UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION





WASHINGTON,
D.C. 20549


FORM
10-K/A





x ANNUAL REPORT
UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the
fiscal year ended October 31, 2008





o TRANSITION REPORT
UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


Commission file number:
000-52815




CODA
OCTOPUS GROUP, INC.


(Exact
name of registrant as specified in its charter)





Delaware
              
              34-200-8348(State
      or other jurisdiction of
              
              (I.R.S.
      Employerincorporation
      or organization)
              
              Identification
      Number)





164 West, 25th Street, 6th Floor, New York


New
York 10001


(Address,
Including Zip Code of Principal Executive Offices)





(212)
924-3442


(Issuer's
telephone number)





Securities
registered under Section 12(b) of the Exchange Act:


NONE


Securities
registered under Section 12(g) of the Exchange Act:


COMMON
STOCK, $0.001 PAR VALUE PER SHARE





s
              Indicate by check mark if the
      registrant is a well-known seasoned issuer, as defined in Rule 405 of the
      Securities Act. Yes ̈Nox


s
              Indicate by check mark if the
      registrant is not required to file reports pursuant to Section 13 or
      Section 15(d) of the Act. Yes ̈Nox
 s
              Indicate by check mark whether
      the registrant (1) has filed all reports required to be filed by Section
      13 or 15(d) of the Exchange Act during the past 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. YesxNo ̈
 s
              Indicate by check mark if
      disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
      (229.405 of this chapter) is not contained herein, and will not be
      contained, to the best of registrant’s knowledge, in definitive proxy or
      information statements incorporated by reference in Part III of this Form
      10-K or any amendment to this Form 10-K. ̈
 s
              Indicate by check mark whether
      the registrant is a large accelerated filer, an accelerated filer, or a
      non-accelerated filer or a smaller reporting
    company.
 Large
      accelerated filer  ̈
                Accelerated
      filer  ̈Non-accelerated
      filer  ̈
                Smaller
      reporting company x
 s
              Indicate by check mark whether
      the registrant is a shell company (as defined in Rule 12b-2 of the Act).
      Yes ̈Nox


s
            State issuer's revenues for its
      most recent fiscal year.
$16,968,922


s
            State
      the aggregate market value of the voting and non-voting common equity held
      by non-affiliates computed by reference to the price at which the common
      equity was last sold, or the average bid and asked price of such common
      equity, as of the April 30, 2008, representing the last business day of
      the registrant’s most recently completed second fiscal quarter:
      approximately $7 million. For purposes of this computation, all directors
      and executive officers of the registrant are considered to be affiliates
      of the registrant. This assumption is not to be deemed an admission by the
      persons that they are affiliates of the
  registrant.


s
            State the number of shares
      outstanding of each of the issuer's classes of common equity, as of the
      latest practicable date: 48,897,358 as of March 13,
      2009.





EXPLANATORY
NOTE





This Form
10-K/A is being filed to amend the Annual Report of Coda Octopus Group, Inc.
(the “Company”) on Form 10-KSB for the fiscal year ended October 31,
2008   filed with the Securities & Exchange Commission on
March 18, 2009 (“Original Filing”).  Specifically, it clarifies and
revises the disclosure of  the Company’s Cash Control Framework
Agreement  entered into with its Convertible Secured Noteholder on
March 16, 2009.  In addition, certain Item headings have been changed
to conform to the requirements of Regulation  S-K and the instructions
to SEC  Form 10-K.




We have
not updated the information contained herein for events occurring subsequent to
March 18, 2009, the filing date of the Original Filing.  No other
information in the Original Filing is amended hereby.   In addition,
the exhibit list in Item 15 of Part IV has not been updated except to
reflect currently dated certifications from our Chief Executive Officer and
Chief Financial Officer, as required by Sections 302 and 906 of the
Sarbanes-Oxley Act of 2002.





TABLE
OF CONTENTS





PART IITEM
      1.
                        BUSINESS
                        3ITEM
      2.
                        PROPERTIES
                        15ITEM
      3.
                        LEGAL
      PROCEEDINGS
                        16ITEM
      4.
                        SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
                        16PART IIITEM
      5.
                        MARKET
      FOR REGISTRANT’S
      COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
      SECURITIES
                        17ITEM
      6.
                        SELECTED
      FINANCIAL DATA
                        17ITEM
      7.
                        MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
                        18ITEM
      8.
                        FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA
                        27ITEM
      9.
                        CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
                        27ITEM
      9A(T)
                        CONTROLS
      AND PROCEDURES
                        27PART IIIITEM
      10.
                        DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
                        29ITEM
      11.
                        EXECUTIVE
      COMPENSATION
                        32ITEM
      12.
                        SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS
                        42ITEM
      13.
                        CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
                        43ITEM
      14.
                        PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
                        45ITEM
      15.
                        EXHIBITS,
      FINANCIAL STATEMENT SCHEDULES
                        46SIGNATURES
                        48


2


FORWARD-LOOKING
STATEMENTS





This
annual report on Form 10-K includes forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, which we refer
to in this annual report as the Securities Act, and Section 21E of the
Securities Exchange Act of 1934, as amended, which we refer to in this annual
report as the Exchange Act. Forward-looking statements are not statements of
historical fact but rather reflect our current expectations, estimates and
predictions about future results and events. These statements may use words such
as "anticipate," "believe," "estimate," "expect," "intend," "predict," "project"
and similar expressions as they relate to us or our management. When we make
forward-looking statements, we are basing them on our management's beliefs and
assumptions, using information currently available to us. These forward-looking
statements are subject to risks, uncertainties and assumptions, including but
not limited to, risks, uncertainties and assumptions discussed in this annual
report. Factors that can cause or contribute to these differences include those
described under the headings "Risk Factors" and "Management Discussion and
Analysis and Plan of Operation."





If one or
more of these or other risks or uncertainties materialize, or if our underlying
assumptions prove to be incorrect, actual results may vary materially from what
we projected. Any forward-looking statement you read in this annual report
reflects our current views with respect to future events and is subject to these
and other risks, uncertainties and assumptions relating to our operations,
results of operations, growth strategy and liquidity. All subsequent written and
oral forward-looking statements attributable to us, or individuals acting on our
behalf are expressly qualified in their entirety by this paragraph. You should
specifically consider the factors identified in this annual report, which would
cause actual results to differ before making an investment decision. We are
under no duty to update any of the forward-looking statements after the date of
this annual report or to conform these statements to actual
results.





PART
I





ITEM
1. BUSINESS





Overview





Coda
Octopus Group, Inc. (“the Company”, “we” or “us”) is engaged in 3D subsea
technology and are the developer and patent holder of real-time 3D sonar
products which we expect to play a critical role in the next generation of
underwater port security. We produce hardware, software and fully integrated
systems which are sold and supported on a worldwide basis, with wide
applications in two distinct market segments:





s
                Marine geophysical survey
      (commercial), which focuses on oil and gas, construction and
      oceanographic research and exploration. Our current products encompass
      geophysical data collection and analysis, through to printers to output
      geophysical data collected by sonar that are marketed to survey companies,
      research institutions, salvage companies. This was our original focus,
      from founding in 1994. We believe that our marine geophysical survey
      markets are experiencing rapid growth due to: 1) successful new product
      introductions in recent periods; 2) market-proximity benefits derived from
      2004 relocation to the United States; 3) initial market penetration into
      new sub-sectors of the marine geophysical survey markets; 4) the high
      price of oil and gas in the past few years, resulting in unprecedented
      exploration and production
activity.





s
              Underwater
      defense/security, which focuses on ports and harbors, state and
      federal government agencies and defense contractors. We started to focus
      on this market following the acquisition of OmniTech AS, a Norwegian
      company, in December 2002 (now operating under the name of Coda Octopus
      Omnitech AS).  Omnitech developed a prototype system, the
      EchoscopeTM, a unique, patented instrument which supplies accurate
      three-dimensional visualization, measurement, data recording and mapping
      of underwater objects. We have recently completed developing and commenced
      marketing this first real time, high resolution, three-dimensional
      underwater sonar imaging device which we believe has important
      applications in the fields of port security, defense and undersea oil and
      gas development.




In
addition, through our two engineering services subsidiaries, Coda Octopus
Martech Ltd (formerly Martech Systems (Weymouth) Ltd), based in Weymouth,
England, UK, and Coda Octopus Colmek, Inc. (formerly Miller & Hilton, Inc.),
based in Salt Lake City, Utah, US, we provide engineering services to a wide
variety of clients in the subsea, defense, nuclear and pharmaceutical
industries. These engineering capabilities are increasingly being combined with
our product offerings, bringing opportunities to provide complete systems,
installation and support.




For the
foreseeable future, we intend to intensify our focus on port security. We
believe that in the post 9/11 era there are significant growth opportunities
available in that particular market segment because of increased government
expenditures aimed at enhancing security. Specifically, we believe that we have
the ability to capitalize on this opportunity as a result of:


3




w
              First
      mover advantage in 3D sonar markets based on our patented technology,
      research and development efforts and extensive and successful tests that
      date back almost two decades as well as the resulting broad customer
      acceptance, as evidenced by orders for our product and its derivatives
      from government agencies, research institutes and oil and gas companies,
      that conduct their own testing prior to placing orders. There is usually a
      significant time period between introduction of the product to a
      prospective customer and the purchase order.  Prospective customers
      need to test the product in the environment in which they intend to use it
      to ensure that it is suitable for its intended purpose.  We hold the
      patent for a “Method for
      Producing a 3D image” of, for example, a submerged object and/or
      underwater environment.  This patent, first applied for in Norway in
      1998, is recorded in the European Patents Register, Australia, Norway and
      the USA.  This method is the culmination of approximately 20
      years of research and testing led by the three inventors/scientists, who
      worked for OmniTech AS. These individuals continue to work for us and are
      actively involved in producing and advancing the EchoscopeTM, which
      incorporates this patent.





s
              Early
      recognition of need for 3D real-time sonar in defense/security
      applications. We believe that we are the first to bring to market a
      product with the capability of producing a 3D image of submerged or
      underwater objects or environment. Prior to the deployment of this method
      in the marine environment, producing an image of a submerged or underwater
      object or environment was accomplished strictly by two-dimensional
      sonar.





s
              Expansion
      into new geographies like North America and Western
  Europe.





s
              Expansion
      into new commercial markets like commercial marine survey and underwater
      construction with innovative
products.





s
              Recent
      sole source classification for one of our products and its derivatives by
      certain government procurement
agencies.





Further,
we believe the EchoscopeTM will transform certain segments of the sonar product
market. In addition, 3D sonar, currently in the early stages of adoption, has
disruptive technology qualities as it has the ability to change industry
standard practice in respect of the method for visualization and imaging of
underwater objects and environment. Therefore, it will likely change who the
suppliers into this market are as well as our market position and that of our
competitors. We believe the market opportunities in underwater security and
defense could grow at a rapid pace over the next several years.




We also
believe that our two acquisitions and formation of our wireless video
surveillance subsidiary and our counter-terrorism and anti-piracy training
subsidiary strengthen our capabilities to produce comprehensive security and
defense systems and solutions and provide new opportunity for us to expand our
offerings.





Corporate
History





The
Company began as Coda Technologies Ltd (now operating under the name of Coda
Octopus Products Limited), a UK corporation which was formed in 1994 as a
start-up company with its origins as a research group at Herriott-Watt
University, Edinburgh, Scotland. Its operations consisted primarily of
developing software for subsea mapping and visualization using sidescan sonar, a
technology widely used in commercial offshore geophysical survey and naval
mine-hunting to detect objects on, and textures of, the surface of the seabed.
During the late 1990s we achieved significant market penetration in Europe and
Asia, but this was difficult to replicate in the USA due to our being a UK based
Company at that time, though we did have a US subsidiary which was established
to market and sell our products in North America. The delay in effectively
breaking into the US market severely limited our growth since this market
constitutes the major portion of the worldwide market for geophysical and
hydrographic survey. Management of Coda Technologies Ltd therefore embarked upon
a program to expand its capabilities in growing the Company with a focus on
strategic markets such as defense, homeland security and port
security.




In June
2002, we acquired by way of merger Octopus Marine Systems Ltd, a UK corporation,
and changed our name from Coda Technologies Ltd to Coda Octopus
Ltd.  At the time of its acquisition, Octopus Marine Systems was
producing geophysical products broadly similar to those of Coda, but targeted at
the less sophisticated, easy-to-use, work-horse market.  It was also
finalizing the development of a new motion sensing device (the “F180”), which
was to be employed aboard vessels conducting underwater surveys to correct sonar
measurement by providing precise positioning and compensation for vessel
motion.




In
December 2002, Coda Octopus Ltd acquired OmniTech AS, a Norwegian company, which
became a wholly-owned subsidiary of the Company and now operates under the name
Coda Octopus Omnitech AS.  Before we acquired OmniTech, it had been
engaged for over ten years in developing revolutionary sonar imaging and
visualization technology to produce three-dimensional underwater images for use
in the subsea construction industry. Marketed by us under the product name
"Echoscope", this technology is unique in that it delivers real time 3D images
and visualization with extremely accurate positioning. This is the subject
matter of a patent in a number of jurisdictions, including the USA. This
technology, which continues to be developed by our Research and Development team
in Norway and Edinburgh, allowed the Company to start to shift the original
focus on hydrographic and geophysical survey to include port security and
defense, with particular emphasis on the US market.


4


On July
13, 2004, pursuant to the terms of a share exchange agreement between The Panda
Project, Inc., a Florida corporation, and Fairwater Technology Group Ltd.
(“Fairwater”), Panda acquired the shares of Coda Octopus Limited, a UK
corporation and Fairwater’s wholly-owned subsidiary, in consideration for the
issuance of a total of 20,050,000 shares of common stock to Fairwater and other
shareholders of Coda Octopus Limited. The shares issued represented
approximately 90.9% of the issued and outstanding shares of Panda. The share
exchange was accounted for as a reverse acquisition of Panda by Coda.
Subsequently, Panda was reincorporated in Delaware and changed its name to Coda
Octopus Group, Inc.





Following
the reverse merger and in continuance of our program to capture more of the
market in the United States and our focus on port security and defense, we
established our headquarters in New York City. In May 2006, we established a
government relations office in Washington, DC.





In June
2006, we acquired a design and engineering firm, Martech Systems (Weymouth) Ltd
("Martech"), which provides high quality bespoke engineering solutions in the
fields of electronic data acquisition, transmission and recording, and has links
into our existing markets.





In
November 2006, we established in New York City a subsidiary, Innalogic, Inc.
which provides encrypted wireless video surveillance products and data
transmission capability.





In April
2007, we acquired a Utah-based engineering firm, Miller & Hilton, Inc. d/b/a
Colmek Systems Engineering, which is a custom engineering service provider of
subsea and other engineering solutions, particularly in the fields of data
acquisition, storage and display. This company has particular links into the US
defense industry, both directly and through its links with prime
contractors.





Also in
April 2007, we established an assembly and test facility in St. Petersburg,
Florida, adding to our existing sales office there, and we now build our
EchoscopeTM and derivative products from this facility in St.
Petersburg.





In
November 2008, the Company started a new subsidiary, Coda Octopus Tactical
Intelligence, Inc. and recruited two individuals,  to improve the
Company’s operational and training reach in the sectors in which it
competes.





In
December 2008, Coda Octopus Martech Ltd, acquired the assets of Dragon Design
Ltd, a company based next door to our Martech business in Weymouth. Management
believes the companies have complementary skills and capabilities that can
enhance revenues and opportunities to our existing Weymouth
operation.




Strategy





Having
started as a products company, we have leveraged our capabilities, technology
and market position to allow us to provide complete systems, combining our
subsea technology products, wireless data transmission products and processes,
and engineering services. Our strategy is to continue to sell each of our
products and services separately, but to increasingly combine our offerings into
systems and move into provision of complete solutions, with special focus in the
areas of defense, and port and coastal infrastructure security.  We
expect increased sales of our current products and their derivatives, especially
the EchoscopeTM and UISTM and comprehensive security systems to increase and
account for significant growth over the next five years. In the EchoscopeTM and
UISTM, we have a unique product addressing a significant need in a niche sector
of the port security, defense, and oil and gas industries, with potential to
greatly enhance subsea visualization.  We expect that the key element
of our growth strategy will be dominated by our 3D technology over the near
future.  Through our Government Relations department in Washington,
DC, we have engaged a number of lobbying groups to address the different areas
of government, i.e. Federal, state, government agencies and the US Department of
Defense. In addition, we have technology affiliations with organizations such as
University of South Florida and PCT, as described elsewhere in this document. We
expect growth through sales of existing products in current and new markets and
through sales of new products based on our own internal research and
development.





Operations





We are
structured as a holding company for a number of operating subsidiaries,
providing corporate management, financing and legal services to group companies.
As a public company, based in New York City, this is also our administrative
center for our investors and shareholders. We currently operate through nine
separate subsidiary companies, which are described below.


5


Coda
Octopus Products, comprising Coda Octopus Products Ltd/Coda Octopus Products,
Inc.





Coda
Technologies Ltd, a UK corporation, was formed in 1994 as a start-up company
with its origins as a research group at Herriott-Watt University, Edinburgh,
Scotland. Its operations consisted primarily of developing software for subsea
mapping and visualization using sidescan sonar, a technology widely used in
commercial offshore geophysical survey and naval mine-hunting to detect
objects  on, and textures of, the surface of the seabed. During the
late 1990s we achieved significant market penetration in Europe and Asia, but
this was difficult to replicate in the US due to our being a UK based company at
that time, though we did, and still do, have a US subsidiary which was
established to market and sell our products in North America. The delay in
effectively breaking into the US market severely limited our growth since such
market constitutes the major portion of the worldwide market for geophysical and
hydrographic survey. Management of Coda Technologies Ltd therefore embarked upon
a program to expand its capabilities, expanding from the original focus on the
survey, research, hydrography, and search and recovery sectors of the subsea
imaging industry. Coda Technologies Limited has since changed its name to Coda
Octopus Limited and more recently to Coda Octopus Products Limited. This company
also has a sister company in the US, Coda Octopus Products, Inc., selling the
same product range to the North American market.




The
Company markets and sells a number of sonar-related products, focused on the
marine hydrographic and geophysical survey markets (see ‘Products and
Services’).





Coda
Octopus Research and Development, comprising Coda Octopus Omnitech AS/Coda
Octopus R&D Ltd





Coda
Octopus Omnitech AS is a Norwegian corporation. Coda Technologies Limited (now
Coda Octopus Products Limited) acquired Coda Octopus Omintech AS in 2002. At the
time of its acquisition by Coda, OmniTech had been engaged for over ten years in
developing sonar imaging technology to produce three-dimensional (3D) underwater
images for use in the subsea construction industry, which we have since our
acquisition further developed and marketed as our flagship product “Echoscope"
which produces and delivers real-time 3D images and visualization in the subsea
environments. The focus of Coda Octopus Omnitech operations is on research and
development of this technology. Alongside this, our UK subsidiary, Coda Octopus
R&D Ltd, focuses on research and development activities, primarily based on
software and focused for now on our Echoscope technology.





Coda
Octopus Martech Ltd (formerly Martech Systems (Weymouth) Ltd)





Martech
is a company incorporated under the laws of the UK operating under its own brand
name in a very specialized niche of high quality design and manufacturing
services to the UK defense, nuclear and pharmaceutical industries. We acquired
this entity in June 2006. Its services are provided on a custom sub-contract
basis where high quality and high integrity devices are required in very small
numbers.





As a
result of Martech’s knowledge of the defense industry and the UK government
procurement marketplace, the Company becomes aware of upcoming opportunities,
allowing an expression of interest and subsequent listing for the appropriate
invitations to tender. The Company enjoys certain pre-approvals to allow it to
be short-listed for certain types of government work. Much of the more
significant business gained by Martech is gained this way through the formal
Government or government contractor tendering process.





On
December 15, 2008, Martech acquired Dragon Design Ltd. Dragon is an electronics
manufacturing and design business employing thirteen staff in leased premises in
Weymouth, Dorset, UK. Unaudited accounts indicate that FY2008 sales were
approximately £790,000 (or $1,550,000 at last year’s average exchange rate of
$1.94 to £1) generating a net profit of approximately £24,000
($47,000).




Examples
of the type of work that Dragon does are its two long term contracts with Dek
International, the leading manufacturer of printing machines for the electronics
industry, where the Company supplies both components for new machines and spares
for older models, and its relationship with Vector Developments, purveyors of
marine night vision equipment for the leisure market.




Coda
Octopus Innalogic, Inc. (formerly Innalogic, Inc.)





Co-located
with our corporate headquarters at our 25th Street
offices in Manhattan, Innalogic, a Delaware corporation, provides wireless
encrypted video surveillance products for commercial organizations (domestic and
international) and local and US Federal government agencies. Innalogic completed
in the last fiscal year customer contracts ranging in value from $40,000 to
$320,000.




Coda
Octopus Colmek, Inc. d/b/a Colmek Systems Engineering (“Colmek”) (formerly
Miller & Hilton, Inc.)





Colmek, a
Utah corporation which we acquired in April 2007, is a service provider of deep
ocean and other engineering solutions, particularly in the fields of data
acquisition, storage, transmission and display. Founded in 1977, it has grown
and diversified since its inception and now provides services and products to a
wide range of defense, research and exploration organizations in the US. For
more than a quarter century, Colmek has been solving system- and
mission-critical problems for its customers. It designs, manufactures and
supports systems that are reliable and effective in multiple military and
commercial applications where ruggedness and reliability under extreme
operational conditions are paramount and where lives depend on accurate and
precise information.


6


Port
Security Group, Inc.





We have
recently formed this subsidiary to spearhead our drive into port and coastal
infrastructure security markets, selling our products, systems and solutions.
This will be a key part of the Group through which we will focus our move into
complete solutions, with the products and engineering services being provided to
this company via our existing capabilities, to avoid duplication. Effectively,
Port Security Group will be a bidding and project management company, providing
solutions in partnership with other Group entities, as well as products and
services from outside the Group.





Coda
Octopus Tactical Intelligence, Inc.





Since the
year end we have formed this subsidiary to facilitate our entry into the
counter-terrorism and anti-piracy training markets, which we believe are
integral to our efforts to help major customers deploy real time 3D sonar
systems in hot spots around the world.  We have recruited two
specialists in the field of real world security training for domestic and
international military units and government agencies to spearhead this drive;
these individuals have designed or led more than 50 such training programs
throughout the world since September 11, 2001, using up to 100 freelance
specialists on a contract basis. The expertise of this part of the Group will be
used to leverage our Echoscope and UIS capabilities in terms of sales and
training.





We also
own separate entities both in the United Kingdom and in the United States that
are specifically designed to complete corporate acquisitions, Coda Octopus (UK)
Holdings Ltd and Coda Octopus (US) Holdings, Inc.





Our
Products





Our
products are marketed under two brands, CodaTM and OctopusTM. Coda brand products
are high-end, enhanced, feature-rich products. They are designed to be used in
the most exacting underwater survey, inspection and monitoring requirements. The
Octopus brand instruments are rugged, simple-to-use work-horse products used by
survey companies, navies and academic organizations, where simple installation
and minimal training is required.





CodaTM Brand
Products





Coda
GeoSurvey Data Acquisition





Our
initial focus was the development of systems for use in geophysical services.
This entails the visualization and analysis of the seabed which is performed in
two forms: sidescan
using a towfish which generates sonar signals allowing imaging of the seabed
itself, highlighting different surface types, textures and objects, and shallow seismic which uses
low frequency sonar to penetrate through the seabed generating data depicting
the below seabed structure. This developed into the Coda GeoSurvey system which
acquires both types of data, allowing digital storage of the data and further
analysis within the software. This system was launched in 1995 and remains one
of our core products. The system operates on both Windows and Linux operating
systems and is usually supplied on ruggedized PC type hardware, and is designed
to interface with most popular third-party sonar systems. Since developing the
initial software, we have implemented a number of additional software modules to
allow analysis of the data in a variety of ways. Today, Coda GeoSurvey is widely
used throughout the world by commercial survey organizations and research
institutes. Specific products include: the DA 2000, for simultaneous acquisition
of sidescan and shallow seismic data, the DA 1000, for acquisition of either
sidescan or shallow seismic data, and the DA 500, a portable version of the DA
1000. The price for this product ranges from $2,400 to $47,200 per unit.





Coda
GeoSurvey Productivity Suite





The
GeoSurvey Productivity Suite is a software product enabling acquired sidescan
and seismic data to be processed, cleaned, analyzed and interpreted for
inclusion in reports and charts. GeoSurvey Productivity Suite comprises an
integrated suite of software modules for different tasks according to the needs
of the user and can be run on the same hardware as GeoSurvey Acquisition or on a
standard PC or laptop. The end products are typically a cleaned image depicting
the seabed and its surface features or its underlying layers and features,
together with information such as co-ordinates, annotations and interpretations,
for integration into geographical information systems (“GIS”). The price for
this product ranges from $8,000 to $46,000 per software module or
bundle.




Coda
EchoscopeTM





The
EchoscopeTM is a unique sonar device which embodies a patented invention for a
method of producing a 3D Sonar Image that permits real time, three-dimensional
viewing, imaging and data recording of underwater scenes and objects. The 3D
aspect enables the high resolution visualization to be performed from multiple
perspectives. It is able to detect moving as well as fixed objects, and unlike
optical sensors can detect and image objects in zero visibility water. Unlike
conventional 2D sonars that generate narrow beams  or fan shaped
beams, the EchoscopeTM uses advanced beam forming techniques to generate over
16,000 individual beams to create instantaneous high resolution 3D images. The
EchoscopeTM is compact, measuring about the size of an average briefcase, thus
enabling it to be used from small vessels. It is suitable for over-the-side or
bow mounting on vessels of any size or on remotely operated underwater vehicles
(“ROV”) and autonomous underwater vehicles (“AUV”). The price for this product
ranges from $250,000 to $340,000 per device depending on depth
rating.


7


The
EchoscopeTM has a very wide range of applications including:




s
              inspection of harbor
      walls;
 
 s
              inspection of ship
      hulls;
 
 s
              inspection of bridge
      pilings;
  s
              ROV navigation (obstacle
      avoidance);
 s
              AUV navigation and target
      recognition (obstacle
avoidance);
 
 s
              construction - pipeline touchdown
      placement and inspection;
 
 s
              obstacle avoidance
      navigation;
 
 s
              bathymetry (measurement of water
      depth to create 3D terrain
models);
 
 s
              monitoring underwater
      construction;
 s
                underwater intruder
      detection;
 
 s
              dredging and rock
      dumping;
 
 s
              contraband
      detection;
 
 s
              locating and identifying objects
      undersea, including
mines.





Considerable
interest in the EchoscopeTM has been shown by the United States Coast Guard,
NAVSEA, the US Office for Naval Research (ONR), the US Office for Naval
Intelligence (ONI), the US Department of Homeland Security and various other
defense agencies. The EchoscopeTM, in its simplest form as a stand alone product,
is priced at $250,000. We have sold and delivered 26 of these to customers since
its introduction. In addition, a number of these devices are on long term rental
in places like the Gulf of Mexico. Among the first purchasers have been United
States naval agencies, the United States Coast Guard, research institutions and
a construction company in Japan.





