prevent  such  activity  in the  future,  there can be no
assurance that our controls and procedures  will prevent all errors or fraud, or
that any future such losses  would be insured or otherwise  recoverable.  We may
need to recruit  additional staff to improve our internal controls or to support
growth of our business,  the costs of which would reduce the funds available for
research and development and marketing activities.

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

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

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

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


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

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



                                       24
<PAGE>

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

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

     As  discussed  more fully in Item 9A of our Annual  Report on Form 10-K for
the year ended October 31, 2004,  in connection  with our audit of our financial
statements  for the fiscal year ended  October 31, 2004,  we  determined  that a
former  accounting  employee  embezzled  funds from us. We conducted an internal
investigation,  discussed  the matter  with our  independent  registered  public
accounting  firm,  Grant  Thornton  LLP,  and also engaged  another  independent
accounting firm to conduct an independent investigation of this matter.

     In connection with the audit of the Company's financial  statements for the
year ended October 31, 2004, Grant Thornton advised us that there was a weakness
in our  internal  control  over  financial  reporting  that did not  allow us to
prevent  or detect  earlier  such  fraudulent  activities.  Specifically,  Grant
Thornton  found  that  there  was a lack of  procedures  in place to  effect  an
adequate  segregation  of duties over cash and  related  cash  processing.  This
weakness caused the following deficiencies:

o    inadequate control of processing of cash receipts,

o    inadequate control over bank transfers,

o    inadequate  control over original bank  statements  and the  reconciliation
     process, and

o    inadequate control over unused checks.

Grant Thornton advised us that these deficiencies constitute a "material
weakness" under standards established by the Public Company Accounting Oversight
Board.

     As  a  result,  and  in  response  also  to  recommendations  made  by  the
independent  accounting  firm that conducted the  investigation,  to help ensure
against  such  fraudulent  activity in the  future,  we  implemented  changes in
certain of our internal  controls  over  financial  reporting  during the fiscal
quarter ended January 31, 2005, as follows:

o    an  individual  from  management,  rather  than  someone in the  accounting
     department,  opens the bank  statements  as they are received from the bank
     and  reviews  them for any  unusual  checks  or other  transactions  before
     providing  the   statements  to  the   accounting   department  to  perform
     reconciliations;

o    this individual compares all of the cancelled checks returned with the bank
     statement with our disbursement  records to ensure that the records reflect
     the  information  on the  check and  reviews  the  checks  for  unusual  or
     unexpected endorsements; and



                                       25
<PAGE>

o    mail is opened by  personnel  outside  the  accounting  department  and any
     checks are immediately  restrictively  endorsed prior to being given to the
     accounting department.

     The  independent  accounting  firm also  recommended  we adopt a "zero-base
balance" or a "sweep"  account in our operating  bank account to enable the bank
to transfer  funds to the  operating  account only when checks are presented for
payment. We are in the process of implementing this recommendation.  We are also
in the process of hiring a replacement for the former  accounting  employee.  We
have reviewed the  segregation of duties in our  accounting  department and will
further  segregate  duties  once such person is hired,  taking into  account our
staffing size and  composition.  Finally,  the independent  accounting firm also
recommended  that, as our business grows, we consider using a lockbox system for
processing cash receipts, under which customers will be requested, via notations
on invoices or monthly statements or the use of preaddressed  envelopes, to send
their payments to a post office box, which will be accessible  only by (and will
be collected daily by) our bank. We will continue to evaluate the  effectiveness
of our  disclosure  controls  and  procedures  and our  internal  controls  over
financial  reporting  on an  ongoing  basis,  and will  take  further  action as
appropriate. However, there can be no assurance that our controls and procedures
will prevent all errors or fraud.



                                       26
<PAGE>

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

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

     On November 9, 2004,  the Company issued 179,000 shares of its Common Stock
to its outside legal counsel,  in satisfaction of outstanding bills for services
rendered  in the amount of  $115,372.  Such  shares of Common  Stock were issued
without  registration  in reliance on the exemption  provided by Section 4(2) of
the Securities Act of 1933, as amended,  for transactions not involving a public
offering.  In claiming such  exemption,  the Company  relied on  representations
that, among other things, such firm was an accredited investor and was acquiring
the  shares  for its  own  account  (and  not for the  account  of  others)  for
investment and not with a view to distribution thereof.


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


31.1 Certification  of Chief Executive  Officer,  pursuant to Section 302 of the
     Sarbanes-Oxley Act of 2002, dated March 10, 2005.

31.2 Certification  of Chief Financial  Officer,  pursuant to Section 302 of the
     Sarbanes-Oxley Act of 2002, dated March 10, 2005.

32.1 Statement of Chief Executive Officer,  pursuant to Section 1350 of Title 18
     of the United States Code, dated March 10, 2005.

32.2 Statement of Chief Financial Officer,  pursuant to Section 1350 of Title 18
     of the United States Code, dated March 10, 2005.



                                       27
<PAGE>

                                   SIGNATURES


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

                                        COPYTELE, INC.


                                        By:/s/ Denis A. Krusos
                                           -------------------
                                        Denis A. Krusos
                                        Chairman of the Board,
                                        Chief Executive Officer
March 10, 2005                          (Principal Executive Officer)


                                        By:/s/Henry P. Herms
                                        Henry P. Herms
                                        Vice President - Finance and
                                        Chief Financial Officer (Principal
March 10, 2005                          Financial and Accounting Officer)



                                       28