Coda
Underwater Inspection System (UISTM)





The Coda
Underwater Inspection System or UISTM is the world’s first, and we believe only,
fully integrated high resolution real-time 3D inspection system. It delivers
precise and intuitive 3D images in real-time, and is designed to inspect large
areas with 100% coverage and 98% probability of detection.





At the
heart of every UISTM is the unique EchoscopeTM real-time 3D sonar incorporating
our cutting edge phased array technology to simultaneously generate over 16,000
beams. This results in an instant three dimensional sonar image where the
position of every data point is accurately known, producing detailed images from
a single sonar ping.




To ensure
accurate positioning the EchoscopeTM is integrated with the Octopus F180TM in the
UISTM, giving series precision attitude and positioning. This provides absolute
positioning at accuracies of up to 10cm (4”), with heading better than 0.05°.
High accuracy is the key to ensuring that all data is correctly geo-referenced,
enabling real-time mosaicing as well as quick relocation of areas of interest
from previous inspections.




As part
of a small boat package, the UISTM includes a ruggedized digital video camera or
optional night vision camera to provide a separate and immediately obvious above
water reference. For remotely operated vehicle (ROV) installations, the latest
laser scaling camera provides an accurate visual cross reference.





Depending
on the application and platform, the UISTM can be combined with a wide range of
additional sensors and other sonars to create a fully integrated bespoke
package. Centered around the unique and powerful EchoscopeTM 3D sonar, the
integrated UISTM solution offers significant advantages and superior performance
over systems using 2D sonar, sector scan sonar, acoustic lens sonars or
underwater video cameras alone.





The price
for this product is approximately $495,000.




In July
2007, we received a $2,597,410 order from the U.S. Department of Defense to
build and deliver over a period of six months three next generation prototype
UISTM for the US Coast Guard and other potential users, to enable rapid
underwater searches in the nation’s ports and waterways. The contract includes
additional options, exercisable at the sole discretion of the U.S. Department of
Defense. If exercised, these options would require us to make enhancements to
the existing systems and deliver a further seven UISTM systems within six months
from the time the option is exercised.


8


The
contract was awarded to us on a sole source basis, which means that the product
is considered to be available from one source only and under Federal rules may
be acquired from that source without a competitive bidding process.




The
systems were delivered over the period October to December 2007, with final
sign-off of the order received towards the end of December 2007. Under the terms
of the agreement, we provided, among other things, operator training and a one
year guarantee for each system supplied. The agreement also grants to the
purchaser a non-exclusive, non-transferable, irrevocable, paid-up license to
practise or have practised for or on behalf of the United States any invention
conceived in the performance of the agreement throughout the world. On February
19, 2008, a contract amendment was awarded to us. Under this amendment a number
of the options listed below were exercised. These are Option 1 (contract value
$634,065), Option 2 (contract value $378,084) and a portion of Option 4. The
total value of the contract amendment is $1,527,149.  In addition, a
further order was made (and completed) for additional development work of
$100,000.





On
February 6, 2009, a further order was made for $1,152,948 for Option 3,
Automated Change Detection. Under the option provisions further options may be
exercised by the US Coast Guard under the contract for up to
$2,851,750.




The
following table sets forth a brief description of the enhancements to the
existing systems, their respective purchase prices and the allotted time period
for each. Per the terms of the agreement, payments for the product enhancements
will be made by the U.S. Department of Defense pending the development and
delivery of those enhancements. Since exercise of the options is at the sole
discretion of the U.S. Department of Defense, there can be no assurance that the
options will be exercised.







Option
                          
                          Description
                          
                          Estimated Purchase Price
                          
                          Time Period for DeliveryOption 1
                            RANGE
      RESOLUTION ENHANCEMENT
                          
                          Development
      of core beam forming hardware and related technology to improve the
      current 3 or 4cm range resolution to 1 or 2cm, and increase target
      detection of objects on harbor walls and other close range
      applications.
                          
                          $
                          634,065
                          
                          CompletedOption 2
                            INCREASE
      ECHOSCOPE FREQUENCY
                          
                          Development
      of new transducer and channel board hardware to allow operation at higher
      frequencies (up to 500KHz) which will increase the resolution of the
      data
                          
                          $
                          378,084
                          
                          CompletedOption 3
                            AUTOMATED
      CHANGE DETECTION
                          
                          Development
      of software compatible with the UIS platform and designed for on-line
      detection and post-processing analysis of captured Echoscope data. In
      essence, the software will have the capability of registering any changes
      of new data collected against a baseline survey and automatically alert
      end-user to the changes (i.e the presence of something that was not there
      on the last inspection - example of a harbor wall).
                          
                          $
                          1,152,948
                          
                          18
      months from date of exerciseOption 4
                            ADVANCED
      PROTOTYPE UIS SYSTEM
                          
                          Building
      of up to seven (7) additional UIS Systems to agreed USCG
      specifications.
                          
                          $
                          3,291,750
                          
                          CompletedOption 5
                            DEVELOPMENT
      OF ONE PIECE F190
                          
                          Development
      of a F190 Positioning System to replace the standard two piece system
      currently used in the UIS.
                          
                          $
                          247,434
                          
                          Completed


9


Octopus®
 Brand
Products




Octopus
F180TM Precision Attitude & Positioning System





The
Octopus F180TM integrates GPS with aerospace motioning sensing devices
(gyroscopes and accelerometers) to provide high-accuracy measurements of
geographical position and motion in the most dynamic environment at sea, and
includes position, heading, heave, pitch and roll as its primary outputs. The
primary application is to compensate for the effects of motion on single beam
and multibeam echosounders where it is critical to know where the instruments
are pointing when depth soundings are being taken in order to ensure accuracy of
depth and position.




Developed
originally for motor sport (measuring vehicle motion and position) the F180TM is
manufactured under license pursuant to which CodaOctopus has exclusive rights to
the products so developed. Since its launch in August 2003, the F180TM has become
a popular and well regarded sensor with a growing number of customers in the
commercial marine survey industry around the world, because of its simplicity of
operation and accuracy at a relatively low cost. Modifications and enhancements
have resulted in a simple-to-use product that brings highly accurate positioning
and motion data into extreme offshore conditions for precision marine survey
applications. Variants within the F180TM series include the F190, exclusively
configured for use ‘inland’, e.g. within ports and harbors, and the F185, with
enhanced precision positioning to 1cm accuracy. Also available is Octopus
iHeave, a software product for dealing with long period ocean swell
compensation, fully integrated with the F180TM series. The price for this product
ranges from $2,700 to $112,000 per unit.




Octopus
760 Series Geophysical Acquisition System





The 760
series is a range of geophysical data acquisition systems for sidescan sonar and
shallow seismic profiling. In common with the Coda GeoSurvey product line, the
Octopus 760 integrates with third party sonars and sensors to acquire, display
and record data. However, it is designed to be simple to operate and requires
minimal training. The 760 series is a self contained instrument rather than
software and a PC. There are four variants of the 760 series - the 760D which
combines simultaneous acquisition of sidescan sonar and sub-bottom profiler; the
760S which provides ‘either/or’ sidescan sonar and sub-bottom profiler data
acquisition; the 460+ for sidescan only; and the 360+ for shallow seismic only.
There is also a variant of the 760 series, the 460P, which is re-packaged into a
splash-proof hand-portable carry-case for operation in the most demanding of
environments such as in small open boats. Combined with compact dual-frequency
sidescan sonar and an optional battery pack, the 460P is also available as a
complete portable sidescan sonar system and has been supplied to the British
Royal Navy amongst other naval and commercial customers. The price for this
product ranges from $2,000 to $43,000 per system.





Octopus
361/461 Analysis Software





The
361/461 Analysis Software is a low-cost, reduced capability alternative to the
Coda GeoSurvey Productivity suite, providing an entry level product for less
demanding sidescan sonar and sub-bottom profiler users. The price for this
product ranges from $500 to $10,000 per software bundle.





Octopus®
Thermal Printers





In June
2004, the Company acquired a thermal printer product line from Ultra Electronics
plc, which we rebranded under the “Octopus” brand name. Octopus® printers are
used to produce high quality grayscale continuous images onto thermal paper or
film and are ideal for producing hard copy output of geophysical data and other
continuous data. They are widely used in the geophysical survey industry in
conjunction with other Coda and Octopus products, as well as in defense
applications as part of surface ship and submarine detection systems. The price
for this product ranges from $100 to $26,500 per printer.





Our
Services





As a
result of the acquisitions of Martech and Colmek, we have moved from being a
pure products company to being a comprehensive provider of systems and
solutions.  Both of these entities focus on producing specific low
volume, high value solutions, bringing the Group firmly into the services sector
in the defense and homeland security markets. The addition of these design and
solution provision capabilities to our  EchoscopeTM product set gives
enormous added strength to the business.




Martech





Martech,
based in Weymouth, UK, provides bespoke design and manufacturing services. It
operates in the very specialized niche of high quality design and manufacturing
services mainly to the United Kingdom defense, nuclear and pharmaceutical
industries. Its services are provided on a custom sub-contract basis where high
quality and high integrity devices are required, but in quite small amounts.
Martech is accredited to ISO 9001-2000 and Tick-IT.


10


An
example of Martech’s design and engineering services is the development of a
ruggedized display unit in military vehicles capable of displaying variables
such as wind speed, air temperature and humidity independent of the vehicle’s
computer.





In the
past, the Company has designed products such as an air traffic management
software system, military sonar test equipment, and equipment for production
testing of sensors used in blood analysis equipment. Contracts ranged in amounts
between a few thousand dollars up to around a million dollars. The Company is
currently bidding on and obtaining contracts in the $500,000 to $1,000,000 range
in addition to continuing to seek smaller contracts.




Martech
competes with larger contractors in the defense industry. Typical amongst these
are Ultra Electonics, BAE Systems, and Thales, all of whom are also partners on
various projects. Martech is like many smaller companies a competitor to its
customers, who have in-house design facilities, and has to manage these
relationships carefully.




Martech’s
business strategy is to continue to grow profitably in its established niche. It
has established credentials with many of the bigger industry players and is well
known as a reliable contractor who delivers service and products to the high
specifications involved in defense, nuclear and pharmaceutical
industries.





Martech
provides Coda Octopus with the skills, practices and knowledge to expand its
foothold in the UK defense sector and ensures that it can substantiate its
credibility as a defense and homeland security supplier.  Martech’s
revenues for the full year ended October 31, 2008 were $3,081,843





Colmek





Colmek
operates in the same specialized niche of high quality design and manufacturing
services as Martech but to the US defense sector mainly, though also in
commercial sectors in the US. Its services are also provided on a custom
sub-contract basis where high quality and high integrity devices are
required.





An
example of the type of business conducted by Colmek is a contract to produce a
system to monitor the build-up of ice on the bows of oil tankers in use in the
Barents Sea. Colmek staff developed a monitoring system using strain-gauge
sensors, attached directly to the hull of the vessel. Environmental concerns
were of paramount importance, as much of the monitoring equipment was to be
located in the hull of the ship, where temperatures could drop well below the
specifications of standard, off-the-shelf, equipment. Colmek created a system
where the captain can monitor actual ice load as measured by the various
strain-gauges on the ship’s hull.





In the
past, the Company has also been engaged on projects such as the design and
production of a pipeline inspection vehicle and helicopter-based mine hunting
system incorporating sonar, laser, and acoustic payload configurations.
Contracts ranged in amounts from very low values to around $1,000,000. For the
future Colmek will seek the larger engagements in addition to continuing to seek
smaller contracts. Colmek’s revenues for the full year ended October 31, 2008
were $3,527,813.




Similarly
to Martech, Colmek intends to continue to grow in its existing established
niche. It has long standing relationships with many of the major companies in
the industry, such as Northrop Grumman and Raytheon. Colmek is a trusted
supplier, as well as occasionally being a competitor to these big
organizations.





Colmek
provides a growing revenue stream in the defense sector, opportunities for
cross-selling, raw skills that can be applied across the Group, and the
operating synergies to be gained between it and Martech.





Research
and Development





The
scientists and engineers who work for Coda Octopus OmniTech AS have become the
nucleus for our research and development center, based in Bergen, Norway. Our
research and development division also includes a team of seven software
engineers based in Edinburgh, Scotland, two of whom are original founders of the
Coda Octopus Products business.





This area
also benefits from strong and long lasting links with the University of Bergen.
We have also developed close links to the University of South Florida (USF) in
St Petersburg, Florida. Our strategic relationship with these institutions has
facilitated the development of our UISTM system to meet key requirements of
government agencies such as the US Coast Guard.




In
Bergen, we have two chief engineers, who between them led the hardware and
software development of the EchoscopeTM, and three other engineers who support
this activity, covering mechanical design and engineering and
software.





The key
drivers for our research and development activities are the lead we believe we
have in 3D acoustic imaging and which we aim to maintain over the coming years.
Our aim and strategy is to stay at the forefront of this technology, allowing us
to generate strong earnings growth from regular new products.


11


We have
recently been investing over $3 million annually in our research and development
activities and expect to continue this investment at a level of between $2m and
$3m during the current year in order to continue the current pace of research
and development, as well as product and intellectual property rights
development. Our products are developed in-house by our team of software design,
hardware design and engineering, and support staff. In the year ended October
31, 2008, we spent $3,525,023 on research and development.





Production
and Manufacturing





Our
production process consists of supply chain management, product assembly,
testing and calibration. We do not undertake any metal fabrication or electronic
circuit board manufacture and all components are manufactured outside of the
Company, bought in as raw materials and then assembled into finished
goods.





Assembly
of our products is carried out in four places at present. Our data acquisition
products and motion sensors are produced and distributed in the UK from our
Edinburgh production facility. Our printers are currently produced in Weymouth,
where Martech also undertake any production required as part of their
engineering design services. Similarly, Colmek undertake any production required
as part of their engineering projects in Salt Lake City, Utah. Finally, the
production of our EchoscopeTM product is currently located in Norway, but is
moving shortly to our facility in Utah.





Marketing




We
conduct worldwide sales and marketing through each company individually, with
our synergies, national and international exposure sought geographically by our
Presidents of European and US Operations. This structure provides dedicated
sales effort in each of the Group companies, and encourages cross-selling and
marketing of other Group companies’ products and services. The companies are
staffed as follows:





s
                Coda
      Octopus Products - nine persons distributed between the UK and Florida,
      USA


s
              Coda
      Octopus Martech - two full time and one part time based in Weymouth,
      UK


s
              Coda
      Octopus Colmek – three full time
staff


s
              Coda
      Octopus Innalogic - one staff member based in New York City,
      USA


s
              Port
      Security Group - currently being developed by Group-level
      staff


s
              Group
      level  – two members of staff, one based in New York City, USA and
      one based in St Petersburg, Florida,
USA





Generally,
our focus is on widening our market reach and selling broader services, systems
and solutions within our existing customer base. Specifically, we have a key
focus on Port and Harbor Security, leading with our flagship 3D sonar product
EchoscopeTM, and its added value derivative, the UISTM. Our marketing effort is
dedicated to enhancing, reinforcing, and protecting the value of our lead in
this huge emerging market, broadening our current product and systems-based
offerings to be able to offer complete solutions. However, within that we have
the following supporting marketing sub-strategies:





s
              Product:
      The extension of our product line (particularly EchoscopeTM) through adding
      value to produce higher added functionality products (eg. UISTM, the
      Company’s Underwater Inspection
System).





s
              Price:
      The maintenance and enhancement of profit margin through value add (as
      described above).





s
              Place:
      The use of strategic partnerships, at the higher value end of the market,
      particularly to provide solutions rather than product (eg. the provision,
      through partnership, of a complete port security solution to a major
      port), and the use of existing and new sales agents to provide sales leads
      for lower value but very important “pure” product
  sales.





s
              Promotion:
      The attendance and illustration of our capabilities at trade shows, use of
      customer mailing, advertising and trade public
  relations.




Each of
the Group companies has a number of external agents and representatives who are
distributed globally for Coda Octopus products, within the UK for Coda Octopus
Martech and within the USA for Coda Octopus Colmek and
Innalogic.


12


Suppliers





Most of
the materials and components used in our products are readily available in the
marketplace and are delivered pursuant to simple purchase orders. We do not have
long term supply contracts with our suppliers with the exception of a three year
agreement with Oxford Technical Solutions dated July 1, 2006, pursuant to which
that entity delivers licensed technology for use in our F180 product line. Other
than this specific technology we are not dependent on any materials that could
not be obtained from alternative sources if our current suppliers cease to make
deliveries to us for any reason.





Government
Regulation





Because
of the nature of some of our products, they may be subject to United States and
other export controls and may be exported outside the United States or the
United Kingdom only with the required level of export license or through an
export license exception.





In
addition, as a provider for the US Government, we may be subject to numerous
laws and regulations relating to the award, administration and performance of US
Government contracts, including the False Claims Act. Non-compliance found by
any one agency could result in fines, penalties, debarment, or suspension from
receiving additional contracts with all US Government agencies. Given our
dependence on US Government business, suspension or debarment could have a
material adverse effect on our business and results of operations.





Government
Relations





As
government has become a primary focus of our marketing of the EchoscopeTM, we
have established an office in Washington, DC, that will enable us to reach the
different levels of government. The office is managed by an experienced
individual to develop this presence. In addition, we have engaged a number of
lobbying firms to assist us with this task:





s
              Flagship
      Government Relations, a lobbying firm based in Washington, D.C., is
      assisting in reaching government officials and government agencies to
      assist with funding towards the use of our products in port security
      applications;


s
              CJ
      Strategies, a lobbying firm based in Washington, DC, is assisting in
      reaching the US Navy and has strong connections with the state of
      California;


s
              The
      Grossman Group, LLC, a lobbying firm based in Washington, D.C, is
      assisting in helping to gain governmental support for our operations in
      Utah;


s
              Dan
      Tate, LLC, a lobbying firm based in Washington, D.C., is assisting in
      helping to gain governmental support for our operations in Panama
      City.





Intellectual
Property





The Coda
Octopus technologies and products are underpinned by strong intellectual
property rights including trademarks, copyrights and patents (“IPRS”). We are in
the process of augmenting our IPRS portfolio, including rationalizing our
brands, seeking to register in the US and other jurisdictions certain trademarks
and the filing of a number of new patents in key areas of our business
activities. We have a number of fundamental patents including a patent covering
the stitching together of acoustic imagery (valid in the US, Europe, Australia
and Norway). This covers the real time acoustic image generation element of what
we do, and we believe it provides us with a competitive advantage.




Our
patented inventions along with our strategy to enhance these are at the heart of
the Company’s strategy for growth and development. In recognition of this, the
Company’s Board has adopted for implementation by the Company a Corporate Patent
Strategy. This provides for the effective management and organization of our
patents and other intellectual property rights. The main goals of our Corporate
Patent Strategy are to (i) protect value; (ii) create value and (iii) extract
value. Protecting value entails implementing measures aimed at protecting the
Company’s existing patents and other intellectual property rights. Creating
Value aims at working closely with our Research and Development Division to
remain at the forefront of 3D Sonar Technology by ensuring that we make the
necessary technological advancements in the market spaces in which we operate
and obtain the right legal protection by filing quality new patents. Extract
value entails ensuring that our Patents and other Intellectual Property Rights
work for us and generate premium revenues.


13


Patents





We have
been granted two patents:





s
                Patent
      No. 6,438,071 concerns the “Method for Producing a 3-D Image” and is
      recorded in the European Patents Register File #SH-44923; Australia
      #55375/99; Norway #307014 and US Patent Office # 6,438,071. This patent
      relates to the method for producing an image of a submerged object (3),
      e.g. a shipwreck or the sea bottom, comprising the steps of emitting
      acoustic waves from a first transducer toward a first chosen
      volume.




s
                Patent
      No. 6,532,192 concerns “Subsea Positioning System and Apparatus”, recorded
      in the US Patent Office. This patent relates to subsea positioning system
      and apparatus.





In
addition, we have applied for the following patents:





s
                Application
      number US2008043572 concerns the “Method of constructing mathematical
      representations of objects from reflected sonar
  signals”;s
                Application
      number US11760417 concerns “Combined pressure compensator and cooling
      unit”;


s
                Application
      number US11676427 concerns “Patch test for 3D sonar
  data”;s
                Application
      number US61026163 concerns “2D sonar beamforming using a real-time 3D
      sonar”;s
                Application
      number US12061298 concerns “Acoustic coating”;s
                Application
      number US12103839 concerns “Fast averaged volumetric rendering of large
      sets polar/range data using minimal intermediate storage”;
    and


s
                Application
      number US12138702 concerns “Edge enhancement of 2D polar range data using
      a common cartesian coordinate
system”.





Trademarks





In
marketing and branding our products and services we use the following registered
and unregistered trademarks:





Coda
TM


Octopus®


Octopus
& Design®


F-180
TM


Echoscope
TM


UISTM




In
addition, we have registered the internet domain names “codaoctopus.com”,
“codaoctopusgroup.com”, “theportsecuritygroup.com”, “3dsonar.com”,
“portsecurity.com”, martechsystems.co.uk and colmek.com with various
ICANN-certified domain name registrars.




Competition





We
compete with numerous companies, some of which are much larger than we are with
much greater financial, technical and human resources.





Products





The sonar
equipment industry is fragmented with several companies occupying niche areas,
and we face specific competition from different competitors with respect to our
different products. In the field of geophysical products Chesapeake, a US-based
company, and Oceanic Imaging Consultants, Hawaii, USA, dominate the market with
an estimated 30% each of world sales, while we believe that we are just behind
this with 25%.





In the
field of motion sensing equipment, we believe that we have four principal
competitors - TSS (International) Ltd in Watford, England which is focused on
the mid-performance segments with about 30% of the world market; Ixsea, a French
company which covers all segments, with about 25% of the market; Seatex, a
Norwegian company, part of Kongsberg Simrad which has products across all
segments, with about 15% of the market; and Applanix, a Canadian company, now
part of Trimble which has one major product focused on the high end of the
market, with about 20% of the market. We believe that our market share in the
field of motion sensing equipment is only about 10% at present.


14


In the
area of grayscale thermal printers, there are two companies besides us who
compete in this small market. EPC Labs, Massachusets, US, have around 40% of the
market, mainly in the US; iSys of Canada have around 20% of the market; we have
around 40% of the market, mainly in Europe and Asia.





In the
field of 3D real time imaging, we believe that we have no direct competition at
present since no other companies offer such a product. There is, however, no
assurance that others will not enter this area with competing
products.





We seek
to compete on the basis of producing quality products employing cutting edge
technology. We intend to continue our research and development activities to
continually improve our products, seek new applications for our existing
products and to develop new innovative products.





Services





We are
involved in custom engineering for the defense industry in the US, and for the
defense, nuclear and pharmaceutical industries in the UK. The size of these
companies means that there is significant competition provided by other small
engineering contracting firms, but the largest competition comes from the
decision by larger companies to proceed with a project in-house instead of
outsourcing to a sub-contractor like Martech or Colmek. In essence, the
potential of each company is determined by their ability to be known and trusted
by potential clients, and the make or buy decisions made by those potential
clients.




Employees





As of the
date hereof, we have 114 employees:




s
              6 are employed in research and
      development in our Bergen
facility
 s
              10 are employed in research and
      development in Edinburgh
 
 s
              20 are employed in sales,
      marketing, production and administration in
    Edinburgh
 
 s
              8 are employed in management and
      administration at our New York City
  office
 
 s
              3 are employed in product
      development, sales and support in New York
  City
 
 s
              10 are employed in sales,
      marketing and support at our Florida
  office
 
 s
              2 are employed in Government
      Relations at our Washington, DC,
office
 
 s
              38 are employed in
      Weymouth
 
 s
              17 are employed in Colmek in Salt
      Lake City, the main categories of employees being engineers and
      technician.




A large
majority of our employees have a background in science, technology and
engineering, with a substantial part being educated to degree and PhD level.
None of our employees are members of any union, and we have not experienced
organized labor difficulties in the past.





ITEM
2.           
PROPERTIES





New York City, New York,
USA. Our corporate offices, and those of our wholly owned subsidiary,
Coda Octopus Innalogic, are located at 164 West 25th Street,
6th
Floor, New York, New York 10001. We lease premises comprising 3,700 square feet
pursuant to a renewable lease which expires in July 2011. The lease provides for
a monthly rental of $10,000.




St Petersburg, Florida,
USA. We lease 3,200 square feet of business premises (comprising
assembly, testing facilities and office space) located at 100 14th Avenue
South, St. Petersburg, Florida. The space houses our US Sales, Marketing and
Production staff and is located close to the University of South Florida, which
is convenient for conducting trials and demonstrations of our products. The
lease, which is renewable at the option of the tenant, expires on March 31, 2009
and provides for a rental of $48,792 per annum (excluding
utilities).





Washington, DC, USA.
We lease office premises located at 700 13th Street,
N.W, Washington, DC 20005 (10th Floor).
This space comprises 186 square feet and houses our Government Relations
operations. The lease provides for a rental of $854 per month and expires on
January 31, 2012 but can be terminated by us with 30 days’ notice at any
point.





Salt Lake City, Utah,
USA. Our wholly owned subsidiary, Coda Octopus Colmek, Inc. d/b/a Colmek
Systems Engineering, leases 6,500 square feet of business premises at 2001 South
3400 West, Salt Lake City, Utah comprising both office space, manufacturing and
testing facilities. The lease provides for a monthly rental of $4,026 (with an
annual rental increase of 3% every April). The lease expires in April
2012.


15


Edinburgh, Scotland,
UK. Our wholly owned UK subsidiary, Coda Octopus Products Limited, leases
business premises comprising 4,099 square feet and located at 2nd Floor,
Anderson House, 1 Breadalbane Street, Edinburgh, Scotland. The space comprises a
main floor which houses sales and support staff and our software product
development team. The building is located close to the Port of Leith and Firth
of Forth, which is convenient for conducting trials and demonstrations of our
products. The lease provides for an annual rental of £65,584 and expires on
September 26, 2016. Pursuant to the provisions of the lease, we may terminate
the lease without penalty on or after the fifth anniversary of the lease
agreement, which is September 26, 2011.





We also
lease workshop and manufacturing facilities at Units 3, 8 and 10 Corunna Place,
Edinburgh, Scotland comprising 2,798 square feet and used as workshop space. The
lease provides for a rental of £19,805 per annum (£1,650 per month). There are
two lease agreements in place for these premises. One expires on 31 July 2009
and is subject to a 4 months notice period and the other expires 20 July 2010
and is fixed for a period of 3 years.





Weymouth, England,
UK. Our UK wholly owned subsidiary, Coda Octopus Martech Limited leases
business premises located at 14 Albany Road, Granby Industrial Estate, Weymouth,
Dorset, England DT4 9TH comprising 5,000 square feet. This space comprises both
office space and manufacturing and testing facilities. The lease provides for an
annual rent of £29,985 and expires on September 30, 2013. The lease provides for
an annual rent increase of 3% of the last annual rent.





We also
lease 4,800 square feet within close proximity of Martech’s premises. This
houses our wholly owned subsidiary, Dragon Design Limited. The lease provides
for an annual rent of £26,328 increasing at 3% per annum each August, and
expires in August 2015.





Bergen, Norway. Our
Norwegian subsidiary, Coda Octopus Omnitech AS, leases 2,370 square feet of
business premises in a recently refurbished maritime business center directly on
the waterway connected to Bergen harbor. This serves as our Research and
Development center with purpose-built laboratories for electronic and mechanical
development. The lease provides for a rental of NOK 440,500 per annum and
expires in May 31, 2012.




ITEM
3.            LEGAL
PROCEEDINGS





From time
to time, we may become involved in various lawsuits and legal proceedings which
arise in the ordinary course of business. However, litigation is subject to
inherent uncertainties, and an adverse result in these or other matters may
arise from time to time that may harm our business. Except as described below,
we are currently not aware of any such legal proceedings that we believe will
have, individually or in the aggregate, a material adverse affect on our
business, financial condition or operating results.




We are
currently engaged in a lawsuit involving the former Chief Executive Officer of
our subsidiary, Coda Octopus Colmek, Inc. (Scott DeBo v Miller & Hilton,
Inc. d/b/a Colmek Systems Engineering and Coda Octopus Group, Inc. File No.
080923661).  Mr DeBo claims breach of his employment contract, tortuous
interference with his contract, termination in violation of public policy and
failure to pay wages when due. He filed a complaint and an amended complaint on
November 10, 2008 and December 10, 2008, respectively. We answered the amended
complaint denying Mr. DeBo’s allegations, raising affirmative defenses on
December 22, 2008 and intend to defend ourselves vigorously.





ITEM
4.            SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS





None.


16


PART
II





ITEM
5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDERS MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES





Our
common stock has been traded on the OTC Bulletin Board under the symbol CDOC
since October 3, 2007. Prior thereto our stock was traded in the pink
sheets.





The
following table shows the reported high and low closing bid quotations per share
for our common stock based on information provided by the OTC Bulletin Board for
the period starting October 3, 2007. Information for the prior periods was
obtained from the Pink Sheets Quotation Service. Particularly since our common
stock is traded infrequently, such over-the-counter market quotations reflect
inter-dealer prices, without markup, markdown or commissions and may not
necessarily represent actual transactions or a liquid trading
market.




Year Ended October 31, 2007
                  
                  HIGH
                  
                  
                  LOWFirst
      Quarter
                  
                  $
                  1.55
                  
                  
                  $
                  0.72Second
      Quarter
                  
                  $
                  1.70
                  
                  
                  $
                  1.05Third
      Quarter
                  
                  $
                  1.72
                  
                  
                  $
                  1.50Fourth
      Quarter
                  
                  $
                  1.50
                  
                  
                  $
                  0.80





Year Ended October 31, 2008
                  
                  HIGH
                  
                  
                  LOWFirst
      Quarter
                  
                  $
                  0.88
                  
                  
                  $
                  0.45Second
      Quarter
                  
                  $
                  0.80
                  
                  
                  $
                  0.35Third
      Quarter
                  
                  $
                  0.39
                  
                  
                  $
                  0.28Fourth
      Quarter
                  
                  $
                  0.30
                  
                  
                  $
                  0.11





Year Ending October 31,
2009
                  
                  HIGH
                  
                  
                  LOWFirst
      Quarter
                  
                  $
                  0.20
                  
                  
                  $
                  0.11Second
      Quarter
                  
                  $
                  0.16
                  
                  
                  $
                  0.05





We have
not declared or paid any cash dividends on our common stock, and we currently
intend to retain future earnings, if any, to finance the expansion of our
business, and we do not expect to pay any cash dividends in the foreseeable
future. The decision whether to pay cash dividends on our common stock will be
made by our board of directors, in their discretion, and will depend on our
financial condition, operating results, capital requirements and other factors
that the board of directors considers significant. As of February 27, 2009, we
had 401 shareholders of record, not including persons who hold their shares
through a nominee.





Recent
Sales of Unregistered Securities





No sales
of unregistered securities have occurred that were not previously
reported.





ITEM
6. SELECTED FINANCIAL DATA





Not
applicable.


17


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OPERATIONS




Forward-Looking
Statements


The
information herein contains forward-looking statements. All statements other
than statements of historical fact made herein are forward looking. In
particular, the statements herein regarding industry prospects and future
results of operations or financial position are forward-looking statements.
These forward-looking statements can be identified by the use of words such as
“believes,” “estimates,” “could,” “possibly,” “probably,” anticipates,”
“projects,” “expects,” “may,” “will,” or “should” or other variations or similar
words. No assurances can be given that the future results anticipated by the
forward-looking statements will be achieved. Forward-looking statements reflect
management’s current expectations and are inherently uncertain. Our actual
results may differ significantly from management’s expectations.





The
following discussion and analysis should be read in conjunction with our
financial statements, included herewith. This discussion should not be construed
to imply that the results discussed herein will necessarily continue into the
future, or that any conclusion reached herein will necessarily be indicative of
actual operating results in the future. Such discussion represents only the best
present assessment of our management.





General
Overview


Coda
Octopus develops, manufactures, sells and services real-time 3D and other sonar
products, as well as engineering design and manufacturing services on a
worldwide basis. Headquartered in New York City, with research and
development, sales and manufacturing facilities located in the United Kingdom,
United States and Norway, the Company is also engaged in software development,
defense contracting and engineering services through subsidiaries located in the
United States and the United Kingdom.





Founded
in 1994, Coda operated for ten years as a private company based in the UK. By
the late 1990s, the Company had developed a strong reputation as a developer and
marketer of high quality software-based products used for underwater mapping,
geophysical survey and other related marine applications.





Shortly
after September 11, 2001, management was introduced to, and in December 2002
completed the acquisition of OmniTech AS, a Norwegian Company that had developed
and patented a prototype system called the EchoscopeTM. The Echoscope
permits accurate three-dimensional visualization, measurement, data recording
and mapping of underwater objects – in effect, the ability to “see” an object
underwater in real time.





Management
believed that real-time 3D sonar could represent a truly disruptive technology
with the potential to change industry standard practices and procedures. It
envisioned significant applications for this technology in Defense, Underwater
Port Security, Oil and Gas Exploration and Security, Bridge Repair, and
large-scale Underwater Construction projects. Given these beliefs, the Company
decided that the best way to gain access to the capital and the visibility
needed to commercialize real time 3D sonar, and to successfully enter multiple
worldwide markets in the post 9/11 environment would be to move its headquarters
to New York City, and to become a publicly traded company in the United
States.





On July
13, 2004 Coda Octopus became a public company through a reverse merger with The
Panda Project, Inc., a publicly traded Florida corporation. As a result of the
transaction, Coda and its shareholders, including its controlling shareholder
Fairwater Technology Group Ltd, were issued 20,050,000 common shares comprising
approximately 90.9% of the then issued and outstanding shares of Panda.
Subsequently, Panda was reincorporated in Delaware, and changed its name to Coda
Octopus Group, Inc. By mid 2005, the Company had completed the move of its
headquarters from the UK to New York City.





Since
moving to New York, the Company has accomplished a series of
objectives:





1.
              It
      has raised approximately $33 million in funds, through three private
      placements primarily with institutional investors. The Company raised
      approximately $8 million in 2006, approximately $13 million in April/May
      2007, and approximately $12 million in a convertible debt transaction that
      was completed in February 2008.2.
              It
      has completed the commercialization of the Echoscope and successfully
      deployed its real-time 3D technology and products on three continents with
      major corporations, governments, ports, law enforcement agencies and
      security organizations.





3.
              It
      has significantly broadened both its revenue base and its base of
      expertise in engineering, defense electronics, military and security
      training, and software development primarily through the acquisition of
      four privately held companies. Management believes that broadening the
      base of the Company in these specific areas was necessary to position Coda
      Octopus as a reliable and experienced contractor, subcontractor and
      supplier of 3D sonar products and systems on a worldwide
      basis.


18




4.
              Beginning
      in July 2007,the US Department of Defense (DoD) Technical Support Working
      Group (TSWG) funded Coda Octopus to build and deliver next-generation
      Underwater Inspection SystemsTM (UIS) for the US Coast Guard and other
      potential users. The program has included money to build and deliver
      current systems, as well as a roadmap for their future development. During
      the year ended October 31, 2007, the Company delivered three UIS systems
      to the US Coast Guard against a purchase order totaling $2.59 million. In
      FY 2008 the Company was funded for an additional $1.53 million to develop
      certain mutually agreed technical enhancements to the system. The
      Company’s latest contract with TSWG covers the funding of an additional
      $1.4 million for additional enhancements and the delivery of additional
      systems. The Company believes it has successfully completed the key
      second-stage enhancements sought by the DoD and the Coast Guard. As a
      result, management believes that the Company is positioned to build and
      deploy fully integrated systems that meet the highest standards in the
      world. They enable users to “see” objects that are smaller than a baseball
      from a distance of more than 100 meters, and to do so in all kinds of
      ocean or water conditions at virtually any depth. In addition, the Company
      through its Colmek subsidiary, has more than 20 years of successful
      experience as contractor with the Department of Defense, and as a
      subcontractor with various large primes, most particularly
      Raytheon.




5.
              The
      Company has taken advantage of its first mover status in real-time 3D
      sonar to start to open up several potentially significant vertical markets
      in the private sector. Thus far, the three areas of focus have been
      Dredging, Underwater Construction, and Security. In each of these areas,
      the Company has selected a lead customer and has worked with that customer
      to develop and deploy a system that management believes will have wide
      application throughout the segment. In the case of Rotterdam-based Van
      Oord, Coda Octopus was funded to develop a particular application, and in
      other cases the Company has financed the development
      internally.





The
Company believes that the largest potential markets for real-time 3D sonar are
with government authorities both in the US and throughout the world. Here in the
US, the Company has deployed systems Jacksonville Sheriff, FL, and in Contra Costa
County, CA, with immediate interest in at least six additional locations.
Overseas the Company has deployed systems in Korea, Japan, the United Kingdom
and the Middle East, and has significant opportunities in Germany, Singapore,
Malaysia and the Netherlands. Our main challenges are the long lead times in
purchasing cycles, the current economic environment, and the initial adoption of
new technology, which can take several years to effect.





The
consolidated financial statements include the accounts of Coda Octopus and our
domestic and foreign subsidiaries that are more than 50% owned and controlled,
which includes Colmek Systems Engineering (now Coda Octopus Colmek, Inc.), which
was acquired on April 6, 2007. Based in Salt Lake City Utah,Colmek is a global
provider ofengineering services,
rugged products, andsystem integration for
the military, defense, and aerospace industry. It has 20 years of experience in
serving as a successful military contractor, and as a subcontractor with various
primes, most particularly Raytheon.





All
significant intercompany transactions and balances have been eliminated in the
consolidated financial statements.





The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and
accompanying disclosures. Although these estimates are based on management's
best knowledge of current events and actions that we may undertake in the
future, actual results may differ from those estimates.





Products
and Services





We are
engaged in 3D subsea technology and are the developer and patent holder of
real-time 3D sonar products, which we expect to play a critical role in the next
generation of underwater port security. We produce hardware, software and fully
integrated systems, which are sold and supported on a worldwide basis, with wide
applications in a number of distinct markets:





s
              Marine
      geophysical survey (commercial), which focuses around oil and gas,
      oceanographic research and exploration, where we market to survey
      companies, research institutions, salvage companies. This was our original
      focus, with current products spanning geophysical data collection and
      analysis, through to printers to output geophysical data collected by
      sonar. We believe that our marine geophysical survey markets are
      experiencing rapid growth due to: 1) successful new product introductions
      in recent periods; 2) market-proximity benefits derived from the 2004
      relocation to the United States; 3) initial market penetration into new
      sub-sectors of the marine geophysical survey markets; 4) the high price of
      oil and gas in the past few years, resulting in unprecedented exploration
      and production activity, which is still having some effect on the market
      even with lower current
prices.


19





s
              Underwater
      defense/security, where we market to ports and harbors, state, local and
      federal government agencies, law enforcement agencies and defense
      contractors. We have recently completed developing and commenced marketing
      our Underwater Inspection System (UISTM), the first real-time, high
      resolution, three-dimensional underwater sonar imaging system, which we
      believe has particularly important applications in the fields of port
      security, defense and undersea oil and gas
  development.





s
              Underwater
      construction, where our products are used for real-time monitoring of
      construction which is conducted subsea, a particularly challenging
      environment. We have also developed for one of our customers a tailored
      software application to allow the laying of concrete AccropodesTM for
      constructing breakwaters. The advantage of our real-time system is in
      giving visibility where previously divers were used to help with the
      construction, a dangerous and inefficient
  process.




s
              Dredging,
      where our products are used for pre-dredge survey and in a real-time mode
      where they monitor the quality and precision of the dredge. The advantage
      we give is in improving the dredge quality and drastically reducing the
      time involved – for example, if a re-dredge is required, this can be done
      immediately from the information we provide, instead of days or weeks
      later, when a new vessel may even have to be
  used.





s
              Other
      applications, such as shallow water hydrography underwater logging, debris
      survey and treasure hunting.





In
addition, through our two engineering services subsidiaries, Coda Octopus
Martech Ltd, based in Weymouth, England, UK, and Colmek Systems Engineering,
based in Salt Lake City, Utah, US we provide engineering services to a wide
variety of clients in the subsea, defense, nuclear, government and
pharmaceutical industries. These engineering capabilities are increasingly being
combined with our product offerings, bringing opportunities to provide complete
systems, installation and support.





For the
foreseeable future, we intend to intensify our focus on port security. We
believe that in the post 9/11 era there are significant growth opportunities
available in that particular market segment because of increased government
expenditures aimed at enhancing security. Specifically, we believe that we have
the ability to capitalize on this opportunity as a result of:





s
              First
      mover advantage in 3D sonar markets based on our patented technology, our
      research and development efforts and extensive and successful testing in
      this area that date back almost two decades as well as broad customer
      acceptance.s
              Early
      recognition of need for 3D real-time sonar in defense/security
      applications.


s
              Expansion
      into new geographies like North America and Western
  Europe.s
              Expansion
      into new commercial markets like commercial marine survey with innovative
      products.


s
              Recent
      sole source classification for one of our products and its derivatives by
      certain government procurement
agencies.





Further,
we believe the EchoscopeTM will transform certain segments of the sonar products
market. In addition, 3D sonar, currently in the early stages of adoption, has
disruptive technology qualities as it has the ability to change industry
standard practice in respect of the method for visualization and imaging of
underwater objects and environment. Therefore, it will likely change who the
suppliers into this market are as well as our market position and that of our
competitors. We believe the market opportunity in underwater security and
defense could grow at a rapid pace over the next several years.





Critical
Accounting Policies





This
discussion and analysis of our financial condition and results of operations are
based on our consolidated financial statements that have been prepared under
accounting principles generally accepted in the United States of America
(“GAAP”). The preparation of financial statements in conformity with US GAAP
requires our management to make estimates and assumptions that affect the
reported values of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
levels of revenue and expenses during the reporting period. Actual results could
materially differ from those estimates.





Below is
a discussion of accounting policies that we consider critical to an
understanding of our financial condition and operating results and that may
require complex judgment in their application or require estimates about matters
which are inherently uncertain. A discussion of our significant accounting
policies, including further discussion of the accounting policies described
below, can be found in Note 1, "Summary of Significant Accounting Policies" of
our Consolidated Financial Statements.


20


Revenue
Recognition





We record
revenue in accordance with the guidance of the SEC's Staff Accounting Bulletin SAB No.
104 (SAB 104), which supersedes SAB No. 101 in order
to encompass EITF No.
00-21, Revenue
Arrangements with Multiple Deliverables (EITF 00-21).





Revenue
is derived from sales of underwater technologies and equipment for imaging,
mapping, defense and survey applications. Revenue is also derived through
contracts gained by our Martech, Colmek and Innalogic businesses.





Revenue
is recognized when conclusive evidence of firm arrangement exists, delivery has
occurred or services have been rendered, the contract price is fixed or
determinable, and collectability is reasonably assured. No right of return
privileges are granted to customers after shipment.





For
arrangements with multiple deliverables, we recognize product revenue by
allocating the revenue to each deliverable based on the fair value of each
deliverable in accordance with EITF No. 00-21 and
SAB No. 104, and recognize revenue for equipment upon delivery and for
installation and other services as performed. EITF No. 00-21 was effective for
revenue arrangements entered into in fiscal periods beginning after June 15,
2003.




Our
contracts typically require customer payments in advance of revenue recognition.
These deposit amounts are reflected as liabilities and recognized as revenue
when the Company has fulfilled its obligations under the respective
contracts.





Revenues
derived from our software license sales are recognized in accordance with
Statement of Position (SOP) SOP No. 97-2, “Software Revenue Recognition,” and
SOP No. 98-9, “Modifications of SOP No. 97-2, Software Revenue Recognition with
Respect to Certain Transactions”. For software license sales for which any
services rendered are not considered essential to the functionality of the
software, we recognize revenue upon delivery of the software, provided (1) there
is evidence of an arrangement, (2) collection of our fee is considered probable
and (3) the fee is fixed and determinable.





Recoverability
of Deferred Costs





We defer
costs on projects for service revenue. Deferred costs consist primarily of
direct and incremental costs to customize and install systems, as defined in
individual customer contracts, including costs to acquire hardware and software
from third parties and payroll costs for our employees and other third
parties.





We
recognize such costs in accordance with our revenue recognition policy by
contract. For revenue recognized under the completed contract method, costs are
deferred until the products are delivered, or upon completion of services or,
where applicable, customer acceptance. For revenue recognized under the
percentage of completion method, costs are recognized as products are delivered
or services are provided in accordance with the percentage of completion
calculation. For revenue recognized ratably over the term of the contract, costs
are recognized ratably over the term of the contract, commencing on the date of
revenue recognition. At each balance sheet date, we review deferred costs, to
ensure they are ultimately recoverable. Any anticipated losses on uncompleted
contracts are recognized when evidence indicates the estimated total cost of a
contract exceeds its estimated total revenue.




Stock
Based Compensation





SFAS
No. 123, “Accounting for Stock-Based Compensation”, established and
encouraged the use of the fair value based method of accounting for stock-based
compensation arrangements under which compensation cost is determined using the
fair value of stock-based compensation determined as of the date of the grant or
the date at which the performance of the services is completed and is recognized
over the periods in which the related services are rendered. The statement also
permitted companies to elect to continue using the current intrinsic value
accounting method specified in Accounting Principles Board (“APB”) Opinion
No. 25, “Accounting for Stock Issued to Employees”, to account for
stock-based compensation to employees. Prior to the adoption of SFAS 123(R) we
elected to use the intrinsic value based method for grants to our employees and
directors and have disclosed the pro forma effect of using the fair value based
method to account for our stock-based compensation to employees.





On
December 16, 2004, the Financial Accounting Standards Board (FASB) issued SFAS
No. 123R (revised 2004), “Share-Based Payment” (“Statement 123R”) which is a
revision of SFAS No. 123.





Statement
123R supersedes APB opinion No. 25 and amends SFAS No. 95, “Statement of Cash
Flows”. Generally, the approach in Statement 123R is similar to the approach
described in Statement 123. However, Statement 123R requires all share-based
payments to employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values. Pro-forma
disclosure is no longer an alternative. This statement does not change the
accounting guidance for share based payment transactions with parties other than
employees provided in SFAS No. 123(R). This statement does not address the
accounting for employee share ownership plans, which are subject to AICPA
Statement of Position 93-6, “Employers’ Accounting for Employee Stock
Ownership


21


Plans”.
On April 14, 2005, the SEC amended the effective date of the provisions of this
statement. The effect of this amendment by the SEC is that the Company had to
comply with Statement 123R and use the Fair Value based method of accounting no
later than the first quarter of 2006. We implemented SFAS No. 123(R)
on November 1, 2004 using the modified prospective method. The fair value
of each option grant issued after November 1, 2004 will be determined as of
grant date, utilizing the Black-Scholes option pricing model. The amortization
of each option grant will be over the remainder of the vesting period of each
option grant.  We use the fair value method for equity instruments granted
to non-employees and use the Black Scholes model for measuring the fair value.
The stock based fair value compensation is determined as of the date of the
grant or the date at which the performance of the services is completed
(measurement date) and is recognized over the periods in which the related
services are rendered.





Income
Taxes





Deferred
income taxes are provided using the asset and liability method for financial
reporting purposes in accordance with the provisions of Statements of Financial
Standards No. 109, "Accounting for Income Taxes". Under this method, deferred
tax assets and liabilities are recognized for temporary differences between the
tax bases of assets and liabilities and their carrying values for financial
reporting purposes and for operating loss and tax credit carry forwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be removed or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the
consolidated statements of operations in the period that includes the enactment
date.




Purchase
price allocation and impairment of intangible and long-lived assets





Intangible
and long-lived assets to be held and used are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amounts of such
assets may not be recoverable. Determination of recoverability is based on an
estimate of undiscounted future cash flows resulting from the use of the asset,
and its eventual disposition. Measurement of an impairment loss for intangible
and long-lived assets that management expects to hold and use is based on the
fair value of the asset as estimated using a discounted cash flow
model.





We
measure the carrying value of goodwill recorded in connection with the
acquisitions for potential impairment in accordance with SFAS No. 142, Goodwill
and Other Intangible Assets”. To apply SFAS 142, a company is divided into
separate “reporting units”, each representing groups of products that are
separately managed. For this purpose, we have one reporting unit. To determine
whether or not goodwill may be impaired, a test is required at least annually,
and more often when there is a change in circumstances that could result in an
impairment of goodwill. If the trading of our common stock is below book value
for a sustained period, or if other negative trends occur in our results of
operations, a goodwill impairment test will be performed by comparing book value
to estimated market value. To the extent goodwill is determined to be impaired
an impairment charge is recorded in accordance with SFAS 142.





Results
of Operations





Comparison
of fiscal year ended October 31, 2008, compared to fiscal year ended October 31,
2007.





Introduction





Due to
the acquisition of Colmek in April 2007, the financial information presented for
the Company for the year ended October 31, 2007 (the "2007 Period"), includes
activity in Colmek for the respective period, combined with revenue, other
income and SG&A expenses of the rest of Coda Octopus Group, Inc. for the
fiscal year ending October 31, 2007. The financial information presented (“2007
Period") does not include any revenues and expenses for Colmek from the period
before the acquisition which occurred on April 6, 2007. As a result, the
sharply increased revenues and expenses in the accompanying audited consolidated
statements of operations in 2008 (“2008 Period”) compared to those in 2007 may
not be a meaningful comparison.





Revenue. Total revenue for
the 2008 Period and the 2007 Period was $16,968,922 and $13,853,313,
respectively, representing an increase of 22.5%. The contribution from Colmek
was $2,439,241 in the 2007 Period starting on April 6, 2007, while it
contributed $3,527,813 in the full year 2008. Subtracting the extra contribution
from this acquisition, there was a 17.8% increase in revenue in our original
businesses. This was due to a strong demand for our traditional products in the
geophysical and hydrographic survey markets, and growth in demand for our
Echoscope.





Gross Margins. Margins were
stronger in the 2008 Period at 59.1% (gross profit of $10,027,635) compared to
53.8% in the 2007 Period, reflecting a different mix of sales. The products
business and the software development business (surrounding our core products)
accounted for approximately 55% of the overall mix in 2008 as our UIS system, a
higher margin product, gained some traction along with products selling into our
geophysical and hydrographic survey markets.


22


Research and Development
(R&D). R&D spending increased to $3,525,023 in the 2008 Period
from $3,019,090 in the 2007 Period as we continued to focus considerable effort
into enhancing the EchoscopeTM and releasing other products in our suite of
marine geophysical offerings. In particular, work focused on delivering our
Underwater Inspection System (UIS), a turnkey system built around the EchoscopeTM
platform. Additionally, two software development projects were successfully
completed in 2008. One involved an upgrade in the imagery produced by the
EchoscopeTM sponsored by TSWG, a research group affiliated with the US Coast
Guard. The other software development project was ordered by a consortium of
companies in the underwater construction industry to enable the EchoscopeTM to
assist in the placing of concrete material (AccropodeTM) on the seabed. Under
terms of an agreement with the holder of our secured convertible notes,
discussed below under Financing Activities – Note Offering, we agreed to reduce
fiscal 2009 R&D.




Selling, General and Administrative
Expenses (SG&A). SG&A expenses for the 2008 Period increased to
$10,592,352 (removing non-cash charges of $1,614,590 and currency translation
effect of $997,312). The 2007 Period reflected $8,759,789,, adjusting $3,656,118
in non-cash charges and a positive $30,657 in exchange rate movement. Excluding
these charges, the SG&A for the 2008 Period rose $1,832,563, or 20.9% versus
a 22.5% increase in revenues. Of this increase, $790,558 of SG&A cost was
attributable to the full year contribution from Colmek which was acquired on
April 6, 2007. This meant that comparable SG&A expenses, excluding non-cash
charges and currency translation effects, increased in the 2008 Period by only
$1,042,005 over the 2007 Period, or 11.9%. This represents a significantly
smaller rate of increase from last year’s but management is dedicated to
reducing SG&A as a percentage of revenues in fiscal 2009. Under terms of an
agreement with the holder of our secured convertible notes, discussed below
under Financing Activities – Note Offering, we agreed to reduce fiscal 2009
SG&A.




Key areas
of 2008 Period expenditure include wages and salaries, where we spent $8,202,854
or 49.0% against $4,715,936 or 29.8% of our SG&A cost, 5% of which was
attributable to the addition of Colmek for the full year; legal and professional
fees, including accounting, audit and investment banking services, where we
spent $1,357,114 or 8.1% in the 2008 Period against $851,450, or 5.4% of our
SG&A costs in the 2007 Period - this increase is due to costs for payroll
service fees, legal fees and accounting; travel costs increased to $782,615 or
4.7% in the 2008 Period from $560,472 or 3.5% of SG&A in the 2007 Period,
with the increased outlay due to the larger staff from the acquisition as well
as three outside directors added and increased travel due to an overseas
financing; rent for our various locations increased in the 2008 Period to
$701,528 or 4.2% against $519,162 or 3.3% of SG&A in the 2007 Period, with
this increase due to a full year’s rent at Colmek, Bergen, Edinburgh and
Florida, the latter three being new facilities for each of those businesses and
the former a business acquisition; marketing increased to in the 2008 Period to
$1,240,508 or 7.4% of SG&A against $471,049 or 3.0% of SG&A in the 2007
Period, due to moving all our Washington consultants into marketing costs as
well as trying to create a new market for our equipment.




Other Operating Expenses. In the 2007 Period,
we incurred costs of $435,000 as non-recurring fees and expenses in connection
with our financings, which are also included in our loss from operations, and
shown separately under Other Operating Expenses. These fees covered equity fund
raising during the 2007 Period. There were no comparable charges in
2008.





Operating Loss. We incurred a
loss from operations of $6,701,642 in the 2008 Period against $8,384,069 in the
2007 Period. Removing non-cash and non-recurring expenses, the comparison shows
a loss from operations of $3,893,726 against a similarly adjusted $5,096,266
loss for 2007. This decreased loss is entirely attributable to increased
revenues, improved margins and the increase in costs required to support this
growth.




Interest Expense. Interest
expense decreased in the 2008 Period to $1,538,724 from the 2007 Period interest
costs which were $6,655,283. In the 2008 Period, we have included amortization
of the 30% redemption premium for our convertible note, at a cost of $348,493
and we have accrued interest on the convertible bond of $705,150, ahead of
payment of this latter amount in February 2009. There was also a financing
charge of $4,200 paid in stock. Of the 2007 Period number, $6,105,918 was
attributable to the valuation of warrants issued as part of our financing,
booked as a financing charge and a non-cash item. Removing non-cash items, the
comparison shows $549,365 for the 2007 Period against $480,881 in 2008, with
both amounts due to interest charged by our factors, FGI, a relationship which
ended on October 31, 2008.




Dividends and Other Stock
Charges. In the 2008 Period, dividends were due only on outstanding
Series A Preferred stock, and totaled $129,568 for the year. During the 2007
Period, dividends of $388,969 were declared on preferred stock (most of the
preferred stock was converted into common stock prior to the end of the 2007
Period). The 2007 amount includes a redemption premium of $181,810 paid on the
Series B preferred stock. This took the net loss applicable to common shares to
$16,141,284 or $0.42 per share for the 2007 Period, based on an average of
38,476,352 shares outstanding over the period, compared to a loss of $8,050,085
or $0.17 per share for the 2008 Period, based on an average of 48,486,291 shares
outstanding over the period.


23


Financial
Instruments Measured at Fair Value




SFAS
No. 157 defines fair value as the price that would be received from selling
an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. When determining the fair value
measurements for assets and liabilities required or permitted to be recorded at
fair value, we considered the principal or most advantageous market in which we
would transact and considered assumptions that market participants would use
when pricing the asset or liability, such as inherent risk, transfer
restrictions, and risk of nonperformance. SFAS No. 157 establishes a fair
value hierarchy that requires an entity to maximize the use of observable inputs
and minimize the use of unobservable inputs when measuring fair value. SFAS
No. 157 establishes three levels of inputs that may be used to measure fair
value:




Level 1 -
Quoted prices in active markets for identical assets or
liabilities.




Level 2 -
Observable inputs other than Level 1 prices such as quoted prices for similar
assets or liabilities; quoted prices in markets with insufficient volume or
infrequent transactions (less active markets); or model-derived valuations in
which all significant inputs are observable or can be derived principally from
or corroborated by observable market data for substantially the full term of the
assets or liabilities.




Level 3 -
Unobservable inputs to the valuation methodology that are significant to the
measurement of fair value of assets or liabilities.




To
the extent that valuation is based on models or inputs that are less observable
or unobservable in the market, the determination of fair value requires more
judgment. In certain cases, the inputs used to measure fair value may fall into
different levels of the fair value hierarchy. In such cases, for disclosure
purposes, the level in the fair value hierarchy within which the fair value
measurement is disclosed is determined based on the lowest level input that is
significant to the fair value measurement.




Items
recorded or measured at fair value on a recurring basis in our accompanying
financial statements consisted of the following items as of October 31,
2008:




Quoted Prices
                                    in Active
                                    Markets for
                                    Identical
                                    Instruments
                                  
                                  
                                  Significant
                                    Other
                                    Observable
                                    Inputs
                                  
                                  
                                  Significant
                                    Unobservable
                                    InputsTotal
                                  
                                  
                                  Level 1
                                  
                                  
                                  Level 2
                                  
                                  
                                  Level 3Assets:Short
      term Investment
                                  
                                  $
                                  153,000
                                  
                                  
                                  $
                                  153,000Total
                                  
                                  $
                                  153,000
                                  
                                  
                                  $
                                  153,000
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  
                                  -




With the
exception of assets and liabilities included within the scope of FSP FAS No.
157-2, we adopted the provisions of SFAS No. 157 prospectively effective as of
the beginning of the 2008 Period.  For financial assets and
liabilities included within the scope of FSP FAS No. 157-2, we will be required
to adopt the provisions of SFAS No. 157 prospectively as of the beginning of
Fiscal 2009.  The adoption of SFAS No. 157 did not have a material
impact on our financial position or results of operations, and we do not believe
that the adoption of FSP FAS No. 157-2 will have a material impact on our
financial position or results of operations.




The fair
value of the assets, short term investments, at October 31, 2008 was grouped as
Level 1 valuation as the market price was readily available, and there has been
no change to the fair value of the securities at October 31, 2008.





Liquidity
and Capital Resources





The
Company generated a deficit in cash flow from operations of $6,261,562 in 2008,
against $10,088,405 in the 2007 Period. This deficit is due to continued losses,
plus a reduction in accounts payable of $800,885.




We
invested $906,904 in the business, including the addition of fixed and
intangible assets and the completion of the acquisition of Colmek, which
required a final outlay of $763,936. Our debt financing raised a net
$10,605,377.





With the
$12M (gross) financing supplied in February 2008 by the sale of convertible
notes to an institutional investor for, amongst other specified uses,
acquisitions, working capital (discussed below in greater detail), an improved
sales pipeline, and the interest the US Coast Guard has shown in the UIS system,
we expect to improve our cash flow results significantly in the 2009
Period.


24


While we
have raised capital to meet our working capital and financing needs in the past,
additional financing may be required in order to meet our current and projected
cash flow requirements from operations and development. We currently have no
commitments for financing. There is no guarantee that we will be successful in
raising any funds required. In addition, any additional financing requires
approval from the convertible notes holder under the financing concluded by us
on February 21, 2008. Under the terms of this transaction we have granted a
blanket lien on all Company assets and can neither sell new securities including
common stock, nor incur further indebtedness above $2 million during the term of
the notes without the prior approval of the holders of the loan note.
Furthermore, we will no longer be able to finance our receivables with another
party without prior approval from the holders of the loan note.





Inflation
and Foreign Currency





The
Company maintains its books in local currency: US Dollars for its US operations,
Pounds Sterling and Norwegian Kroner for its United Kingdom and Norwegian
operations, respectively.





Until
recently, the Company’s operations were conducted primarily outside the United
States through its wholly-owned subsidiaries. As a result, fluctuations in
currency exchange rates may significantly affect the Company's sales,
profitability and financial position when the foreign currencies of its
international operations are translated into U.S. dollars for financial
reporting. In additional, we are also subject to currency fluctuation risk with
respect to certain foreign currency denominated receivables and payables.
Although the Company cannot predict the extent to which currency fluctuations
may or will affect the Company's business and financial position, there is a
risk that such fluctuations will have an adverse impact on the Company's sales,
profits and financial position. Because differing portions of our revenues and
costs are denominated in foreign currency, movements could impact our margins
by, for example, decreasing our foreign revenues when the dollar strengthens and
not correspondingly decreasing our expenses. The Company does not currently
hedge its currency exposure. In the future, we may engage in hedging
transactions to mitigate foreign exchange risk.




The
translation of the Company’s UK operations’ pound sterling denominated balance
sheets into US dollars, as of October 31, 2007, has been affected by the rapid
strengthening of the US dollar against the British pound sterling from $2.08 at
October 31, 2007, to $1.63 at October 31, 2008, an approximate 28% appreciation
in value. The average British pound sterling/US dollar exchange rates used for
the translation of the UK operations’ pound sterling denominated statements of
operations into US dollars, for the years to October 31, 2008 and 2007 were
$1.94 and $1.98, respectively.





The
translation of the Company’s Norwegian operation’s Kroner denominated balance
sheets into US dollars, as of October 31, 2008, has not been materially affected
by the currency fluctuations of the US dollar against the Kroner from $0.186 as
of October 31, 2007, to $0.149 as of October 31, 2008, an approximate 20% change
in value. The average Kroner/US dollar exchange rates used for the translation
of the Norwegian operation’s Kroner denominated statements of operations into US
dollars, for the years to October 31, 2008 and 2007 were $0.186 and $0.167,
respectively.





The
impact of these currency fluctuations on the 2008 Period is shown
below:




Pound Sterling
                  
                  
                  Norwegian KronerActual
                    Results
                  
                  
                  Constant
                    Rates
                  
                  
                  Actual
                    Results
                  
                  
                  Constant
                    Rates
                  
                  
                  Total EffectRevenues
                  
                  $
                  9,825,663
                  
                  
                  $
                  10,040,931
                  
                  
                  $
                  63,705
                  
                  
                  $
                  57,134
                  
                  
                  $
                  208,697Costs
                  
                  
                  7,267,630
                  
                  
                  
                  7,426,854
                  
                  
                  
                  92,701
                  
                  
                  
                  83,139
                  
                  
                  
                  149,663Net
      Income/(Losses)
                  
                  
                  2,558,033
                  
                  
                  
                  2,614,077
                  
                  
                  
                  (28,996
                  )
                  
                  
                  (26,005
                  )
                  
                  
                  59,034Assets
                  
                  
                  10,561,905
                  
                  
                  
                  12,679,655
                  
                  
                  
                  482,824
                  
                  
                  
                  590,672
                  
                  
                  
                  2,225,597Liabilities
                  
                  
                  7,289,881
                  
                  
                  
                  9,057,984
                  
                  
                  
                  291,014
                  
                  
                  
                  361,597
                  
                  
                  
                  1,838,686Net
      Assets
                  
                  
                  3,272,024
                  
                  
                  
                  3,621,670
                  
                  
                  
                  191,810
                  
                  
                  
                  229,074
                  
                  
                  
                  386,911





This
table shows that the effect of constant exchange rates, versus the actual
exchange rate fluctuations, increased profits for the year by $59,034 and
increased net assets by $386,911. In addition, the Company booked transactional
exchange rate losses of $997,312 during the 2008 Period. All of these amounts
are material to our overall financial results.





It is the
opinion of the Company that inflation has not had a material effect on its
operations.


25


Financing
Activities





Equity
Offerings




On April
30, 2006, we issued 2,377 shares of our Series A Preferred Stock to a group of
individual investors for total cash consideration of $407,100. An additional
4,943.88 shares of our Series A Preferred Stock were issued to various
individuals as repayment of $734,628 in debt. The aggregate value of these
issuances was $1,141,728 for a total of 7320.88 shares.





In June
2006, we issued to one institutional investor units consisting of 23,000 shares
of our Series B Preferred Stock and two five-year warrants to purchase 4.6
million shares of our common stock at a price ranging from $1.30 to $2.00 per
share for total cash consideration of $2,300,000. Of these shares of Series B
Preferred Stock, 4,819 were converted into 481,900 shares of common stock in
April 2007 and 18,181 shares of Series B Preferred Stock were repurchased by us.
These repurchased shares have now been cancelled.





In July
2006, we issued to two individual investors 820 shares of our Series A Preferred
Stock for a total cash consideration of $82,000. These have since been converted
into 82,000 shares of our common stock.





From
September 2006 through January 2007, we issued to one institutional investor
units consisting 23,000 shares of our Series B Preferred Stock and four five
year warrants to purchase 4.6 million shares of our common stock at a price
ranging from $1.3 to $2.00 per share and 650,000 shares of our Common Stock for
a total cash consideration of $2,300,000. The 23,000 shares of Series B
Preferred Stock were converted into 2,300,000 shares of our common stock in
March 2007.





On
October 31, 2006, we issued to one investor 500 shares of our Series A Preferred
Stock for a total consideration of $50,000. These have since been converted into
50,000 shares of our common stock.




In
January 2007, we issued to one investor 3,000 shares of our Series B Preferred
Stock plus five-year warrants to purchase 300,000 shares of our common stock at
$1.30 per share and five-year warrants to purchase 300,000 shares of our common
stock at $1.70 per share for a total cash consideration of $300,000. The 3000
shares of Series B Preferred Stock have since been converted into 300,000 shares
of our common stock.




In April
2007 we issued to an individual investor 25,000 shares of our common stock plus
five-year warrants to purchase the same amount of shares of common stock (of
which 12,500 may be purchased at $1.30 and the balance at $1.70 per share) for a
total of $25,000.





In April
and May, 2007, the Company consummated a series of securities purchase
agreements with a group of accredited individual and institutional investors
providing for the sale and issuance of 15,025,000 shares of our common stock and
five-year warrants to purchase 7,512,400 shares of common stock at $1.30 per
share and five-year warrants to purchase 7,512,500 shares of common stock at
$1.70 per share. Gross proceeds from the offering amounted to $15,025,000,
generating $13,877,980 after costs. Also, in the period, we raised $800,000 from
the sale of preferred stock and warrants, with the preferred stock since
converted into common stock. We also issued five-year warrants to purchase
2,400,000 shares of our common stock at $1.00 per share as part of placement
agent fees.





Secured
Convertible Debentures





On
February 21, 2008 we entered into and completed the transactions contemplated
under a series of agreements providing for the issuance to a London based
institutional investor, The Royal Bank of Scotland plc of senior secured
convertible notes in the principal amount of $12,000,000 (the “Notes”). The
Notes are secured by all of the assets of the Company and its subsidiaries and
mature 84 months after the date of issuance at which time they are redeemable at
130% of the face amount of the Notes. The Notes accrue interest at the annual
rate of 8.5% which is payable in semi-annually in arrears. The Notes also
stipulate additional interest payments of 2% per annum above the base rate
quoted by The Royal Bank of Scotland plc from time to time, in the event that
the semi-annual interest payments are not paid by us on the due dates. All of
these amounts are payable by us in cash. Of the proceeds, $6,000,000 constituted
a specific purpose loan and in the event that we failed to use the proceeds as
agreed within 12 months from the closing, then, unless alternative investments
were approved by the holders of the Notes, this $6,000,000 was repayable in
February 2009.. In such case there will be a partial redemption of 60 of the
notes (having an aggregate nominal value of $6 million). Pursuant to the terms
of the agreement, a further $1 million of the proceeds has been retained by RBS
to secure the performance of certain contractual obligations of the Company.
Upon performance of these by us, this will be released. We expect such release
to occur no later than February 2009. During the period from February 2008 to
December 2008 in which this $1million was retained we earned approximately
interest on this restricted cash balance based on RBS’s internal overnight funds
rate. During the term, the Notes are convertible into our common stock at the
option of the Noteholders at a conversion price of $1.05. We may also force the
conversion of these Notes into our common stock after two years in the event
that we obtain a listing on a national exchange and our stock
price  closes on 40 consecutive trading days at or above $2.50 between
the second and third anniversaries of this agreement; $2.90 between the third
and fourth anniversaries of this agreement; and $3.50 after the fourth
anniversary of this agreement or where the daily volume weighted average price
of our stock as quoted on OTCBB or any other US National Exchange on which our
securities are then listed has, for at least 40 consecutive trading days closed
at the agreed price.


26


In August
2008, we notified the Noteholder that we believed that we would be unable to use
the $6,000,000 in the manner agreed to under the terms of the Notes. In
response, the Noteholder orally consented to the use of an additional $2 million
of the $6,000,000 for general working capital purpose. In January 2009, we
notified the Noteholder that the balance of the $6,000,000 had fallen below
$4 million. On March 16, 2009, we entered into a Cash Control Framework
Agreement with the Noteholder pursuant to which it is assumed that, subject to
the Company being fully compliant with the terms of this agreement and those set
out in the Transaction Documents entered into between the Company and the
Noteholder on February 21, 2008, no adverse actions will be taken by the
Noteholder. The agreement provides, among other things, for the placement of
approximately $2.15 million into a segregated cash account.  Under the
terms of the agreement, we may request the release of funds from the account
from time to time for working capital purposes, subject to the Noteholder’s
consent and agreed upon terms and conditions. Under the terms of the agreement,
we must also adhere to a cost cutting program which involves reducing our
selling, general and administrative, research and development  and
capital expenditure by an annualized $3.35 million. We believe that the terms of
this agreement will provide us with sufficient liquidity to operate for fiscal
2009.




Off-Balance
Sheet Arrangements





We do not
have any off balance sheet arrangements that are reasonably likely to have a
current or future effect on our financial condition, revenues, results of
operations, liquidity or capital expenditures.





ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





Reference
is made to the Index of Financial statements following Part III of this Report
for a listing of the Company’s financial statements and notes
thereto.





ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE





None.





ITEM 9A(T). CONTROLS AND
PROCEDURES





Evaluation of Disclosure
Controls and Procedures




Disclosure
controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed by us in the reports that we
file or submit under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”) is recorded, processed, summarized and reported, within the time
periods specified in the Securities and Exchange Commission's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by us in
the reports that we file under the Exchange Act is accumulated and communicated
to our management, including our principal executive and financial officers, as
appropriate to allow timely decisions regarding required
disclosure.




The
Company’s management, under the supervision and with the participation of the
Company's Chief Executive Officer and Chief Financial (and principal accounting)
Officer, carried out an evaluation of the effectiveness of the design and
operation of the Company's disclosure controls and procedures (as defined in
Rule 13a-15(e) and 15d-15(e) of the Exchange Act) as of October 31,
2008.  Based upon that evaluation and the identification of the
material weakness in the Company’s internal control over financial reporting as
described below under “Management’s Report on Internal Control over Financial
Reporting,” the Chief Executive Officer and Chief Financial Officer concluded
that the Company’s disclosure controls and procedures were ineffective as of the
end of the period covered by this report.




Management's Report on
Internal Control over Financial Reporting




A
company’s internal control over financial reporting is a process designed by, or
under the supervision of, a public company’s principal executive and principal
financial officers, or persons performing similar functions, and effected by the
board of directors, management and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles (“GAAP”) including those policies and procedures
that: (i) pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the  transactions and dispositions of
the assets of the company, (ii) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in
accordance with GAAP, and that receipts and expenditures are being made only in
accordance with authorizations of management and directors of the company, and
(iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the company’s assets that could
have a material effect on the financial statements.


27


Management
is responsible for establishing and maintaining adequate internal control over
financial reporting. Our management, with the participation of our Chief
Executive Officer and Chief Financial Officer, has assessed the effectiveness of
our internal control over financial reporting as of October 31, 2008. In making
this assessment, our management used the criteria established in Internal Control—Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).




During
this evaluation, the Company identified a material weakness in its internal
control over financial reporting.  A material weakness is a
deficiency, or combination of deficiencies, in internal control over financial
reporting such that there is a reasonable possibility that a material
misstatement of our annual or interim financial statements will not be
prevented or detected on a timely basis.  The identified material
weakness consists of, as of the end of the period covered by this report,
limited resources and limited number of employees, namely an understaffed
financial and accounting function, and the need for additional personnel to
prepare and analyze financial information in a timely manner and to allow review
and on-going monitoring and enhancement of our controls.




Based on
our assessment and the criteria discussed above, the Company has concluded that,
as of October 31, 2008, the Company’s internal control over financial reporting
was not effective as a result of the aforementioned material
weakness.




Notwithstanding
the material weakness in the Company’s internal control over financial reporting
and the Company’s consequently ineffective disclosure controls and procedures
discussed above, management believes that the financial statements included in
this Annual Report on Form 10-K present fairly, in all material respects, our
financial position, results of operations, and cash flows for the periods
presented in accordance with the U. S. generally accepted accounting
principles.




This
annual report does not include an attestation report of the Company’s
independent registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to attestation by the
Company’s independent registered public accounting firm pursuant to temporary
rules of the SEC that permit the Company to provide only management’s report in
this annual report.




Plan
for Remediation of Material Weaknesses




With
oversight from our Audit Committee, we plan to improve our control environment
and to remedy the identified material weakness by expanding the resources
available to the financial reporting process.  These ongoing efforts
are to include: (i) evaluating and improving our existing internal control
documentation to develop clear identification of key financial and reporting
controls; (ii) a restructuring of our existing personnel in order to achieve a
full-time equivalent position in our accounting and analysis processes which
occurred in the second quarter 2008; (iii) reviewing our accounting process;
and, (iv) and reviewing our control procedures and assist us in developing
on-going test plans to assure compliance and enhancement as needed to existing
controls.




Limitations
on Effectiveness of Controls and Procedures




Our
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our disclosure controls and procedures or our internal
controls will prevent all errors and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints
and the benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within the Company have been detected. These inherent limitations
include, but are not limited to, the realities that judgments in decision-making
can be faulty and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions. Over time, controls may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be
detected.


28


Changes
in Internal Control over Financial Reporting




There
were no changes in our internal control over financial reporting identified in
connection with the evaluation required by paragraph (d) of Rule 13a-15 or
15d-15 under the Exchange Act that occurred during the quarter ended October 31,
2008 that have materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.




PART
III





ITEM
10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE





Directors
and Executive Officers





The
following persons are our executive officers and directors as of the date
hereof:





Name
              
              Age
              
              Position(s)Jason
      Reid
              
              43
              
              President,
      Chief Executive Officer and DirectorPaul
      Nussbaum
              
              61
              
              Chairman
      of the Board of DirectorsJody
      E. Frank
              
              57
              
              Chief
      Financial OfficerBlair
      Cunningham
              
              40
              
              Chief
      Technology OfficerAnthony
      Davis
              
              43
              
              President
      US OperationsFrank
      B. Moore
              
              73
              
              Senior
      Vice President, Government Relations and DirectorGeoff
      Turner
              
              56
              
              President
      European OperationsAngus
      Lugsdin
              
              32
              
              Senior
      Vice President, Market DevelopmentRichard
      Lewis
              
              42
              
              Senior
      Vice President, Corporate Administration and
DevelopmentRodney
      Peacock
              
              62
              
              DirectorFaith
      Griffin
              
              59
              
              Chairman
      of the Audit Committee and
Director





Jason Reid
has served since June, 2004 as a director, President and Chief Executive Officer
of Coda Octopus Group, Inc. Mr. Reid has been affiliated with Coda Octopus
Products Ltd., the current key operating subsidiary, since 1994, initially as a
founder and independent director and, since 2002, as Managing Director. Mr. Reid
is a director of the Company’s subsidiaries, Coda Octopus Products Ltd., Coda
Octopus Omnitech AS (Norway), Coda Octopus Products, Inc., Coda Octopus
Innalogic, Inc., Port Security Group, Inc., Coda Octopus Martech Limited, Coda
Octopus Colmek, Inc., and Coda Octopus Tactical Intelligence, Inc. He is also a
director of Fairwater Holdings Ltd. and Fairwater Technology Group Ltd, a
principal stockholder of the Company. He was a founding partner, in 1984, of
Weight Management Group Ltd, a $20m Scottish company which competes directly
with Weight Watchers International, Inc., and which is market leader in
Scotland. From 1992-2004, he was Managing Director of Weight Management Group
Ltd, acquiring, in 2001, Green Meadow Foods Ltd, which distributed controlled
dietary foods throughout Scotland to the major retail trade. In 2003, he oversaw
the successful national UK launch of a new magazine title, published by Weight
Management Group Ltd. He became a non-executive director of both companies when
he assumed the role of President and CEO of Coda Octopus Group, Inc. in 2004.
Between 1993 and 2004 he was also chairman of a software development company in
Scotland, Softworks Business Systems Solutions Ltd., producing commercial
software for public companies, including Bulthaup and Manchester Ship Canal,
part of Peel Holdings plc. In 1997, he was a Director of William Grant Mining
Ltd.





Paul
Nussbaum has served since January 2005 as Chairman of the Board of
Directors of Coda Octopus Group, Inc. in a non-executive capacity. He is the
chairman of the Waramaug Partners Group, a private real estate and special
situations equity firm. He is the former Chairman Emeritus of Wyndham
International, Inc., (NYSE:WYN), successor to Patriot American Hospitality, Inc.
From 1991 to 1999 he served as Founder, Chairman & Chief Executive Officer
for the Patriot American Group of Companies, including Patriot American
Hospitality, Inc., a paired share real estate investment trust which owned the
Wyndham, Grand Bay, Malmaison, Summerfield Suites, and Clubhouse Inn proprietary
hotel brands. From 1979 to 1991, Mr. Nussbaum served as chairman of the real
estate practice group of Schulte Roth & Zabel, a law firm in New York. From
1971 to 1979, he was an associate and later a partner in the Dreyer & Traub
law firm in New York. Mr. Nussbaum earned his B.A. degree from the State
University of New York at Buffalo and his J.D. degree from Georgetown University
Law Center.


29


Jody E.
Frank became the Chief Financial Officer of Coda Octopus Group, Inc. on
July 16, 2007. He served as Senior Vice President of Investments for UBS Wealth
Management from January 2003 through June 2007 and has 28 years of years of
experience in the financial services industry. He began his career at Prescott
Ball & Turben in 1979 and thereafter worked as a Financial Advisor at
Shearson Lehman Brothers and CIBC Oppenheimer. He has served on the Board of
Directors of two public companies and has been instrumental in formulating
business plans for several private corporations and numerous business ventures.
During 1985-1995 he served on the board of directors of publicly-held Peoples
Telephone Inc. He received his BA degree from the University of Rochester, and
his MBA in Finance from Rutgers University.




Blair
Cunningham has served as Chief Technology Officer of Coda Octopus Group,
Inc. since 2005 and Technical Manager of Coda Octopus Products Ltd between July
2004 and July 2005. From March 1992 to present he has served as a Director of
Softworks Business Systems Solutions Ltd, an Aberdeen, Scotland based software
company which developed turnkey software solutions for large public companies.
From 1990-92, Mr. Cunningham was an Analyst/Programmer with Weight Management
Group Ltd, Aberdeen. Mr. Cunningham received an HND in Computer Science in 1989
from Moray College of Further Education, Elgin, Scotland.





Anthony
Davis has served, initially as Chief Commercial Officer of Coda Octopus
Group, Inc. since July 2005 and, since November 1, 2007, as President US
Operations. Previously, he served as Business Development Manager of Coda
Octopus Products Ltd from 2002-04, prior to which he was a Sales Manager between
1998 and 2002. Mr. Davis is also a Director of the Company’s subsidiaries, Coda
Octopus Products, Inc., Coda Octopus Colmek, Inc., and Coda Octopus Innalogic,
Inc. He was a Project Manager from 1996 to 1998 at Cable & Wireless Marine,
Chelmsford, England and Survey Manager in Abu Dhabi for NPCC from 1994 to 1996.
He served as a Project Geophysicist in Singapore for Ocean Science International
from 1992 to 1994, as an Offshore Geophysicist for NESA in Delft from 1990-91
and as a Logging Engineer for Schlumberger in Aberdeen from 1987 to 1990. He
earned his BSc Geology & Geophysics at Edinburgh University in
1987.





Frank B.
Moore has served as Senior Vice President, Government Relations of Coda
Octopus Group, Inc. since May 2006 and as a Director since July
2008.  Mr. Moore is also a Director of our key subsidiary, Coda
Octopus Colmek, Inc. Since December, 2001, Mr. Moore has served as Chairman of
Ulysses Financial, a company engaged in private equity financing. Between
January 1977 and January 1981, Mr. Moore served as Assistant to the President of
the United States. His chief responsibility was the Administration’s relations
with Congress. Mr. Moore reported directly to the President and also worked on
international matters such as the Panama Canal Treaty and the Strategic Arms
Limitations Talks (S.A.L.T. II). Prior to his position in the White House, Mr.
Moore served as Assistant, and later as Chief of Staff, to the Governor of
Georgia, Jimmy Carter. Between July, 1982 and September, 1998, Mr. Moore was
Vice President for Government Affairs and Public Policy for Waste Management.
Mr. Moore earned his BBA from the University of Georgia and completed the
Advanced Management Program at Harvard Business School.




Geoff
Turner has served initially as Senior Vice President, Mergers and
Acquisitions of Coda Octopus Group, Inc. since May 2006, and, since November 1,
2007, as President European Operations. Previously, he served as a consultant
from November 2005 to April 2006 through his consultancy company Taktos Limited.
Mr. Turner is also a Director of the Company’s subsidiaries, Coda Octopus
Martech Limited and Coda Octopus Products Limited. He has been involved in the
IT industry for over 30 years, in both technical and commercial roles. He spent
the 13 years up to 1999 with GE Information Services (& International
Network Services), the then global market leader in Electronic Commerce, where
he was Director of Business Development for Europe, Middle East and Africa.
During this time, in addition to his business development roles he held posts as
Software Products Director, and in global channel sales management. Since
leaving GE in 1999, Mr. Turner has been involved as a shareholder and a
consultant through Taktos Limited in a number of businesses ranging from
financial services businesses to a provider of supply chain management
software.




Angus
Lugsdin has been with us since 2002, has recently been appointed as
Senior Vice President of Market Development. Prior to this, Mr. Lugsdin was Vice
President of Market Development from November 2006. He has held a number of
positions with us including Sales Manager of Octopus Marine (which was acquired
by us in 2002) from July 1999 to May 2002, Sales Manager of Coda Octopus, Inc
from May 2002 to June 2004 and Strategic Development Executive from July to
October 2006. He earned his BSC in Marine Geography from University of Wales in
1998.





Richard
Lewis has been with us since 2005.  He was appointed as Senior
Vice President of Corporate Administration and Development in November
2008.  Prior to this, Mr Lewis was Vice President Corporate
Development, having initially joined the Company as Strategic Development
Executive. Before joining the Company he had spent ten years in the banking and
fund management industries, latterly with JPMorgan Asset
Management.  He earned his BA Hons from Liverpool
University.





Rodney
Peacock has served as an independent director of Coda Octopus Group, Inc.
since January 2005. He has been Managing Director of Axiom Marketing &
Management Ltd, a consultancy firm, since November 1997. From 1990 to 1997, he
served as Joint Managing Director of the Brand Development Company and from
1985-90, Managing Director of NPL, an Addison Group Subsidiary. He was, from
1981-85, head of the Marketing Group of Arthur Young Consultancy and from
1976-81 General Manager, Retail Products Division of Tate & Lyle. From
1970-76, he served as Brand Group Manager of United Biscuits and from 1964 to
1970, Research Chemist of Ilford Films. Mr. Peacock received his BSc (Hons) in
Physics and Chemistry from London University.


30


Faith
Griffin was elected to Board as an independent member in July 2008 and,
at the same time, was also appointed Chairman of the Audit Committee of the
Board of Directors. Until 2002, Ms. Griffin was an institutional research
analyst and, subsequently, an investment banker, with a focus on emerging
technology companies, including entities involved in the design, manufacturing
and marketing of computers, software, communications and semiconductors. Since
2002, she has served as a business consultant to several emerging technology
companies. Since 2005, she has served as a member of the Board of Directors of
Enherent Corp., a publicly traded company in the information services and
solutions field. Ms. Griffin holds a BA in Mathematics from Franklin &
Marshall College and an MBA in Finance from New York
University.





Election
and Removal of Directors





All
directors of the Company are elected at its annual meeting of stockholders to
hold office until the next annual meeting of stockholders and until their
successor is elected and qualified, or until such director’s earlier death,
resignation or removal. All officers of the Company serve at the pleasure of the
Board, subject to their contractual rights.





The
Company’s Certificate of Incorporation provides that any director or all the
directors of a single class (but not the entire board of directors) of the
Company may be removed, at any time, but only for cause and only by the
affirmative vote of the holders of at least 2/3 of the voting power of the
outstanding shares of capital stock of the Company entitled to vote generally in
the election of directors cast at a meeting of the stockholders called for that
purpose. Notwithstanding the foregoing, whenever the holders of any one or more
series of preferred stock of the Company shall have the right, voting separately
as a class, to elect one or more directors of the Company, the preceding
provisions shall not apply with respect to the director or directors elected by
holders of preferred stock.




Audit
Committee





Our Audit
Committee was established on May 31, 2006 pursuant to our Audit Committee
Charter. The Audit Committee’s purpose is to:





s
              be
      directly responsible for the appointment, compensation and oversight of
      the independent auditor, which shall report directly to the Audit
      Committee, including resolution of disagreements between management and
      auditors regarding financial reporting for the purpose of preparing or
      issuing an audit report or related work;s
              oversee
      management’s preparation of the Company’s financial statements and
      management’s conduct regarding the accounting and financial reporting
      processes;s
              oversee
      management’s maintenance of internal controls and procedures for financial
      reporting;s
              oversee
      the Company’s compliance with applicable legal and regulatory
      requirements, including without limitation, those requirements relating to
      financial controls and reporting;s
              oversee
      the independent auditor’s qualifications and
  independence;s
              oversee
      the performance of the independent auditors, including the annual
      independent audit of the Company’s financial
statements;s
              prepare
      the report required by the rules of the SEC to be included in the
      Company’s proxy statement; ands
              discharge
      such duties and responsibilities as may be required of the Audit Committee
      by the provisions of applicable law or rule or regulation of the American
      Stock Exchange and the Sarbanes-Oxley Act of
  2002.




The
members of the Audit Committee are Faith Griffin, who serves as Chairman, Paul
Nussbaum and Rodney Peacock, each of whom is an “independent director” under the
standards of Item 7(d)(3)(iv) of Schedule 14A of the Securities Exchange Act of
1934, as amended. Ms Griffin is our “audit committee financial expert” as
defined by Section 407 of the Sarbanes-Oxley Act of 2002. We believe that the
composition of our Audit Committee meets the requirements for independence under
the current requirements of the Sarbanes-Oxley Act of 2002 and SEC rules and
regulations. We believe that the functioning of the Audit Committee complies
with the applicable requirements of the Sarbanes-Oxley Act of 2002, as well as
SEC rules and regulations.


31


Compensation
Committee




On
October 19, 2004, we established a Compensation Committee. The Compensation
Committee, which is made up of Messrs Nussbaum and Peacock, is responsible for,
among other things, reviewing and evaluating all compensation arrangements for
the executive officers of the Company and administrating the Company’s 2004
Employees, Directors, Officers and Consultants Stock Option and Stock Award Plan
(the “2004 Plan”), as well as the Company’s 2006 Employees, Directors, Officers
and Consultants Stock Option and Stock Award Plan (the “2006 Plan”), and the
Company’s 2008 Employees, Directors, Officers and Consultants Stock Option and
Stock Award Plan (the “2008 Plan”). The Compensation Committee
approved the restrictions contained in the definitive agreements relating to the
issuance of the convertible secured loan note by us on February 21, 2008, which
limits the amount of options which may be awarded during the term and the price
at which such options may be issued.







ITEM
11. EXECUTIVE COMPENSATION





The
Summary Compensation Table shows certain compensation information for services
rendered for the fiscal years ended October 31, 2007 and 2008 by our executive
officers. The following information includes the dollar value of base salaries,
bonus awards, stock options grants and certain other compensation, if any,
whether paid or deferred. Conversion rates were used for 2008 and 2007 of
$1.94143 and $1.9840 to £1 respectively.





Name and Principal
                                              Position
                                            
                                            Year
                                            
                                            Salary
                                            
                                            
                                            Bonus
                                            
                                            
                                            Restricted
                                              Stock
                                              Awards
                                            
                                            
                                            Option
                                              Awards
                                            
                                            
                                            All Other
                                              Compensation
                                            
                                            
                                            Total($)
                                            
                                            
                                            ($)
                                            
                                            
                                            ($)
                                            
                                            
                                            ($)(2)
                                            
                                            
                                            ($)(3)
                                            
                                            
                                            ($)Jason
      Reid
                                            
                                            2007
                                            
                                            
                                            350,000
                                            
                                            
                                            
                                            -0-
                                            
                                            
                                            
                                            100,000
                                            (5)
                                            
                                            
                                            -0-
                                            
                                            
                                            
                                            50,385
                                            
                                            
                                            
                                            500,385President
      & CEO
                                            
                                            2008
                                            
                                            
                                            375,000
                                            
                                            
                                            
                                            -0-
                                            
                                            
                                            
                                            -0-
                                            
                                            
                                            
                                            15,635
                                            
                                            
                                            
                                            10,200
                                            
                                            
                                            
                                            400,835Blair
      Cunningham (1)
                                            
                                            2007
                                            
                                            
                                            175,000
                                            
                                            
                                            
                                            -0-
                                            
                                            
                                            
                                            50,000
                                            (6)
                                            
                                            
                                            -0-
                                            
                                            
                                            
                                            18,866
                                            
                                            
                                            
                                            243,866Chief
      Technology Officer
                                            
                                            2008
                                            
                                            
                                            178,815
                                            
                                            
                                            
                                            -0-
                                            
                                            
                                            
                                            -0-
                                            
                                            
                                            
                                            10,423
                                            
                                            
                                            
                                            50,095
                                            
                                            
                                            
                                            239,333Anthony
      Davis (1)
                                            
                                            2007
                                            
                                            
                                            175,000
                                            
                                            
                                            
                                            -0-
                                            
                                            
                                            
                                            50,000
                                            (6)
                                            
                                            
                                            -0-
                                            
                                            
                                            
                                            11,962
                                            
                                            
                                            
                                            236,962President
      US Operations
                                            
                                            2008
                                            
                                            
                                            178,815
                                            
                                            
                                            
                                            -0-
                                            
                                            
                                            
                                            -0-
                                            
                                            
                                            
                                            10,423
                                            
                                            
                                            
                                            72,825
                                            
                                            
                                            
                                            262,063Jody
      Frank
                                            
                                            2007
                                            
                                            
                                            104,808
                                            (4)
                                            
                                            
                                            -0-
                                            
                                            
                                            
                                            14,400
                                            (8)
                                            
                                            
                                            281,243
                                            (9)
                                            
                                            
                                            1,750
                                            
                                            
                                            
                                            402,201Chief
      Financial Officer
                                            
                                            2008
                                            
                                            
                                            350,000
                                            
                                            
                                            
                                            -0-
                                            
                                            
                                            
                                            60,000
                                            
                                            
                                            
                                            10,423
                                            
                                            
                                            
                                            11,000
                                            
                                            
                                            
                                            431,423Frank
      Moore
                                            
                                            2007
                                            
                                            
                                            175,000
                                            
                                            
                                            
                                            -0-
                                            
                                            
                                            
                                            50,000
                                            (6)
                                            
                                            
                                            -0-
                                            
                                            
                                            
                                            -0-
                                            
                                            
                                            
                                            225,000SVP
      Governmt Relations
                                            
                                            2008
                                            
                                            
                                            147,500
                                            (7)
                                            
                                            
                                            -0-
                                            
                                            
                                            
                                            -0-
                                            
                                            
                                            
                                            10,423
                                            
                                            
                                            
                                            -0-
                                            
                                            
                                            
                                            157,923Geoff
      Turner (1)
                                            
                                            2007
                                            
                                            
                                            175,000
                                            
                                            
                                            
                                            -0-
                                            
                                            
                                            
                                            50,000
                                            (6)
                                            
                                            
                                            -0-
                                            
                                            
                                            
                                            15,833
                                            
                                            
                                            
                                            240,833President
      European Ops
                                            
                                            2008
                                            
                                            
                                            178,815
                                            
                                            
                                            
                                            -0-
                                            
                                            
                                            
                                            -0-
                                            
                                            
                                            
                                            10,423
                                            
                                            
                                            
                                            15,328
                                            
                                            
                                            
                                            204,566Angus
      Lugsdin
                                            
                                            2007
                                            
                                            
                                            151,667
                                            (10)
                                            
                                            
                                            -0-
                                            
                                            
                                            
                                            50,000
                                            (6)
                                            
                                            
                                            -0-
                                            
                                            
                                            
                                            3,619
                                            
                                            
                                            
                                            205,286SVP
      Market Develpmnt
                                            
                                            2008
                                            
                                            
                                            174,458
                                            
                                            
                                            
                                            -0-
                                            
                                            
                                            
                                            -0-
                                            
                                            
                                            
                                            10,423
                                            
                                            
                                            
                                            14,285
                                            
                                            
                                            
                                            199,708




(1)
      A portion of these amounts were paid in UK Pounds (the conversion rate
      used in this table for these amounts is stated above).(2)
      Amount represents the aggregate grant date fair value computed in
      accordance with Statement of Financial Accounting Standards No. 123R,
      “Share-Based
      Payment ” (“SFAS 123R”). Information regarding the assumptions made
      in the valuation reported and material terms of each grant are
      incorporated herein by reference from “Note 4 Capital Stock” to our
      Consolidated Financial Statements for the Year Ended October 31,
      2008.(3)
      All other compensation consisted of car allowances, re-location expenses,
      disability payments, pension benefits and/or pay for vacation not taken.
      Some of these amounts were paid in UK Pounds at the conversion rates shown
      above.(4)
      Jody Frank is paid at the annual rate of $350,000 – his employment started
      with the Company in July 2007 so the values shown are pro-rated for this
      period.(5)
      Comprising 80,317 shares valued at $100,000.(6)
      Comprising 40,159 shares valued at $50,000.(7)
      With effect from July 1, 2008, Mr Moore undertakes his executive
      employment with the Company on a part-time basis, on a pro-rated annual
      salary of $92,500.  Therefore, the values shown are pro-rated
      for the period.(8)
      Comprising 12,908 shares valued at $14,400.(9)
      Comprising 237,500 options issued at $1.30, and vesting 34% in 2007, 33%
      in 2008 and 33% in 2009.(10)
      Effective July 1, 2007, Mr Lugsdin is paid at the annual rate of
      $175,000.  Prior to this date, his annual salary was
      $140,000.  Therefore, the values shown are pro-rated for this
      period.


32


OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END 2008*


Option Awards




Name
                                          (a)
                                        
                                        Number of
                                          Securities Underlying
                                          Unexercised
                                          Options
                                          (#)
                                          Exercisable
                                          (b)
                                        
                                        
                                        Number of
                                          Securities Underlying
                                          Unexercised
                                          Options
                                          (#)
                                          Unexercisable
                                          (c)
                                        
                                        
                                        Option
                                          Exercise
                                          Price
                                          ($)
                                          (e)
                                        
                                        Option
                                          Expiration Date
                                          (f)Jason
      Reid
                                        
                                        
                                        400,000
                                        
                                        
                                        
                                        
                                        
                                        
                                        $
                                        1.00
                                        
                                        May
      2010President
      and Chief Executive Officer
                                        
                                        
                                        25,500
                                        
                                        
                                        
                                        49,500
                                        
                                        
                                        
                                        1.30
                                        
                                        August
      2013Blair
      Cunningham
                                        
                                        
                                        200,000
                                        
                                        
                                        
                                        
                                        
                                        
                                        $
                                        1.00
                                        
                                        May
      2010Chief Technology
      Officer
                                        
                                        
                                        17,000
                                        
                                        
                                        
                                        33,000
                                        
                                        
                                        
                                        1.30
                                        
                                        August
      2013Anthony
      Davis
                                        
                                        
                                        150,000
                                        
                                        
                                        
                                        
                                        
                                        
                                        $
                                        1.00
                                        
                                        May
      2010President US Operations
                                        
                                        
                                        17,000
                                        
                                        
                                        
                                        33,000
                                        
                                        
                                        
                                        1.30
                                        
                                        August
      2013Jody
      Frank
                                        
                                        
                                        237,500
                                        
                                        
                                        
                                        
                                        
                                        
                                        $
                                        1.30
                                        
                                        May
      2012Chief
      Financial Officer
                                        
                                        
                                        17,000
                                        
                                        
                                        
                                        33,000
                                        
                                        
                                        
                                        1.30
                                        
                                        August
      2013Geoff
      Turner
                                        
                                        
                                        150,000
                                        
                                        
                                        
                                        
                                        
                                        
                                        $
                                        1.00
                                        
                                        November 2010President European
      Operations
                                        
                                        
                                        17,000
                                        
                                        
                                        
                                        33,000
                                        
                                        
                                        
                                        1.30
                                        
                                        August
      2013Frank
      Moore
                                        
                                        
                                        150,000
                                        
                                        
                                        
                                        
                                        
                                        
                                        $
                                        1.00
                                        
                                        May
      2011Senior   VP   Government   Relations
                                        
                                        
                                        17,000
                                        
                                        
                                        
                                        33,000
                                        
                                        
                                        
                                        1.30
                                        
                                        August
      2013Angus
      Lugsdin
                                        
                                        
                                        150,000
                                        
                                        
                                        
                                        
                                        
                                        
                                        $
                                        1.00
                                        
                                        May
      2010Senior
      VP Market Development
                                        
                                        
                                        17,000
                                        
                                        
                                        
                                        33,000
                                        
                                        
                                        
                                        1.30
                                        
                                        August
      2013





* In
accordance with the rules promulgated by the Securities and Exchange Commission,
certain columns relating to information that is not applicable have been omitted
from this table.





DIRECTOR
COMPENSATION*


(During
Last Completed Fiscal Year)




Name
                  (a)
                
                Fees Earned or Paid
                  in Cash
                  ($)
                  (b)
                
                
                Stock
                  Awards ($)
                  (c)
                
                
                Option
                  Awards ($)
                  (d) (6)
                
                
                Total
                  ($)
                  (j)Paul
      Nussbaum
                
                $
                30,000
                (2)
                
                $
                -0-
                
                
                $
                57,675
                (6a)
                
                $
                87,675Rodney
      Peacock
                
                $
                20,000
                (3)
                
                $
                -0-
                
                
                $
                38,450
                (6b)
                
                $
                58,450Frank
      Moore
                
                $
                6,667
                (4)
                
                $
                60,000
                
                
                $
                -0-
                
                
                $
                66,667Faith
      Griffin
                
                $
                9,333
                (5)
                
                $
                60,000
                
                
                $
                52,016
                (6c)
                
                $
                121,349





* In
accordance with the rules promulgated by the Securities and Exchange Commission,
certain columns relating to information that is not applicable have been omitted
from this table.




(2)
              Consists
      of an annual retainer in the amount of $22,500 and $1,875 per board
      meeting attended.(3)
              Consists
      of an annual retainer in the amount of $12,500 and $1,875 per board
      meeting attended.(4)
              Consists
      of an annual retainer of $12,500 and $1,875 per board meeting
      attended.  Pro-rated in accordance with appointment as a
      director with effect from July 1, 2008.(5)
              Consists
      of an annual retainer of $12,500 and $1,875 per board meeting attended,
      $4,000 per annum as Chair of the Audit Committee, and $4,000 per annum as
      member of the advisory board.  Pro-rated in accordance with
      appointment as a director with effect from July 1,
2008.(6a)
              Comprising
      75,000 options valued based on date of issue using Black Scholes method
      and booked into our accounts as an
expense.


33





(6b)
                Comprising
      50,000 options valued based on date of issue using Black Scholes method
      and booked into our accounts as an expense.(6c)
                Comprising
      250,000 options valued based on date of issue using Black Scholes method
      and booked into our accounts as an
expense.





Compensation
of Directors





Pursuant
to Agreements dated January 26, 2005 with our non-employee directors at that
time, Paul Nussbaum and Rodney Peacock, each received a fee of $2,500 per board
and committee meeting attended (which amount was increased to $3,750 per meeting
starting November 1, 2006) and they are reimbursed for expenses incurred in
connection with attending board and committee meetings. Our board chairman
received an annual retainer of $40,000 and Mr. Peacock received an annual
retainer of $20,000. Messrs. Nussbaum and Peacock received 100,000 shares and
150,000 shares, respectively, on January 26, 2005. On May 1, 2005, each director
also received five-year options to purchase 200,000 shares of our common stock,
exercisable at $1.00 per share, and vesting 34% immediately, and 33% on the
first and second anniversaries of the award. Messrs. Nussbaum and Peacock also
receive options to purchase 75,000 shares and 50,000 shares, respectively, at
the first board meeting in each fiscal year, at an exercise price to be
established by the Board. Each director is also entitled while serving as a
director and for a period of three years thereafter, to participate in directors
and officers liability insurance and to indemnification of all costs and
expenses, including cost of legal counsel, selected and retained by the
director, in connection with any action, suit or proceeding to which the
director may be a party by reason of the director acting in such capacity. All
options granted but not vested to Messrs. Nussbaum and Peacock, unless
exercised, terminate at such time as the individual is no longer serving as a
director.





The
Compensation Committee awarded the following increases on November 1, 2006 (i)
fees for each board and committee meeting to $3,750. Mr. Nussbaum was also
awarded an increase on annual retainer of $5,000 making his annual retainer
$45,000 and similarly Mr. Peacock was awarded an increase on his annual retainer
of $5,000 making his annual retainer $25,000. At this point, both Mr. Nussbaum
and Mr. Peacock’s payments made under the retainers were half cash and half
common stock.




Commencing
November 1, 2007, the Compensation Committee reviewed the fee arrangements for
directors. The Board Meeting fees were reduced from $3,750 to $1,875 and the
common stock portion of the retainer was no longer applicable. Mr. Nussbaum,
therefore, now receives an annual retainer of $22,500 and fees of $1,875 per
board meeting, and Mr. Peacock receives an annual retainer of $12,500 and fees
of $1,875 per board meeting.





Effective
on the date of their election on July 10, 2008, both Ms. Griffin and Mr. Moore
(in his capacity as a director) will receive $20,000 per annum (consisting of a
$12,500 basic fee plus $1,875 per meeting, for up to four meetings per year with
additional meetings to be paid for at a rate of $500 per meeting). Ms. Griffin
will also receive $4,000 per year for her membership of the Audit
Committee.  Each will also receive a grant of 200,000 shares of common
stock, to be issued over a period of 24 months. In addition, Ms. Griffin and Mr.
Moore will be granted a five year option to purchase 200,000 shares of common
stock and 50,000 shares of common stock at $1.30 per share,
respectively.  Further, each will receive an annual grant of 50,000
options (with a strike price to be determined at the time of
grant).





Employment
Agreements





Jason
Reid





On April
1, 2005, the Company entered into an Employment Agreement with Jason Reid. The
Agreement has an indefinite term until terminated pursuant to said Agreement.
Mr. Reid agreed to serve as President and Chief Executive Officer. Pursuant to
said Agreement, Mr. Reid was paid a base annual salary of $250,000 from April 1,
2005 through October 31, 2006. Thereafter, Mr. Reid shall be entitled to receive
an annual cash and stock incentive bonus for each fiscal year based upon a level
of accomplishment of management and performance objectives as established by the
Compensation Committee subject to a minimum bonus of $50,000 for the preceding
year on the basis that the Employment Agreement is renewed after each one year
term. At its meeting held in October 2006 and in accordance with its remit the
Compensation Committee approved an increase in the base annual salary to
$350,000 effective November 1, 2006. The bonus stipulated for 2005-06 was
waived.




At the
end of each quarter during the contract, Mr. Reid shall be entitled to receive a
restricted stock grant of $25,000 paid in common stock. The value shall be
calculated using the average closing price for each trading day in that quarter
unless in the opinion of the Compensation Committee the market for the Company’s
common Stock lacks sufficient liquidity to establish a market price in which
event the value for the common stock for that quarter will be $1.00 per share.
Mr. Reid is entitled to 40 business days vacation for each calendar year,
reimbursement for business expenses, entitled to directors and officers
liability insurance during his employment with the Company and for a period of
three years after termination, is entitled to receive up to $15,000 for
relocation expenses to New York and up to $850 per month in lieu of specific
reimbursement expenses for use of a personal vehicle and indemnification to the
maximum extent permitted by law against all costs and expenses incurred by him,
including cost of his legal counsel. Mr. Reid is also entitled to participate in
all Company life, health and disability insurance, pension, deferred
compensation and incentive plans, options and awards, performance bonuses and
other benefits extended by the Company as a matter of policy to its executive
employees. He shall also be entitled, at the Company’s cost, to the benefit of a
disability insurance policy or plan during his employment.


34


For the
fiscal year ended October 31, 2008, the Compensation Committee decided that
while Mr. Reid’s remuneration package would remain the same, the breakdown would
be changed as follows: Basic Pay (cash $375,000 instead of $350,000 and stock
$75,000 instead of $100,000).





With
effect from November 1, 2007, the annual grant of common stock is replaced by an
equivalent amount in number of options in the Company.  For the year
ended October 31, 2008, Mr Reid therefore received 75,000 options in the
Company. Mr. Reid’s employment contract is deemed amended in these
respects.





Anthony
Davis





On July
1, 2005, the Company entered into an Employment Agreement with Anthony Davis.
The Agreement has an indefinite term until terminated pursuant to said
Agreement. Mr. Davis agreed to serve as Senior Vice President, Commercial
Division (now President of US Operations). Pursuant to said Agreement, Mr. Davis
was paid a base annual salary of approximately $150,000, which is subject to
increase at the discretion of the Compensation Committee. In addition, Mr. Davis
is entitled to receive an annual cash and stock incentive bonus for each fiscal
year based upon a level of accomplishment of management and performance
objectives as established by the Compensation Committee. At its meeting held in
October 2006 and in accordance with its remit the Compensation Committee
approved an increase in the base annual salary to $175,000 effective November 1,
2006.





Mr. Davis
is entitled to receive 50,000 shares of the Company’s common stock for services
performed through October 31, 2006 and thereafter $50,000 of common stock
annually, paid quarterly. Mr. Davis is entitled to 35 business days vacation for
each calendar year, reimbursed for business expenses, entitled to directors and
officers liability insurance during his employment with the Company and for a
period of three years after termination, shall receive a mutually agreed upon
amount of relocation expenses to the USA and either provided with a vehicle or
up to $5,000 per annum in lieu of specific reimbursement expenses for use of a
personal vehicle and indemnification to the maximum extent permitted by law
against all costs and expenses incurred by him, including cost of his legal
counsel. Mr. Davis is also entitled to participate in all Company life, health
and disability insurance, pension, deferred compensation and incentive plans,
options and awards, performance bonuses and other benefits extended by the
Company as a matter of policy to its executive employees. He shall also be
entitled, at the Company’s cost, to the benefit of a disability insurance policy
or plan during his employment.





Effective
November 1, 2007, the annual grant of common stock is replaced by an equivalent
amount in number of options in the Company.  For the year ended
October 31, 2008, Mr Davis therefore received 50,000 options in the
Company.





Blair
Cunningham





On July
1, 2005, the Company entered into an Employment Agreement with Blair Cunningham.
The Agreement has an indefinite term until terminated pursuant to said
Agreement. Mr. Cunningham agreed to serve as Senior Vice President, Products
Division (now Chief Technology Officer). Pursuant to said Agreement, Mr.
Cunningham was paid a base annual salary of approximately $150,000, which is
subject to increase at the discretion of the Compensation Committee. Mr.
Cunningham shall be entitled to receive anannual cash and stock incentive bonus
for each fiscal year based upon a level of accomplishment of management and
performance objectives as established by the Compensation Committee. At its
meeting held in October 2006 and in accordance with its remit the Compensation
Committee approved an increase in the base annual salary to $175,000, effective
November 1, 2006.





Mr.
Cunningham is entitled to receive 50,000 shares of the Company’s common stock
for services performed through October 31, 2006 and thereafter $50,000 of common
stock annually, paid quarterly. Mr. Cunningham is entitled to 40 business days
vacation for each calendar year, reimbursed for business expenses, entitled to
directors and officers liability insurance during his employment with the
Company and for a period of three years after termination, shall receive a
mutually agreed upon amount of relocation expenses to the USA and either
provided with a vehicle or up to $5,000 per annum in lieu of specific
reimbursement expenses for use of a personal vehicle and indemnification to the
maximum extent permitted by law against all costs and expenses incurred by him,
including cost of his legal counsel. Mr. Cunningham is also entitled to
participate in all Company life, health and disability insurance, pension,
deferred compensation and incentive plans, options and awards, performance
bonuses and other benefits extended by the Company as a matter of policy to its
executive employees. He shall also be entitled, at the Company’s cost, to the
benefit of a disability insurance policy or plan during his
employment.





With
effect from November 1, 2007, the annual grant of common stock is replaced by an
equivalent amount in number of options in the Company.  For the year
ended October 31, 2008, Mr Cunningham therefore received 50,000 options in the
Company.


35


Frank
B. Moore





On May 1,
2006, the Company entered into an Employment Agreement with Frank B. Moore. The
Agreement  has an indefinite term until terminated pursuant to said
Agreement. Mr. Moore agreed to serve as Senior Vice President, Government
Relations. Pursuant to said Agreement, Mr. Moore was paid a base annual salary
of approximately $150,000, which is subject to increase at the discretion of the
Compensation Committee. Mr. Moore shall be entitled to receive an annual cash
and stock incentive bonus for each fiscal year based upon a level of
accomplishment of management and performance objectives as established by the
Compensation Committee. At its meeting held in October 2006 and in accordance
with its remit the Compensation Committee approved an increase in the base
annual salary to $175,000, effective November 1, 2006.





Mr. Moore
is entitled to receive 25,000 shares of the Company’s common stock for services
performed through October 31, 2006 and thereafter $50,000 of common stock
annually, paid quarterly. Mr. Moore is entitled to 30 business days vacation for
each calendar year, reimbursed for business expenses, entitled to directors and
officers liability insurance during his employment with the Company and for a
period of three years after termination, shall be provided with either a vehicle
or paid up to $5,000 per annum in lieu of specific reimbursement expenses for
use of a personal vehicle and indemnification to the maximum extent permitted by
law against all costs and expenses incurred by him, including cost of his legal
counsel. Mr. Moore is also entitled to participate in all Company life, health
and disability insurance, pension, deferred compensation and incentive plans,
options and awards, performance bonuses and other benefits extended by the
Company as a matter of policy to its executive employees. He shall also be
entitled, at the Company’s cost, to the benefit of a disability insurance policy
or plan during his employment.





Effective
November 1, 2007, the annual grant of common stock is replaced by an equivalent
amount in number of options in the Company.  For the year ended
October 31, 2008, Mr Moore therefore received 50,000 options in the
Company.





Effective
July 1, 2008, Mr Moore undertakes his executive employment with the Company on a
part-time basis, on a pro-rated annual salary of $92,500.




Angus
Lugsdin





On July 1
2005, the Company entered into an Employment Agreement with Mr. Angus Lugsdin.
The Agreement has an indefinite term until terminated pursuant to said
Agreement. Mr. Lugsdin, at the date of the employment agreed to serve as Vice
President, Strategic Business Development. Since then Mr. Lugsdin has been
promoted to Senior Vice President, Market Development and the said employment
agreement is deemed amended from November 1, 2007. Pursuant to said Agreement,
we are paying Mr. Lugsdin a base annual salary of approximately $175,000, which
is subject to increase at the discretion of the Compensation Committee. Other
terms relating to his compensation package are: entitlement to (i) receive
$50,000 shares of the Company’s common stock issued quarterly following Board
approval; (ii) a minimum of 30 business days vacation for each calendar year;
(iii) reimbursement against submission of proper receipts for business expenses;
(iv) directors and officers liability insurance during his employment with the
Company and for a period of three years after termination, and indemnification
to the maximum extent permitted by law against all costs and expenses incurred
by him, including cost of his legal counsel; (vi) participate in all Company
life, health and disability insurance, pension, deferred compensation and
incentive plans, options and awards, performance bonuses and other benefits
extended by the Company as a matter of policy to its executive employees; (vi)
at the Company’s cost, to the benefit of a disability insurance policy or plan
during his employment; (vii) to receive an annual cash and stock incentive bonus
for each fiscal year based upon a level of accomplishment of management and
performance objectives as established by the Compensation
Committee.





Effective
November 1, 2007, the annual grant of common stock is replaced by an equivalent
amount in number of options in the Company.  For the year ended
October 31, 2008, Mr Lugsdin therefore received 50,000 options in the
Company.





Geoff
Turner


On
November 1, 2006, the Company entered into a one year Consulting Agreement with
Taktos Ltd., a United Kingdom corporation owned by Geoff Turner. The Agreement
requires Taktos Ltd. to provide the services of Geoff Turner during the term of
the Agreement to provide the following services:




(a)
              assist
      the Company’s Management with the analysis and effective and optimal
      implementation of its business plan;(b)
              oversee
      the Company’s European operations and performance of the
      Group;(c)
              explore
      acquisitions, strategic alliances, partnering opportunities and other
      cooperative ventures within and without its industry
  focus;(d)
              evaluate
      possible acquisitions and strategic strategies and partnering candidates,
      including the evaluation of targets and the structuring of related
      transactions; and(e)
              advise
      and consult with executive officers with respect to any of the above
      described matters.


36


The
Company is paying approximately $178,000 per annum to the consultant for
providing the services of Mr. Turner. Consultant is also entitled to
reimbursement of travel and other expenses. Pursuant to a separate option
agreement with Mr. Turner who serves as an executive officer, the Company
granted him five year options to purchase 150,000 shares of common stock with
34% having vested on November 1, 2005 and with 33% having vested on each of
November 1, 2006 and 2007. He is also entitled to directors and officers
liability insurance during his tenure as an executive officer with the Company
and for a period of three years after termination. The Compensation Committee
approved in October 2006 the renewal of this contract and approved an increase
in the compensation package paid for the services of Mr. Turner
effective November 1, 2006 we are paying Taktos Limited $178,000
for Mr. Turner's services.





Effective
November 1, 2007, the annual grant of common stock is replaced by an equivalent
amount in number of options in the Company.  For the year ended
October 31, 2008, Mr Turner therefore received 50,000 options in the
Company.





Jody
Frank





Effective
July 16, 2007, the Company entered into an Employment Agreement with Jody Frank
to act as our Chief Financial Officer. The Agreement has an indefinite term
until terminated pursuant to the terms of the Agreement. During the first two
years of the Agreement, either party may only terminate the Employment Agreement
for cause. Pursuant to said Agreement, we will be paying Mr. Frank a base annual
salary of approximately $350,000, which is subject to increase at the discretion
of the Compensation Committee. Mr. Frank will also be entitled to receive annual
cash and stock incentive bonus for each fiscal year based upon a level of
accomplishment of management and performance objectives as established by the
Compensation Committee.





During
the term of the Employment Agreement, Mr. Frank is also entitled to receive
annually $50,000 shares of the Company’s common stock for services rendered,
distributed quarterly. Mr. Frank is entitled to 30 days vacation for each
calendar year, reimbursement for business expenses, and directors and officers
liability insurance during his employment with the Company and for a period of
three years after termination. The Company will also reimburse Mr. Frank for up
to $5,000 per annum in lieu of specific reimbursement expenses for use of a
personal vehicle. In addition, Mr. Frank is also entitled to participate in all
Company life, health and disability insurance, pension, deferred compensation
and incentive plans, options and awards, performance bonuses and other benefits
extended by the Company as a matter of policy to its executive employees. He is
also entitled, at the Company’s cost, to the benefit of a disability insurance
policy or plan during his employment.





Effective
November 1, 2007, the annual grant of common stock is replaced by an equivalent
amount in number of options in the Company.  For the year ended
October 31, 2008, Mr Frank therefore received 50,000 options in the
Company.





Richard
Lewis





On July 1
2005, the Company entered into an Employment Agreement with Richard Lewis. The
Agreement has an indefinite term until terminated pursuant to said Agreement.
Mr. Lewis, at the date of the employment agreed to serve as Vice President,
Strategic Business Development. Since then Mr. Lewis has been promoted to Senior
Vice President, Corporate Administration and Development and the said employment
agreement is deemed amended from July 7, 2008. Pursuant to said Agreement, we
are paying Mr. Lewis a base annual salary of approximately $175,000, which is
subject to increase at the discretion of the Compensation Committee. Other terms
relating to his compensation package are: entitlement to (i) receive $50,000
shares of the Company’s common stock issued quarterly following Board approval;
(ii) a minimum of 30 business days vacation for each calendar year; (iii)
reimbursement against submission of proper receipts for business expenses; (iv)
directors and officers liability insurance during his employment with the
Company and for a period of three years after termination, and indemnification
to the maximum extent permitted by law against all costs and expenses incurred
by him, including cost of his legal counsel; (vi) participate in all Company
life, health and disability insurance, pension, deferred compensation and
incentive plans, options and awards, performance bonuses and other benefits
extended by the Company as a matter of policy to its executive employees; (vi)
at the Company’s cost, to the benefit of a disability insurance policy or plan
during his employment; (vii) to receive an annual cash and stock incentive bonus
for each fiscal year based upon a level of accomplishment of management and
performance objectives as established by the Compensation
Committee.





Effective
November 1, 2007, the annual grant of common stock is replaced by an equivalent
amount in number of options in the Company.  For the year ended
October 31, 2008, Mr Lewis therefore received 50,000 options in the
Company.





In
respect of all the foregoing officers named, the Compensation Committee decided
not to grant any increases in the level of compensation for the fiscal year
2007-8. The Compensation Committee also decided not to grant any more stock to
these employees on a quarterly basis (as is provided in their contracts) but to
grant options instead. Each of their employment contracts is deemed amended in
this respect.


37


Termination
provisions in Employment Agreements





With the
exception of the employment agreement between the Company and Mr. Jody Frank,
under which neither party may terminate the agreement without cause for the
first two years, the Company may terminate Executive’s employment at any time
upon 90 days prior written notice, if such termination is for cause as defined
in the Agreement. Executive may terminate his or her Employment Agreement
without good reason upon giving the Company 90 days’ written notice or at the
Company’s sole discretion, it may substitute 90 days salary in lieu of notice.
Executive may also terminate his or her Employment Agreement upon written notice
to the Company for good reason as defined in the Agreement. His or her
Employment Agreement shall also terminate upon his or her death or upon 30 days’
prior written notice of his or her disability, which lasts for a period of at
least 90 days. In the event Executive’s employment is terminated for cause or
without good reason, Executive shall be entitled to the following (“Minimum
Termination Pay and Benefits”):





s
              the
      unpaid portion of his or her base salary;s
              reimbursement
      for out-of-pocket expenses;s
              continued
      insurance benefits to the extent required by law;s
              payment
      of any vested but unpaid rights as required by any bonus or incentive pay
      or stock plan or any other employee benefit plan; ands
              any
      unpaid bonus or incentive compensation that was approved (except in the
      case of termination for
cause).





In the
event his or her termination is by the Company without cause or by Executive for
good reason, he or she shall be entitled to the Minimum Termination Pay and
Benefits in addition to the following:





s
              a
      lump sum payment equal to one times the sum of (x) the Executive’s then
      current Base Salary and (y) the greater of (A) the average of the
      Executive’s bonuses (taking into account a payment of no bonus or a
      payment of a bonus of $0) with respect to the preceding three fiscal years
      (or the period of the Executive’s employment if shorter), (B) the
      Executive’s bonus with respect to the preceding fiscal year and (C) in the
      event that such termination of employment occurs before the first
      anniversary of the Commencement Date, the Executive’s annualized projected
      bonus for such year (the “Severance Payment”). The Severance Payment shall
      be paid to the Executive within 60 days following the Date of
      Termination;s
              continued
      payment by Coda Octopus for life, health and disability insurance coverage
      and salary and other benefits for the Executive and the Executive’s spouse
      and dependents for one year following the Date of Termination to the same
      extent that Coda Octopus paid for such coverage immediately prior to the
      termination of the Executive’s employment and subject to the eligibility
      requirements and other terms and conditions of such insurance coverage,
      provided that if any such insurance coverage shall become unavailable
      during the one year period, Coda Octopus thereafter shall be obliged only
      to pay to the Executive an amount which, after reduction for income and
      employment taxes, is equal to the employer premiums for such insurance for
      the remainder of such severance period; ands
              vesting
      as of the Date of Termination in any unvested portion of any stock option,
      restricted stock and any other long term incentive award previously issued
      to the Executive by Coda Octopus. Each such stock option must be exercised
      by the Executive within 180 days after the Date of Termination or the date
      of the remaining option term, if
earlier.





Termination
Following Change in Control





If during
the employment period and within 12 months following a change in control as
defined in the Employment Agreement, Coda Octopus (or its successor) terminates
the Executive’s employment without cause or the Executive terminates his or her
employment for Good Reason, or the Executive, by notice given during the 90 day
period commencing on the three-month anniversary of the date of the Change in
Control (the “Notice Period”), terminates his or her employment for any reason,
which termination shall be effective on the last day of the Notice Period, the
Executive shall be entitled to receive the same termination pay and benefits as
if he or she were terminated by the Company without cause or by the Executive
for good reason, plus a Tax Gross-up Payment. In the event that any termination
payment or any insurance benefits, accelerated vesting, pro-rated bonus or other
benefit payable to the Executive (under the Employment Agreement or otherwise),
constitute “parachute payments” within the meaning of Section 280G (as it may be
amended or replaced) of the Internal Revenue Code of 1986, as amended (the
“Code”) and are subject to the excise tax imposed by Section 4999 (as it may be
amended or replaced) of the Code (“the Excise Tax”), then Coda Octopus shall pay
to the Executive an additional amount (the “Gross-Up Amount”) such that the net
benefits retained by the Executive after the deduction of the Excise Tax
(including interest and penalties) and any federal or local income and
employment taxes (including interest and penalties) upon the Gross-Up Amount
shall be equal to the benefits that would have been delivered hereunder had the
Excise Tax not been applicable and the Gross-Up Amount not been
paid.


38


Termination
Provisions of Consulting Agreement Geoff Turner




Consulting
Agreement with Taktos Limited under which the services of Mr. Turner are
provided stipulates that the agreement continues unless terminated by either
party giving 3 months’ notice in writing.





Stock
Option Plans





2004
Plan





In
October 2004, the Board approved and on June 27, 2006, the stockholders ratified
the Company’s 2004 Employees, Directors, Officers and Consultants Stock Option
and Stock Award Plan (the “2004 Plan”), which provides for, among other things,
the award of up to 2,500,000 shares of Common Stock.





Pursuant
to the 2004 Plan, officers, employees, directors and consultants of the Company
and certain of its subsidiaries are eligible to receive awards of stock options
and restricted stock. Options granted under the 2004 Plan may be ISOs or
non-qualified stock options (“NQSOs”). Restricted stock may be granted in
addition to or in lieu of any other award made under the 2004 Plan.





The
maximum number of shares of Common Stock reserved for the grant of awards under
the 2004 Plan is 2,500,000. Such share reserves are subject to further
adjustment in the event of specified changes to the capital structure of the
Company. The shares may be made available either from the Company’s authorized
but unissued capital stock or from capital stock reacquired by the
Company.





The
Compensation Committee of the Board of Directors administers the 2004 Plan.
Subject to the provisions of the plan, the Compensation Committee will determine
the type of awards, when and to which executives awards will be granted, the
number of shares covered by each award and the terms, provisions and kind of
consideration payable (if any), with respect to awards. The Compensation
Committee may interpret the plan and may at any time adopt such rules and
regulations for the plan as it deems advisable, including the delegation of
certain of its authority. In determining the persons to whom awards shall be
granted and the number of shares covered by each award, the Compensation
Committee takes into account the duties of the respective persons, their present
and potential contributions to the success of the Company and such other factors
as the Compensation Committee deems relevant.





The
Compensation Committee may provide for the payment of the option price in cash,
by delivery of common stock having a fair market value equal to such option
price, by delivery of options or warrants having an intrinsic value equal to
such option price or by a combination thereof or by any other method. Options
granted under the 2004 Plan will become exercisable at such times and under such
conditions as the Compensation Committee shall determine.





The Board
of Directors may at any time and from time to time suspend, amend, modify or
terminate the 2004 Plan; provided, however, that, to the extent required by any
other law, regulation or stock exchange rule, no such change shall be effective
without the requisite approval of the Company’s stockholders. In addition, no
such change may adversely affect an award previously granted, except with the
written consent of the grantee.





The
Company has issued all the options allowable under the 2004 Plan and all of said
options are Non-qualified options as stockholder approval of the 2004 Plan was
not obtained within one year of Board approval, as required under the Internal
Revenue Code of 1986, as amended.





2006
Plan





On March
2, 2006, the Board approved and on June 27, 2006, the stockholders ratified the
Company’s 2006 Employees, Directors, Officers and Consultants Stock Option and
Stock Award Plan (the “2006 Plan”), which provides for, among other things, the
award of up to 2,500,000 shares of Common Stock.





Pursuant
to the 2006 Plan, officers, employees, directors and consultants of the Company
and certain of its subsidiaries are eligible to receive awards of stock options
and restricted stock. Options granted under the 2006 Plan may be ISOs or
non-qualified stock options (“NQSOs”). Restricted stock may be granted in
addition to or in lieu of any other award made under the 2006 Plan.





The
maximum number of shares of Common Stock reserved for the grant of awards under
the 2006 Plan is 2,500,000. Such share reserves are subject to further
adjustment in the event of specified changes to the capital structure of the
Company. The shares may be made available either from the Company’s authorized
but unissued capital stock or from capital stock reacquired by the
Company.


39


The
Compensation Committee of the Board of Directors administers the 2006 Plan.
Subject to the provisions of the plan, the Compensation Committee will determine
the type of awards, when and to which executives awards will be granted, the
number of shares covered by each award and the terms, provisions and kind of
consideration payable (if any), with respect to awards. The Compensation
Committee may interpret the plan and may at any time adopt such rules and
regulations for the plan as it deems advisable, including the delegation of
certain of its authority. In determining the persons to whom awards shall be
granted and the number of shares covered by each award, the Compensation
Committee takes into account the duties of the respective persons, their present
and potential contributions to the success of the Company and such other factors
as the Compensation Committee deems relevant.




An option
may be granted on such terms and conditions as the Compensation Committee may
approve, and generally may be exercised for a period of up to five years from
the date of grant. Generally, ISOs will be granted with an exercise price at the
minimum equal to the “Fair Market Value” on the date of grant. In the case of
ISOs, certain limitations will apply with respect to the aggregate value of
option shares which can become exercisable for the first time during any one
calendar year, and certain additional limitations will apply to ISOs granted to
“Ten Percent Stockholders” of the Company (as defined in the 2006 Plan). The
Compensation Committee may provide for the payment of the option price in cash,
by delivery of common stock having a fair market value equal to such option
price, by delivery of options or warrants having an intrinsic value equal to
such option price or by a combination thereof or by any other method. Options
granted under the 2006 Plan will become exercisable at such times and under such
conditions as the Compensation Committee shall determine.





The Board
of Directors may at any time and from time to time suspend, amend, modify or
terminate the 2006 Plan; provided, however, that, to the extent required by any
other law, regulation or stock exchange rule, no such change shall be effective
without the requisite approval of the Company’s stockholders. In addition, no
such change may adversely affect an award previously granted, except with the
written consent of the grantee.





2008
Plan





On March
26, 2008, our Board of Directors adopted and on July 1, 2008, our stockholders
ratified the 2008 Employees, Directors, Officers and Consultants Stock Option
and Stock Award Plan (the “2008 Plan”).  The plan provides for the
issuance of up to 2,500,000 shares of common stock.  The main features
of the 2008 Plan are similar to those of the 2006 Plan.





To date,
1,025,000 options have been issued under the 2008 Plan.




As of
October 31, 2008, we had granted non-qualified options to purchase an aggregate
of 5,755,900 shares of the Company’s common stock at exercise prices ranging
from $1.00 per share to $1.80 per share, of which 4,578,000 have
vested.




2008
Stock Purchase Plan





On March
26, 2008 our Board of Directors adopted the 2008 Stock Purchase Plan (the
“Purchase Plan“).  The Purchase Plan has not been ratified by our
stockholders.





The
Purchase Plan provides that, at the discretion of the Board, the Company will
make “Offerings” to employees and participating consultants to purchase stock
under the Purchase Plan.  Offerings will begin each June 1, September
1, December 1, and March 1, or the first business day thereafter (the “Offering
Commencement Date”). Each Offering Commencement Date will begin a three-month
period (the “Offering Period”) during which payroll deductions will be made and
held for the purchase, in the open market, of Common Stock at the end of the
Offering Period. The Board or a Committee may, at its discretion, choose a
different Offering Period of twelve (12) months or less for
Offerings.





For
Offering Periods ending after November 30, 2008, the Company will grant to the
employee an option to purchase one share of common stock for each share acquired
by the employee or participating consultant for the applicable Offering
Period.





To date,
no shares have been purchased under the Purchase Plan.  In addition,
no options have been granted under the Purchase Plan.





Limitation
on Stock Option Plans





Under the
Subscription Agreement entered into between the Company and The Royal Bank of
Scotland, plc on February 21, 2008, there are certain restrictions on the
adoption of new stock option plans by the Company. In particular, until the
redemption of the notes, the Company may only adopt new stock option plans on
substantially similar terms to its existing stock option plan 2006 and it may
not issue stock options under any plan (or outside any such plan) at a price
which is less than $1.05.


40


Section
16(a) Beneficial Ownership Reporting Compliance




Under the
Exchange Act, our directors, our executive officers, and any persons holding
more than 10% of our common stock are required to report their ownership of the
common stock and any changes in that ownership to the Securities and Exchange
Commission. To our knowledge, based solely on our review of the copies of such
reports received or written representations from certain reporting persons that
no other reports were required, we believe that during our fiscal year ended
October 31, 2008, a number of reports were filed late.





The table
below sets forth for each person required to file and who was delinquent in such
obligation, the type of form, the date it was filed and the date of the earliest
transactions required to be disclosed in such form. We are in the process of
designing a compliance program to assist each of our officers and directors in
making the requisite filings on a timely basis.





Name of Reporting Person
                                        
                                        Form
                                        
                                        Date Filed
                                        
                                        Earliest Transaction ReportedJason
      Reid
                                        
                                        4
                                        
                                        July
      3, 2008
                                        
                                        June
      21, 20084
                                        
                                        August
      21, 2008
                                        
                                        August
      16, 2008Paul
      Nussbaum
                                        
                                        4
                                        
                                        August
      21, 2008
                                        
                                        August
      16, 20084
                                        
                                        October
      16, 2008
                                        
                                        October
      11, 2008Rodney
      Peacock
                                        
                                        4
                                        
                                        August
      21, 2008
                                        
                                        August
      16, 2008Blair
      Cunningham
                                        
                                        4
                                        
                                        August
      21, 2008
                                        
                                        August
      16, 2008Anthony
      Davis
                                        
                                        4
                                        
                                        August
      21, 2008
                                        
                                        August
      16, 20084
                                        
                                        August
      21, 2008
                                        
                                        August
      14, 2008Frank
      Moore
                                        
                                        4
                                        
                                        August
      21, 2008
                                        
                                        August
      16, 20084
                                        
                                        August
      13, 2008
                                        
                                        July
      13, 2008Geoff
      Turner
                                        
                                        4
                                        
                                        July
      3, 2008
                                        
                                        June
      21, 2008Jody
      Frank
                                        
                                        4
                                        
                                        March
      25, 2008
                                        
                                        March
      13, 20084
                                        
                                        August
      21, 2008
                                        
                                        August
      16, 2008Angus
      Lugsdin
                                        
                                        3
                                        
                                        August
      15, 2008
                                        
                                        June
      13, 20084
                                        
                                        October
      8, 2008
                                        
                                        October
      5, 2008Faith
      Griffin
                                        
                                        3
                                        
                                        August
      21, 2008
                                        
                                        July
      13,
2008


41


ITEM 12.  SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS





The
following table sets forth information as of February 27, 2009 regarding the
beneficial ownership of our Common Stock, based on information provided by (i)
each of our executive officers and directors; (ii) all executive officers and
directors as a group; and (iii) each person who is known by us to beneficially
own more than 5% of the outstanding shares of our Common Stock. The percentage
ownership in this table is based on 48,897,358 shares issued and outstanding as
of March 13, 2009.




Unless
otherwise indicated, the address of each beneficial owner is in care of the
Company, 164 West 25th Street,
6th
Floor, New York, NY 10001. Unless otherwise indicated, we believe that all
persons named in the following table have sole voting and investment power with
respect to all shares of Common Stock that they beneficially own.





Name and Address of Beneficial Owner (1)
                    
                    Amount and Nature of Beneficial
                      Ownership of Common Stock (2)
                    
                    
                    Percent of
                      Common StockJason
      Reid (3)
                    
                    
                    23,750,089
                    
                    
                    
                    45.5
                    %Paul
      Nussbaum (4)
                    
                    
                    863,295
                    
                    
                    
                    1.8
                    %Rodney
      Peacock (5)
                    
                    
                    617,064
                    
                    
                    
                    1.3
                    %Blair
      Cunningham (6)
                    
                    
                    806,446
                    
                    
                    
                    1.6
                    %Anthony
      Davis (7)
                    
                    
                    423,659
                    
                    
                    
                    *Frank
      B. Moore (8)
                    
                    
                    298,659
                    
                    
                    
                    *Geoff
      Turner (9)
                    
                    
                    223,659
                    
                    
                    
                    *Jody
      Frank (10)
                    
                    
                    335,033
                    
                    
                    
                    *Angus
      Lugsdin (11)
                    
                    
                    543,087
                    
                    
                    
                    1.1
                    %Faith
      Griffin (12)
                    
                    
                    336,500
                    
                    
                    
                    *Richard
      Lewis (13)
                    
                    
                    332,428
                    
                    
                    
                    *The
      Royal Bank of Scotland plc (14)
                      135
      Bishopsgate, London EC2M 3UR, England
                    
                    
                    11,428,571
                    
                    
                    
                    18.9
                    %Vision
      Opportunity Master Fund Limited (15)
                      317
      Madison Avenue, Suite 1220.New York, NY 10017
                    
                    
                    4,943,276
                    
                    
                    
                    9.9
                    %All
      Directors and Executive Officers as a Group
                      (eleven
      persons):
                    
                    
                    28,529,919
                    
                    
                    
                    52.2
                    %





*
      Less than 1%.(1)
      Unless otherwise indicated, the address of all individual and entities
      listed below is c/o Coda Octopus Group, Inc. 164 West 25th Street, 6th
      Floor, New York NY10001.(2)
      The number of shares indicated includes (i) shares issuable upon the
      exercise of outstanding stock options or warrants held by each individual
      or group to the extent such options and warrants are exercisable within
      sixty days of February 27, 2009.(3)
      Includes the following: (i) 450,250 shares issuable upon exercise of
      options, (ii) 19,523,251 shares of common stock and a further 2,746,418
      shares issuable upon exercise of warrants held by Fairwater Technology
      Group Ltd, of which Mr. Reid may be deemed to be a control person, (iii)
      282,787 shares of common stock and a further 50,000 shares issuable upon
      exercise of warrants held by Softworks Business Systems Solutions Limited,
      of which Mr. Reid may be deemed to be a control person, (iv) 172,540 held
      by Mr. Reid’s wife, and (v) 524,843 that are owned by Mr. Reid
      directly.(4)
      Includes 425,000 shares issuable upon exercise of options and 60,000
      shares issuable upon the exercise of warrants.(5)
      Includes 350,000 shares issuable upon exercise of
  options.(6)
      Includes 283,500 shares issuable upon exercise of options and 282,787
      shares held by Softworks Business Systems Solutions Limited of which Mr.
      Cunningham was a director until October 31, 2008.(7)
      Includes 183,500 shares issuable upon exercise of
  options.(8)
      Includes 233,500 shares issuable upon exercise of
  options.(9)
      Includes 183,500 shares issuable upon exercise of currently exercisable
      options.(10)
      Includes 159,125 shares issuable upon exercise of options. Also includes
      13,000 shares held by Drummer Capital Management of which Mr. Frank is a
      general partner.(11)
      Includes 183,500 shares issuable upon exercise of options and 57,000
      issuable upon exercise of warrants.(12)
      Includes 233,500 shares issuable upon exercise of currently exercisable
      options.(13)
      Includes 158,500 shares issuable upon exercise of currently exercisable
      options.(14)
      Consists of shares issuable upon conversion of convertible
      notes.(15)
      Consist of 4,314,700 shares of Common Stock and 628,576 shares of Common
      Stock issuable upon currently exercisable warrants. The warrants contain a
      provision that limits their exercise to the extent that the Company’s
      ownership percentage would exceed 9.9% of our issued and outstanding
      common stock of the Company. Adam Benowitz, portfolio manager, has
      investment and dispositive power of the shares held by this
      entity.




42




ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE





Since
August 2004, our largest stockholder is Fairwater Technology Group Ltd. The
voting shares of Fairwater Technology are controlled 54.8% by Jason Reid, who
also beneficially owns 57.9% of the non-voting preferred shares of Fairwater
Technology Group Limited. The balance of the voting and non-voting shares of
Fairwater is principally owned by members of Mr. Reid’s family.





Between
June 2006 and January 2007, we sold to Vision Opportunity Masters Fund, Ltd.,
46,000 shares of Series B preferred Stock and 650,000 shares of common stock for
a total of $4,600,000. We also granted five-year warrants to purchase an
aggregate of 9,200,000 shares of Common Stock at an exercise price ranging from
$1.30 to $1.70 per share. In accordance with Emerging Issues Task Force (“EITF”)
No.00-27, a portion of the proceeds were allocated to the warrants based on
their relative fair value, which totaled approximately $3,261,016, using
the Black Scholes option pricing model. Further, we attributed a beneficial
conversion feature of approximately $1,338,985 to the Series B
preferred shares based upon the difference between the conversion price of those
shares and the closing price of our common shares on the date of issuance,
limited to the proceeds attributable to the sale of the preferred shares. The
warrants contained cashless exercise provisions, anti-dilution provisions in the
event of stock splits, stock dividends, combinations, reclassifications and the
like and sales of stock below the exercise price. The cashless exercise
provisions have now been amended by way of agreement between the parties in
March 2007. The warrants are also redeemable on the fifth anniversary from the
date of grant at an amount equal to three times the conversion price. We also
granted Vision a nine month option to subscribe for and purchase up to 10,000
Units consisting of one share of Series B Preferred Stock, one Series A Warrant
and one Series B Warrant at a purchase price of $100.00 per Unit. This option
has now been exercised. At the time of Vision’s purchase of our securities, it
also entered into a registration rights agreement for us to register the resale
of Vision’s shares of Common Stock issuable upon conversion of the Series B
Preferred Stock and upon exercise of the Series A and Series B Common Stock
Warrants. The agreement had provided for this be filed within 75 days of the
closing date and effective within 175 days after the closing date. The Unit
Purchase Warrant also contains certain registration rights to file within 45
days after the Unit Purchase Warrant is exercised in whole or in part, but not
more than two registration statements and to have the registration statement
declared effective within 135 days after the Unit Purchase Warrant is partially
or fully exercised. Contemporaneously with Vision’s purchase of securities, Mr.
Jason Reid, Mr. Bill Ahearn (now deceased) and the Company entered into lock-up
agreements that have now expired.





In March
2007, the Company and Vision entered into an Amendment of the Securities
Purchase Agreement whereby, amongst other things, the obligations of the Company
to register the securities sold were waived and deemed to have effect from the
inception of the parties’ agreement. Vision also entered into an agreement for
the lock up of all its securities for a period of 12 months from March 21, 2007.
Between March 2007 and May 2007, Vision exercised its rights to convert its
preferred stock into the Company’s Common Stock and 27,819 shares of Series B
Preferred Stock were converted into 2,781,900 shares of the Company’s Common
Stock. Further, pursuant to the terms of the private offering of the Company
that was completed in April 2007, the Company on May 10, 2007, repurchased
18,181 shares of Series B Preferred Stock from Vision at a purchase price of
$110 per share. A total of $1,999,910 was paid for the repurchase of these
shares. Vision paid an aggregate of $1,818,100 for these shares at the time of
purchase, which included warrants, as discussed in the previous paragraph. As
discussed further in the previous paragraph, these warrants were valued at
$3,261,016 on the date of purchase by Vision. The repurchased shares of Series B
Preferred Stock were cancelled by the Company. The repurchase was financed from
the proceeds of the private offering completed in April 2007 and accords with
the use of proceeds provision in the offering. The warrants that were issued
still remain in Vision’s ownership.




In May
2006 we issued warrants to purchase 250,000 of our shares of common stock at a
purchase price of $0.50 per share to Mr. Joel Pensley who was then an executive
officer of the Company. These warrants were valued at approximately
$122,228.





In April
2007 all officers and directors of the Company entered into lock-up agreements
to prohibit the resale of the Common Stock until the 12 month anniversary after
an effective registration statement for the offering which is the subject matter
of this registration statement.





In April
2007, Fairwater Technology Group Limited exercised the option to convert 15,000
shares of its Series A Sterling Denominated Preferred stock, which Fairwater
Technology had purchased from the Company in October 2005 for £1,500,000,
equivalent to approximately $2,655,000, based upon a conversion ratio of $1.77
for each UK Pound at the time of the investment, and 914.8 Series A $
Denominated Preferred Stock purchased from the Company in April 2006 for a total
consideration of $91,418. In consideration for early conversion, the Company
granted Fairwater Technology Group Limited two five year warrants to purchase
1,373,209 of its shares of common stock at a purchase price of $1.30 and
1,373,209 at a purchase price of $1.70. These warrants were valued at
approximately $2,991,099.





In April
2007, as consideration for two officers of the Company early conversion of 820
Series A Preferred Stock, we issued to them 5 year warrants to purchase 82,000
shares of our common stock at a purchase price ranging from $1.30 to $1.70 per
share. The warrants were valued at $89,305.


43


Our
wholly owned subsidiary Coda Octopus (UK) Holdings Limited (guaranteed by the
Company) entered into an acquisition agreement on June 26, 2006 for the sale and
purchase of the entire issued outstanding share capital of Martech Systems
(Weymouth) Limited. Pursuant to this agreement certain parts of the purchase
price were outstanding and in this regard we were indebted to the sellers of
Martech Systems (Weymouth) Limited: Mr. Colin Richard Pegrum, Mr. Barry
Granville Brookes, Mr. Lawrence Lucian Short, Mrs. Elizabeth Short, Mrs. Janice
Brookes and Mrs. Jennifer Pegrum for an amount of £200,000 or $392,000 (using an
exchange rate of $1.96) which, under the terms of the acquisition agreement was
paid on June 26, 2007 (first anniversary of closing). This amount was guaranteed
by Coda Octopus Group, Inc. Mr. Colin Richard Pegrum, Mr. Barry Granville
Brookes and Mr. Lawrence Lucian Short each serve as Directors on the Board of
Directors of Martech and are considered key employees of Martech. These
outstanding amounts were paid by us on June 26, 2007 and as such the Company is
released from the guarantee for these amounts.





Our
wholly owned subsidiary Coda Octopus (US) Holdings, Inc entered into an
acquisition agreement on April 6, 2007 for the sale and purchase of the entire
issued and outstanding share capital of Colmek Systems Engineering. Pursuant to
this agreement certain parts of the purchase price remain outstanding and in
this regard our wholly owned subsidiary is indebted to the sellers of Colmek
Systems Engineering (now a wholly owned subsidiary of the Company) an amount of
$700,000 which, under the terms of the acquisition agreement was due to be paid
on April 6, 2008 (first anniversary of closing). We were also under an
obligation to issue up to another 42,910 shares as part of the purchase price.
This was also subject to the pledge. This amount was guaranteed by the Company
and was secured by a pledge in favor of the Colmek sellers, and was also
guaranteed by Coda Octopus Group, Inc. Certain of the sellers to whom this
amount is owed are key employees within Colmek.





We and
our affiliates have entered into a Security Agreement with the US Department of
Defense, under which we agree to exercise limited control over our wholly owned
subsidiary Colmek, in respect of US government classified or restricted
information, materials or property. Under this Agreement, all members of the
Colmek Board must be US Citizen and comply with certain conditions under the
National Industrial Security Program.





During
January 2008, we issued to the holders of our 12% Preferred Stock, all of whom
are affiliates of the Company, an aggregate of 28,288 shares of common stock in
payment of cumulative dividends due on the Preferred Stock between 2006 and
2007. All shares were issued at a price ranging from $1.07 to $1.55 per share,
representing the average stock price for the relevant period.




In
February 2008 all directors entered into lock-up agreements to restrict the
resale of any of the Company’s common stock held by them for four years. The
lock period shall cease upon the full redemption or conversion of the notes.
During the lock period and subject to compliance with any other contractual
obligations, each executive may sell up to 10% or 50,000 of their common stock
(whichever is greater).





Other
Transactions with our President and Chief Executive Officer and his
Affiliates




Since the
beginning of the last fiscal year we have been party to the following additional
transactions involving Jason Reid, our President and Chief Executive Officer,
and his affiliates:





s
            As
      a result of a series of loan transactions, at October 31, 2005 we owed an
      amount of $81,107 to Fairwater Technology Group Limited, a UK company, of
      which Mr. Reid is a Director and Principal Stockholder. A summary of
      material charges and payments between the two entities follows – note that
      none of these transactions was interest
bearing:




s
            An
      additional $10,491 in cash was loaned to us by Fairwater Technology Group
      in April 2006.





s
            Of
      the balance outstanding, $91,418 was converted into Series A Preferred
      Stock at April 30, 2006 (which has since been converted into shares of our
      common stock). Allowing for a currency translation gain of $177, this left
      a balance due to Fairwater of $878 which was repaid in cash on July 31,
      2007.





s
            Dividends
      due to Fairwater on series A preferred stock, before its conversion on
      March 25, 2007, were not paid but recognized as a loan from Fairwater to
      the Company, bearing no interest. This left an amount of $105,685 owed by
      the Company to Fairwater at October 31,
2007.





s
            This
      amount was repaid to Fairwater over the year, leaving no balance
      outstanding at October 31,
2008.


44





s
            At
      October 31, 2005 we owed an amount of $67,435 to Weight Management (UK)
      Limited, a UK company of which Mr. Reid is a Director and Principal
      Stockholder, for services rendered, including administration, internet
      hosting, office facilities and health insurance. This amount was reduced
      as follows – note that none of these transactions was interest
      bearing:




s
            From
      November 2005 to June 2006, a variety of services were provided by Weight
      Management (UK) Limited, including health insurance, vehicles, internet
      hosting, administrative services, insurance, plus the recharge of
      telephone and travel costs incurred and paid for by Weight Management.
      These services and recharges totaled $128,159. From July 2006 to October
      2006, the Company supplied to Weight Management software development and
      support services totaling $42,418. The Company made some repayments, both
      in cash and through the provision of services, to leave a balance of
      $78,740 owing to Weight Management at October 31,
  2007.





s
            Since
      that point, cash payments of $37,219 have been made to Weight Management,
      taking the balance owed by the Company to $41,521 as at October 31, 2008.
      In addition, software development and support services totaling $244,604
      have been provided to Weight Management by our subsidiary company, Coda
      Octopus R&D Ltd, leaving a net amount outstanding of $203,083, which
      has, subsequent to the year end, become subject of a lease/license
      agreement through which this amount is repaid over the coming 3
      years.




s
            At
      October 31, 2006, Mr. Reid owed a balance of $104,720 to the Company,
      which was expense incurred by Mr. Reid in moving both himself and the
      Company’s headquarters to New York in 2004 and 2005. This amount increased
      by $965 in the twelve months to October 31, 2007 as a result of a
      payment made on Mr. Reid’s behalf. This left a balance outstanding of
      $105,685 at October 31, 2007. This amount was expensed in the past year, a
      non-cash cost hitting the Company’s Statement of Operations in
      2008.





All of
the foregoing transactions were approved by our Board of Directors. Mr. Reid
abstained from deliberations and voting on these transactions.




ITEM
14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES




Audit
Fees. The aggregate fees billed by RBSM LLP (formerly Russell Bedford Stefanou
Mirchandani LLP), our principal accountants, for professional services rendered
for the audit of the Company's annual financial statements for the last two
fiscal years and for the reviews of the financial statements included in the
Company's Quarterly reports on Form 10-QSB during the last two fiscal years 2008
and 2007 were $261,114 and $268,992, respectively.




Audit-Related
Fees. The aggregate fees billed by RBSM LLP (formerly Russell Bedford Stefanou
Mirchandani LLP), our principal accountants, for professional services rendered
in connection with the audits of acquired businesses, the review of and consent
to the filing of registration statements, and assistance in responding to
comment letters issued by the Securities & Exchange Commission during the
last two fiscal years 2008 and 2007 were nil and $134,562,
respectively.




Tax Fees.
The aggregate fees billed by the Company's principal accountants for tax
compliance, tax advice and tax planning services rendered to the Company during
the last two fiscal years 2008 and 2007 were nil and nil,
respectively.




All Other
Fees. The Company did not engage its principal accountants to render services to
the Company during the last two fiscal years, other than as reported above.





Prior to
the Company's engagement of its independent auditor, such engagement is approved
by the Company's audit committee. The services provided under this engagement
may include audit services, audit-related services, tax services and other
services. Pre-approval is generally provided for up to one year and any
pre-approval is detailed as to the particular service or category of services
and is generally subject to a specific budget. Pursuant to the Company's Audit
Committee Charter, the independent auditors and management are required to
report to the Company's audit committee at least quarterly regarding the extent
of services provided by the independent auditors in accordance with this
pre-approval, and the fees for the services performed to date. The audit
committee may also pre-approve particular services on a case-by-case basis. All
audit-related fees, tax fees and other fees incurred by the Company for the year
ended October 31, 2008, were approved by the Company's audit
committee.


45





ITEM
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES





Exhibit Number
                  
                  Description2.1
                  
                  Plan
      and Agreement of Merger dated July 12, 2004 by and between Panda and Coda
      Octopus *2.2
                  
                  Share
      Purchase Agreement dated June 26, 2006 between Colin Richard, Coda Octopus
      (UK) Holdings Limited and Coda Octopus, Inc. *2.
      3
                  
                  Stock
      Purchase Agreement dated April 6, 2007, between Miller & Hilton d/b/a
      Colmek Systems Engineering, its shareholders and Coda Octopus (US)
      Holdings Inc. *3.1
                  
                  Certificate
      of Incorporation *3.1(
      a )
                  
                  Certificate
      of Designation Series A Preferred Stock *3.1(
      b )
                  
                  Certificate
      of Amendment to Certificate of Designation Series A Preferred Stock
      *3.1(
      c )
                  
                  Certificate
      of Designation Series B Preferred Stock*3.1( d
    )
                  
                  Certificate of Amendment to
      Certificate of Incorporation3.2
                  
                  By-Laws
      *4.1
                  
                  Form
      of Warrant *10.1
                  
                  Employment
      Agreement dated April 1, 2005 between the Company and Jason   Reid
      *10.2
                  
                  Employment
      Agreement dated July 1, 2005 between the Company and Anthony   Davis
      *10.3
                  
                  Employment
      Agreement dated July 1, 2005 between the Company and Blair  
      Cunningham *10.4
                  
                  Employment
      Agreement dated May 1, 2006, between the Company and Frank   Moore
      *10.5
                  
                  Employment
      Agreement dated April 6, 2007, between Miller and Hilton d/b/a Colmek
      Systems Engineering and Scott Debo *10.6
                  
                  Director’s
      Agreement dated January 26, 2005 between the Company and Paul Nussbaum
      *10.7
                  
                  Director’s
      Agreement dated January 26, 2005 between the Company and Rodney Peacock
      *10.8
                  
                  Form
      of Securities Purchase Agreement dated April 4, 2007 *10.9
                  
                  Sale
      of Accounts and Security Agreement dated August 17, 2005 between the
      Company and Faunus Group International, Inc. *10.10
                  
                  Standard
      Form of Office Lease dated June 1, 2007 between the Company and Nelco Inc.
      *10.11
                  
                  Collaboration
      Agreement dated July 1, 2006 between Oxford Technical Solutions Ltd. and
      Coda Octopus10.12
                  
                  Amendment
      to Securities Purchase Agreements dated March 21, 2007 between Vision
      Opportunity Master Fund Ltd. and Coda Octopus*10.13
                  
                  Securities
      Repurchase Agreement dated April 10, 2007 between Coda Octopus and Vision
      Opportunity Master Fund*10.14
                  
                  Employment
      Agreement dated as of July 16, 2007 between the Company and Jody
      Frank*10.15
                  
                  Award/Contract
      dated July 2, 2007 issued by U.S.
Army*





46





10.16
              
              Subscription
      Agreement dated February 21, 2008, between the Company and The Royal Bank
      of Scotland**10.17
              
              Form
      of Loan Note Instrument dated February 21, 2008**10.18
              
              Form
      of Loan Note Certificate**10.19
              
              Security
      Agreement dated February 21, 2008**10.20
              
              Floating
      Charge executed by Coda Octopus R&D Limited dated February 21,
      2008**10.21
              
              Floating
      Charge executed by Coda Octopus Products Limited dated February 21,
      2008**10.22
              
              Form
      of Guarantee**10.23
              
              Intercreditor
      Deed dated February 20, 2008 between the Company, The Royal Bank of
      Scotland and Faunus Group International**10.24
              
              Debenture
      issued by Martech Systems (Weymouth) Limited**10.25
              
              2008
      Incentive Stock Option Plan***10.26
              
              2008
      Stock Purchase Plan****10.27
              
              Cash
      Control Framework Agreement dated March 16, 2009 by and between the
      Company, The Royal Bank of Scotland and Greenhouse Investment
      Limited23.1
              
              Consent
      by RBSM LLP31.1
              
              Chief
      Executive Officer Certification31.2
              
              Chief Financial
      Officer Certification32
              
              Certification
      Pursuant to 18 U.S.C. Section 1350










*
            Incorporated
      by reference to the Company’s Registration Statement on Form SB-2 (SEC
      File No.143144)**
            Incorporated
      by reference to the Company’s Anuual Report on Form 10-KSB for the year
      ended October 31, 2007


***
            Incorporated
      by reference to the Company’s Proxy Statement filed with the Securities
      and Exchange Commission June 13, 2008****
            Incorporated
      by reference to the Company’s Registration Statement on Form S-8 (SEC File
      No. 153254)


47




SIGNATURES
 
 Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
 
 DATE:       
      March 31, 2009
              CODA
      OCTOPUS GROUP, INC./s/
      Jason ReidJason
      ReidPresident
      and Chief Executive Officer
 
 POWER
OF ATTORNEY
 
 KNOW ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Jason Reid, his attorney-in-fact, each with the power
of substitution, for him in any and all capacities, to sign any amendments in
this Annual Report on Form 10-K, and to file the same, with exhibits thereto and
other documents in connections therewith, with the Securities and Exchange
Commission, hereby ratifying and conforming all that each of said
attorneys-in-fact, or his or her substitutes, may do or cause to be done by
virtue of hereof.
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
 
 Signature
              
              Title
              
              Date/s/
              Jason
      Lee Reid
              
              Director
      and Chief Executive Officer
              
              March
      31, 2009(Principal
      Executive Officer)/s/
              Jody
      Frank
              
              Director
      and Chief Financial Officer
              
              March
      31, 2009(Principal
      Financial and Accounting Officer)/s/
              Paul
      Nussbaum
              
              Chairman
              
              March
      31, 2009/s/
              Rodney
      Peacock
              
              Director
              
              March
      31, 2009/s/
              Frank
      Moore
              
              Director
              
              March
      31, 2009/s/
              Faith
      Griffin
              
              Director
              
              March
      31, 2009
  Nick
      Franks
              
              Director
              
              March
      ___, 2009
 48





CODA
OCTOPUS GROUP, INC.





INDEX TO
FINANCIAL STATEMENTS




PAGEREPORT
      OF INDEPENDENT REGISTERED CERTIFIED
                          
                          F-1PUBLIC
      ACCOUNTING FIRMCONSOLIDATED
      BALANCE SHEETSOCTOBER
      31, 2008 and 2007
                          
                          
                          F-2CONSOLIDATED
      STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSSFOR
      THE YEARS ENDED OCTOBER 31, 2008 and 2007
                          
                          
                          F-3CONSOLIDATED
      STATEMENT OF STOCKHOLDERS' EQUITYFOR
      THE TWO YEARS ENDED OCTOBER 31, 2008
                          
                          
                          F-4CONSOLIDATED
      STATEMENT OF CASH FLOWSFOR
      YEARS ENDED OCTOBER 31, 2008 and 2007
                          
                          
                          F-5NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
                          
                          
                          F-6 - F-26




49




REPORT OF
INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM





Board of
Directors


Coda
Octopus Group, Inc.


New York,
New York





We have
audited the accompanying consolidated balance sheets of Coda Octopus Group, Inc.
and its wholly owned subsidiaries (the “Company”), as of October 31, 2008 and
2007, and the related consolidated statements of operations and comprehensive
loss, stockholders’ equity and cash flows for each of the two years in the
period ended October 31, 2008. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.




We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States of America). The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatements. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe our audit
provide a reasonable basis for our opinion.




As
discussed in Note 16 to the financial statements, the Company has failed to
comply with certain covenants in connection with the secured convertible debt.
Subsequent to the date of the financial statements, the Company and the
noteholder entered into an agreement, whereby the noteholder agreed not to
undertake any adverse actions against the Company, subject to the Company
complying with the terms of the agreement.





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Coda Octopus Group, Inc. and its
wholly owned subsidiaries as of October 31, 2008 and 2007, and the results of
its operations and its cash flows for each of the two years in the period ended
October 31, 2008, in conformity with accounting principles generally accepted in
the United States of America.





/S/RBSM
      LLPNew
      York, New York
              RBSM
      LLPMarch
      17, 2009


F-1


CODA
OCTOPUS GROUP, INC.


CONSOLIDATED
BALANCE SHEETS


OCTOBER
31, 2008 and 2007





2008
                                      
                                      
                                      2007ASSETSCurrent
      assets:Cash
      and cash equivalents
                                      
                                      $
                                      3,896,149
                                      
                                      
                                      $
                                      916,257Restricted
      cash, Note 2
                                      
                                      
                                      1,017,007
                                      
                                      
                                      
                                      -Short
      term investments, Note 4
                                      
                                      
                                      153,000
                                      
                                      
                                      
                                      935,000Accounts
      receivable, net of allowance for doubtful accounts
                                      
                                      
                                      2,589,174
                                      
                                      
                                      
                                      2,720,151Inventory
                                      
                                      
                                      2,317,322
                                      
                                      
                                      
                                      2,926,517Due
      from related parties, Note 13
                                      
                                      
                                      54,166
                                      
                                      
                                      
                                      105,685Unbilled
      receivables, Note 3
                                      
                                      
                                      518,326
                                      
                                      
                                      
                                      380,017Other
      current assets, Note 5
                                      
                                      
                                      407,080
                                      
                                      
                                      
                                      691,560Prepaid
      expenses
                                      
                                      
                                      385,831
                                      
                                      
                                      
                                      476,283Total
      current assets
                                      
                                      
                                      11,338,055
                                      
                                      
                                      
                                      9,151,470Property
      and equipment, net, Note 6
                                      
                                      
                                      355,909
                                      
                                      
                                      
                                      422,738Deferred
      financing costs, net of accumulated amortization of $181,596 in 2008 and
      $0 in 2007, Note 12
                                      
                                      
                                      1,513,297
                                      
                                      
                                      
                                      -Goodwill
      and other intangible assets, net, Note 7
                                      
                                      
                                      3,832,023
                                      
                                      
                                      
                                      4,007,253Total
      assets
                                      
                                      $
                                      17,039,284
                                      
                                      
                                      $
                                      13,581,461LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable, trade
                                      
                                      $
                                      1,159,849
                                      
                                      
                                      $
                                      1,618,250Accrued
      expenses and other current liabilities
                                      
                                      
                                      2,347,522
                                      
                                      
                                      
                                      1,937,569Deferred
      revenues, Note 3
                                      
                                      
                                      268,650
                                      
                                      
                                      
                                      593,325Deferred
      payment related to acquisitions, Note 14
                                      
                                      
                                      -
                                      
                                      
                                      
                                      763,936Accrued
      preferred stock dividends
                                      
                                      
                                      53,874
                                      
                                      
                                      
                                      86,766Due
      to related parties, Note 13
                                      
                                      
                                      41,904
                                      
                                      
                                      
                                      184,425Loans
      and notes payable, short term, Notes 12 and 16
                                      
                                      
                                      12,358,597
                                      
                                      
                                      
                                      56,382Total
      current liabilities
                                      
                                      
                                      16,230,396
                                      
                                      
                                      
                                      5,240,653Loans
      and notes payable, long term, Notes 12 and 16
                                      
                                      
                                      162,700
                                      
                                      
                                      
                                      265,139Total
      liabilities
                                      
                                      
                                      16,393,096
                                      
                                      
                                      
                                      5,505,792Stockholders'
      equity:Preferred
      stock, $.001 par value; 5,000,000 shares authorized, 6,287 and 6,407
      shares Series A issued and outstanding, as of October 31, 2008 and 2007,
      respectively, Note 8
                                      
                                      
                                      6
                                      
                                      
                                      
                                      6Common
      stock, $.001 par value; 150,000,000 shares authorized, 48,853,664 and
      48,245,768 shares issued and outstanding as of October 31, 2008 and 2007,
      respectively, Note 8
                                      
                                      
                                      48,854
                                      
                                      
                                      
                                      48,246Common
      stock subscribed
                                      
                                      
                                      131,790
                                      
                                      
                                      
                                      80,000Additional
      paid-in capital
                                      
                                      
                                      51,433,049
                                      
                                      
                                      
                                      49,785,244Accumulated
      other comprehensive loss
                                      
                                      
                                      (1,317,696
                                      )
                                      
                                      
                                      (238,097
                                      )Accumulated
      deficit
                                      
                                      
                                      (49,649,815
                                      )
                                      
                                      
                                      (41,599,730
                                      )Total
      stockholders' equity
                                      
                                      
                                      646,188
                                      
                                      
                                      
                                      8,075,669Total
      liabilities and stockholders' equity
                                      
                                      $
                                      17,039,284
                                      
                                      
                                      $
                                      13,581,461


The
accompanying notes are an integral part of these consolidated financial
statements.


F-2





CODA
OCTOPUS GROUP, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS


FOR THE
YEARS ENDED OCTOBER 31, 2008 and 2007




2008
                                  
                                  
                                  2007Net
      revenue
                                  
                                  $
                                  16,968,922
                                  
                                  
                                  $
                                  13,853,313Cost
      of revenue
                                  
                                  
                                  6,941,287
                                  
                                  
                                  
                                  6,398,042Gross
      profit
                                  
                                  
                                  10,027,635
                                  
                                  
                                  
                                  7,455,271Research
      and development
                                  
                                  
                                  3,525,023
                                  
                                  
                                  
                                  3,019,090Selling,
      general and administrative expenses
                                  
                                  
                                  13,204,254
                                  
                                  
                                  
                                  12,385,250Other
      operating expenses
                                  
                                  
                                  -
                                  
                                  
                                  
                                  435,000Total
      operating expenses
                                  
                                  
                                  16,729,278
                                  
                                  
                                  
                                  15,839,340Operating
      loss
                                  
                                  
                                  (6,701,642
                                  )
                                  
                                  
                                  (8,384,069
                                  )Other
      (income) expenseOther
      income
                                  
                                  
                                  323,866
                                  
                                  
                                  
                                  87,143Interest
      expense
                                  
                                  
                                  (1,538,724
                                  )
                                  
                                  
                                  (6,655,283
                                  )Total
      other expense, net
                                  
                                  
                                  (1,214,858
                                  )
                                  
                                  
                                  (6,568,140
                                  )Loss
      before income taxes
                                  
                                  
                                  (7,916,500
                                  )
                                  
                                  
                                  (14,952,209
                                  )Provision
      for income taxes
                                  
                                  
                                  4,017
                                  
                                  
                                  
                                  106Net
      loss
                                  
                                  
                                  (7,920,517
                                  )
                                  
                                  
                                  (14,952,315
                                  )Preferred
      stock dividends:Series
      A
                                  
                                  
                                  (129,568
                                  )
                                  
                                  
                                  (281,289
                                  )Series
      B
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (107,680
                                  )Beneficial
      conversion feature
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (800,000
                                  )Net
      loss applicable to common shares
                                  
                                  $
                                  (8,050,085
                                  )
                                  
                                  $
                                  (16,141,284
                                  )Loss
      per share, basic and diluted
                                  
                                  $
                                  (0.17
                                  )
                                  
                                  $
                                  (0.42
                                  )Weighted
      average shares outstanding
                                  
                                  
                                  48,486,291
                                  
                                  
                                  
                                  38,476,352Comprehensive
      loss:Net
      loss
                                  
                                  $
                                  (7,920,517
                                  )
                                  
                                  $
                                  (14,952,315
                                  )Foreign
      currency translation adjustment
                                  
                                  
                                  (297,599
                                  )
                                  
                                  
                                  (30,276
                                  )Unrealized
      (loss) gain on investment
                                  
                                  
                                  (782,000
                                  )
                                  
                                  
                                  85,000Comprehensive
      loss
                                  
                                  $
                                  (9,000,116
                                  )
                                  
                                  $
                                  (14,897,591
                                  )




The
accompanying footnotes are an integral part of these consolidated financial
statements.


F-3


CODA
OCTOPUS GROUP, INC.


CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY


FOR THE
TWO YEARS ENDED OCTOBER 31, 2008 and 2007




Preferred Stock
                                                  Series A
                                                
                                                
                                                Preferred Stock
                                                  Series B
                                                
                                                
                                                Common Stock
                                                
                                                
                                                Stock
                                                
                                                
                                                Additional
                                                  Paid-in
                                                
                                                
                                                Accumulated
                                                  Other
                                                  Comprehensive
                                                
                                                
                                                AccumulatedShares
                                                
                                                
                                                Amount
                                                
                                                
                                                Shares
                                                
                                                
                                                Amount
                                                
                                                
                                                Shares
                                                
                                                
                                                Amount
                                                
                                                
                                                Subscribed
                                                
                                                
                                                Capital
                                                
                                                
                                                Loss
                                                
                                                
                                                Deficit
                                                
                                                
                                                TotalBalance,
      October 31, 2006
                                                
                                                
                                                23,641
                                                
                                                
                                                $
                                                24
                                                
                                                
                                                
                                                41,000
                                                
                                                
                                                $
                                                41
                                                
                                                
                                                
                                                24,301,980
                                                
                                                
                                                $
                                                24,302
                                                
                                                
                                                $
                                                153,750
                                                
                                                
                                                $
                                                25,858,307
                                                
                                                
                                                $
                                                (292,821
                                                )
                                                
                                                $
                                                (25,458,447
                                                )
                                                
                                                $
                                                285,156Sale
      of preferred stock
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                8,000
                                                
                                                
                                                
                                                8
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                799,342
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                799,350Conversion
      of preferred stockSeries
      A
                                                
                                                
                                                (17,234
                                                )
                                                
                                                
                                                (18
                                                )
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                2,878,418
                                                
                                                
                                                
                                                2,879
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (2,861
                                                )
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                -Series
      B
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (30,819
                                                )
                                                
                                                
                                                (31
                                                )
                                                
                                                
                                                3,081,900
                                                
                                                
                                                
                                                3,082
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (3,051
                                                )
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                -Redemption
      of preferred stock
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (18,181
                                                )
                                                
                                                
                                                (18
                                                )
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (1,818,082
                                                )
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (1,818,100
                                                )Sale
      of common stock for cash
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                15,709,100
                                                
                                                
                                                
                                                15,709
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                13,782,921
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                13,798,630Shares
      issued for compensation
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                1,619,280
                                                
                                                
                                                
                                                1,619
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                1,888,244
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                1,889,863Stock
      issued for acquisition
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                532,090
                                                
                                                
                                                
                                                532
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                792,282
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                792,814Stock
      subscribedPreferred
      stock
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                20,000
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                20,000Common
      stock
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                123,000
                                                
                                                
                                                
                                                123
                                                
                                                
                                                
                                                (93,750
                                                )
                                                
                                                
                                                153,627
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                60,000Fair
      value of options and warrants issued forcompensation
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                1,428,597
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                1,428,597financing
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                6,105,918
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                6,105,918Preferred
      dividend, beneficial conversion featureSeries
      B
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                800,000
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (800,000
                                                )
                                                
                                                
                                                -Preferred
      dividendSeries
      A
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (281,288
                                                )
                                                
                                                
                                                (281,288
                                                )Series
      B
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (107,680
                                                )
                                                
                                                
                                                (107,680
                                                )Foreign
      currency translation adjustment
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (30,276
                                                )
                                                
                                                
                                                
                                                
                                                
                                                
                                                (30,276
                                                )Unrealized
      gain from marketable securities
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                85,000
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                85,000Net
      loss
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (14,952,315
                                                )
                                                
                                                
                                                (14,952,315
                                                )Balance,
      October 31, 2007
                                                
                                                
                                                6,407
                                                
                                                
                                                $
                                                6
                                                
                                                
                                                
                                                -
                                                
                                                
                                                $
                                                -
                                                
                                                
                                                
                                                48,245,768
                                                
                                                
                                                $
                                                48,246
                                                
                                                
                                                $
                                                80,000
                                                
                                                
                                                $
                                                49,785,244
                                                
                                                
                                                $
                                                (238,097
                                                )
                                                
                                                $
                                                (41,599,730
                                                )
                                                
                                                $
                                                8,075,669Shares
      issued for compensation
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                448,737
                                                
                                                
                                                
                                                449
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                258,827
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                259,276Shares
      issued for
                                                  financing
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                4,200
                                                
                                                
                                                
                                                4
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                4,196
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                4,200Stock
      subscribedPreferred
      stock
                                                
                                                
                                                (120
                                                )
                                                
                                                
                                                (0
                                                )
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                116,640
                                                
                                                
                                                
                                                117
                                                
                                                
                                                
                                                (80,000
                                                )
                                                
                                                
                                                79,883
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                -Common
      stock
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                131,790
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                131,790Fair
      value of options and warrants issued ascompensation
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                872,170
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                872,170financing
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                391,230
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                391,230Preferred
      stock dividendsSeries
      A
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                38,319
                                                
                                                
                                                
                                                38
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                41,498
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (129,568
                                                )
                                                
                                                
                                                (88,032
                                                )Foreign
      currency translation adjustment
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (297,599
                                                )
                                                
                                                
                                                
                                                
                                                
                                                
                                                (297,599
                                                )Unrealized
      loss from marketable securities
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (782,000
                                                )
                                                
                                                
                                                
                                                
                                                
                                                
                                                (782,000
                                                )Net
      loss
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (7,920,517
                                                )
                                                
                                                
                                                (7,920,517
                                                )Balance,
      October 31, 2008
                                                
                                                
                                                6,287
                                                
                                                
                                                $
                                                6
                                                
                                                
                                                
                                                -
                                                
                                                
                                                $
                                                -
                                                
                                                
                                                
                                                48,853,664
                                                
                                                
                                                $
                                                48,854
                                                
                                                
                                                $
                                                131,790
                                                
                                                
                                                $
                                                51,433,049
                                                
                                                
                                                $
                                                (1,317,696
                                                )
                                                
                                                $
                                                (49,649,815
                                                )
                                                
                                                $
                                                646,188





The
accompanying notes are an integral part of these consolidated financial
statements.


F-4





CODA
OCTOPUS GROUP, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


FOR THE
YEARS ENDED OCTOBER 31, 2008 and 2007





2008
                                        
                                        
                                        2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                                        
                                        $
                                        (7,920,517
                                        )
                                        
                                        $
                                        (14,952,315
                                        )Adjustments
      to reconcile net loss to net cash used by operating
      activities:Depreciation
      and amortization
                                        
                                        
                                        547,369
                                        
                                        
                                        
                                        337,658Stock
      based compensation
                                        
                                        
                                        1,067,221
                                        
                                        
                                        
                                        3,318,460Financing
      costs
                                        
                                        
                                        1,057,843
                                        
                                        
                                        
                                        6,105,918Bad
      debt expense
                                        
                                        
                                        74,897
                                        
                                        
                                        
                                        17,910Changes
      in operating assets and liabilities:(Increase)
      decrease in:Restricted
      cash
                                        
                                        
                                        (1,017,017
                                        )
                                        
                                        
                                        -Accounts
      receivable
                                        
                                        
                                        56,080
                                        
                                        
                                        
                                        (1,800,802
                                        )Inventory
                                        
                                        
                                        609,195
                                        
                                        
                                        
                                        (975,125
                                        )Prepaid
      expenses
                                        
                                        
                                        90,452
                                        
                                        
                                        
                                        (316,367
                                        )Other
      receivables
                                        
                                        
                                        37,581
                                        
                                        
                                        
                                        (672,216
                                        )Increase
      (decrease) in:Accounts
      payable and accrued expenses
                                        
                                        
                                        (800,885
                                        )
                                        
                                        
                                        (1,033,074
                                        )Due
      to related parties
                                        
                                        
                                        (63,781
                                        )
                                        
                                        
                                        (118,452
                                        )Net
      cash used by operating activities
                                        
                                        
                                        (6,261,562
                                        )
                                        
                                        
                                        (10,088,405
                                        )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of property and equipment
                                        
                                        
                                        (131,502
                                        )
                                        
                                        
                                        (288,803
                                        )Purchases
      of intangible assets
                                        
                                        
                                        (11,466
                                        )
                                        
                                        
                                        (118,475
                                        )Acquisitions
                                        
                                        
                                        (763,936
                                        )
                                        
                                        
                                        (1,358,470
                                        )Cash
      acquired in acquisitions
                                        
                                        
                                        -
                                        
                                        
                                        
                                        35,515Net
      cash used by investing activities
                                        
                                        
                                        (906,904
                                        )
                                        
                                        
                                        (1,730,233
                                        )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from (payments of) loans, net of repayments
                                        
                                        
                                        11,909,040
                                        
                                        
                                        
                                        (884,405
                                        )Proceeds
      from sale of stock
                                        
                                        
                                        -
                                        
                                        
                                        
                                        14,677,980Redemption
      of preferred stock
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (1,818,100
                                        )Payment
      of deferred financing cost
                                        
                                        
                                        (1,303,663
                                        )
                                        
                                        
                                        -Preferred
      stock dividend
                                        
                                        
                                        (127,541
                                        )
                                        
                                        
                                        (637,476
                                        )Net
      cash provided by financing activities
                                        
                                        
                                        10,477,836
                                        
                                        
                                        
                                        11,337,999Effect
      of exchange rate changes on cash
                                        
                                        
                                        (329,477
                                        )
                                        
                                        
                                        18,924Net
      increase (decrease) in cash
                                        
                                        
                                        2,979,892
                                        
                                        
                                        
                                        (461,715
                                        )Cash
      and cash equivalents, beginning of year
                                        
                                        
                                        916,257
                                        
                                        
                                        
                                        1,377,972Cash
      and cash equivalents, end of year
                                        
                                        $
                                        3,896,149
                                        
                                        
                                        $
                                        916,257Cash
      paid for:Interest
                                        
                                        $
                                        480,881
                                        
                                        
                                        $
                                        549,365Income
      taxes
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Supplemental Disclosures:During
      the twelve months ended October 31, 2008, 452,937 shares of common
      stock  were issued as payment of $263,476 of compensation that
      was earned.During
      the twelve months ended October 31, 2007, 1,742,280 shares of common
      stock  were issued as payment of $1,926,268 of compensation that
      was earned.The
      acquisitions figure consists of the acquisitions of Colmek and Martech in
      2007 and  Colmek in 2008:Deferred
      note payable
                                        
                                        $
                                        763,936
                                        
                                        
                                        $
                                        (763,936
                                        )Cash
      acquired
                                        
                                        
                                        -
                                        
                                        
                                        
                                        35,515Equipment
      acquired
                                        
                                        
                                        -
                                        
                                        
                                        
                                        80,007Goodwill
      and intangible assets
                                        
                                        
                                        -
                                        
                                        
                                        
                                        2,773,613Liabilities
      assumed
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (727,913
                                        )Current
      assets acquired
                                        
                                        
                                        -
                                        
                                        
                                        
                                        195,528Amount
      paid in common stock
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (792,814
                                        )Associated
      costs of acquisition
                                        
                                        
                                        -
                                        
                                        
                                        
                                        158,470Cash
      paid for acquisition
                                        
                                        $
                                        763,936
                                        
                                        
                                        $
                                        958,470




The
accompanying notes are an integral part of these consolidated financial
statements.


F-5


CODA
OCTOPUS GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


October
31, 2008 and 2007





NOTE
1 - SUMMARY OF ACCOUNTING POLICIES




A summary
of the significant accounting policies applied in the preparation of the
accompanying consolidated financial statements follows.




Business
and Basis of Presentation




Coda
Octopus Group, Inc. (”we”, “us”, “our company” or “Coda”) was formed under the
laws of the State of Florida in 1992. We are a developer of underwater
technologies and equipment for imaging, mapping, defense and survey
applications. We are based in New York, with research and development, sales and
manufacturing facilities located in the United Kingdom and Norway, and
additional sales locations in Florida, Utah and Washington, D.C.




The
consolidated financial statements include the accounts of Coda and our domestic
and foreign subsidiaries that are more than 50% owned and controlled. All
significant intercompany transactions and balances have been eliminated in the
consolidated financial statement.




Use
of Estimates




The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and
accompanying disclosures. Although these estimates are based on management's
best knowledge of current events and actions that we may undertake in the
future, actual results may differ from those estimates.




Revenue
Recognition




We record
revenue in accordance with the guidance of the SEC's Staff Accounting Bulletin
SAB No.
104 (SAB 104), which supersedes SAB No. 101 in order
to encompass Emerging Issues Task Force (EITF) No. 00-21,
Revenue Arrangements with
Multiple Deliverables. Our revenue is derived from sales of underwater
technologies and equipment for imaging, mapping, defense and survey
applications. Revenue is recognized when persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the contract price
is fixed or determinable, and collectibility is reasonably assured. No right of
return privileges are granted to customers after shipment.




For
arrangements with multiple deliverables, we recognize product revenue by
allocating the revenue to each deliverable based on the fair value of each
deliverable in accordance with EITF No. 00-21 and
SAB No. 104 ,
and recognize revenue for equipment upon delivery and for installation and other
services as performed. EITF No. 00-21 was
effective for revenue arrangements entered into in fiscal periods beginning
after June 15, 2003.




Our
contracts sometimes require customer payments in advance of revenue recognition.
These deposit amounts are reflected as liabilities and recognized as revenue
when the Company has fulfilled its obligations under the respective
contracts.




Revenues
derived from our software license sales are recognized in accordance with
Statement of Position (SOP) No. 97-2, “Software
Revenue Recognition,” and SOP No. 98-9,
“Modifications of SOP
No. 97-2, Software Revenue Recognition with Respect to Certain
Transactions”. For software license sales for which any services rendered are
not considered essential to the functionality of the software, we recognize
revenue upon delivery of the software, provided (1) there is evidence of an
arrangement, (2) collection of our fee is considered probable and (3) the fee is
fixed and determinable.


F-6


CODA
OCTOPUS GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


October
31, 2008 and 2007




Foreign
Currency Translation




The
Company translates the foreign currency financial statements of its foreign
subsidiaries in accordance with the requirements of SFAS No. 52, Foreign Currency Translation.
Assets and liabilities are translated at exchange rates existing at the balance
sheet dates, related revenue and expenses are translated at average exchange
rates in effect during the period and stockholders’ equity, fixed assets and
long-term investments are recorded at historical exchange rates. Resulting
translation adjustments are recorded as a separate component in stockholders'
equity as part of accumulated other comprehensive income (loss). Foreign
currency transaction gains and losses are included in the statement of
income.




Income
Taxes




Deferred
income taxes are provided using the asset and liability method for financial
reporting purposes in accordance with the provisions of SFAS No. 109, Accounting for Income Taxes.
Under this method, deferred tax assets and liabilities are recognized for
temporary differences between the tax bases of assets and liabilities and their
carrying values for financial reporting purposes, and for operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be removed or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
the consolidated statements of operations in the period that includes the
enactment date.




Cash
and Cash Equivalents




Cash
equivalents are comprised of highly liquid investments with maturity of three
months or less when purchased. We maintain our cash in bank deposit accounts,
which at times, may exceed insured limits. We have not experienced any losses in
such accounts.




Concentrations
of Credit Risk




Financial
instruments and related items, which potentially subject us to concentrations of
credit risk, consist primarily of cash and cash equivalents and accounts
receivable. We place our cash and temporary cash investments with credit quality
institutions. At times, such investments may be in excess of applicable
government mandated insurance limits.




Accounts
Receivable




We
periodically review our trade receivables in determining our allowance for
doubtful accounts.   Allowance for doubtful accounts was $74,897 and
$17,910 for the years ended October 31, 2008 and 2007 respectively.




Fair
Value of Financial Instruments




SFAS No.
107, "Disclosures About Fair Value of Financial Instruments", requires
disclosure of the fair value of certain financial instruments. The carrying
value of cash and cash equivalents, accounts receivable, other receivables,
accounts payable and short-term borrowings, as reflected in the balance sheets,
approximate fair value because of the short-term maturity of these instruments.
Our long term debt has interest rates that approximate market and therefore the
carrying amounts approximate their fair values.





Fair
Values




In the
first quarter of fiscal year 2008, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 157, “Fair Value Measurements” (SFAS
No. 157) as amended by FASB Statement of Position (FSP) FAS 157-1 and FSP
FAS 157-2. SFAS No. 157 defines fair value, establishes a framework for
measuring fair value, and enhances fair value measurement disclosure. FSP FAS
157-2 delays, until the first quarter of fiscal year 2009, the effective date
for SFAS 157 for all non-financial assets and non-financial liabilities, except
those that are recognized or disclosed at fair value in the financial statements
on a recurring basis (at least annually). The adoption of SFAS No. 157 did
not have a material impact on the Company’s financial position or operations.
Refer to Note 11 for further discussion regarding fair value.


F-7





CODA
OCTOPUS GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


October
31, 2008 and 2007




Debt
and Equity Securities




The
Company follows the provisions of Statement of Financial Accounting Standards
No. 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS
115). The Company classifies debt and equity securities into one of three
categories: held-to-maturity, available-for-sale or trading. These security
classifications may be modified after acquisition only under certain specified
conditions. Securities may be classified as held-to-maturity only if the Company
has the positive intent and ability to hold them to maturity. Trading securities
are defined as those bought and held principally for the purpose of selling them
in the near term. All other securities must be classified as
available-for-sale.




Held-to-maturity
securities are measured at amortized cost in the consolidated balance sheets.
Unrealized holding gains and losses are not included in earnings or in a
separate component of capital. They are merely disclosed in the notes to the
consolidated financial statements.




Available-for-sale
securities are carried at fair value on the consolidated balance sheets.
Unrealized holding gains and losses are not included in earnings but are
reported as a net amount (less expected tax) in a separate component of capital
until realized.




Trading
securities are carried at fair value on the consolidated balance sheets.
Unrealized holding gains and losses for trading securities are included in
earnings.




Declines
in the fair value of held-to-maturity and available-for-sale securities below
their cost that are deemed to be other than temporary are reflected in earnings
as realized losses.





Inventory




Inventory
is stated at the lower of cost or market using the first-in first-out method.
Inventory is comprised of the following components at October 31, 2008 and
2007:




2008
                    
                    
                    2007Raw
      materials
                    
                    $
                    1,917,566
                    
                    
                    $
                    1,789,051Work
      in process
                    
                    
                    113,942
                    
                    
                    
                    334,813Finished
      goods
                    
                    
                    285,814
                    
                    
                    
                    802,653Total
      inventory
                    
                    $
                    2,317,322
                    
                    
                    $
                    2,926,517


F-8


CODA
OCTOPUS GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


October
31, 2008 and 2007




Property
and Equipment




We record
our equipment at historical cost. We expense maintenance and repairs as
incurred. Depreciation is provided for by the straight-line method over three to
four years, the estimated useful lives of the property and
equipment.




Long-Lived
Assets




We follow
SFAS No. 144, "Accounting for Impairment of Disposal of Long-Lived Assets",
which established a "primary asset" approach to determine the cash flow
estimation period for a group of assets and liabilities that represents the unit
of accounting for a long-lived asset to be held and used. Long-lived assets to
be held and used are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The carrying amount of a long-lived asset is not recoverable if it
exceeds the sum of the undiscounted cash flows expected to result from the use
and eventual disposition of the asset. Long-lived assets to be disposed of are
reported at the lower of carrying amount or fair value less cost to sell. No
impairment loss was recognized during the years ended October 31, 2008 and
2007.




Research
and Development




Research
and development costs consist of expenditures for the present and future patents
and technology, which are not capitalizable. We are eligible for United Kingdom
tax credits related to our qualified research and development expenditures. Tax
credits are classified as a reduction of research and development expense. We
recorded no tax credits during the years ended October 31, 2008 and
2007.




Advertising




We charge
the costs of advertising to expense as incurred. For the years ended October 31,
2008 and 2007, advertising costs were $1,237,175 and $471,049,
respectively.




Other
Operating Expenses




We
incurred costs of nil and $435,000 as non-recurring fees and expenses in
connection with our financings and acquisitions for October 31, 2008 and 2007,
respectively, which are also included in our loss from operations, and shown
separately under Other Operating Expenses.





Intangible
Assets




Intangible
assets consist principally of the excess of cost over the fair value of net
assets acquired (or goodwill), customer relationships, non-compete agreements
and licenses. Goodwill was allocated to our reporting units based on the
original purchase price allocation. Customer relationships, non-compete
agreements and licenses are being amortized on a straight-line basis over
periods of 3 to 10 years. The Company amortizes its intangible assets using the
straight-line method over their estimated period of benefit. We periodically
evaluate the recoverability of intangible assets and take into account events or
circumstances that warrant revised estimates of useful lives or that indicate
that impairment exists.




We test
for impairment at the reporting unit level as defined in SFAS No. 142,
“Goodwill and Other Intangible Assets.” This test is a two-step process. The
first step of the goodwill impairment test, used to identify potential
impairment, compares the fair value of the reporting unit with its carrying
amount, including goodwill. If the fair value, which is based on future cash
flows, exceeds the carrying amount, goodwill is not considered impaired. If the
carrying amount exceeds the fair value, the second step must be performed to
measure the amount of the impairment loss, if any. The second step compares the
implied fair value of the reporting unit’s goodwill with the carrying amount of
that goodwill. In the fourth quarter of each year, we evaluate goodwill on a
separate reporting unit basis to assess recoverability, and impairments, if any,
are recognized in earnings. An impairment loss would be recognized in an amount
equal to the excess of the carrying amount of the goodwill over the implied fair
value of the goodwill. SFAS No. 142 also requires that intangible
assets with determinable useful lives be amortized over their respective
estimated useful lives and reviewed annually for impairment in accordance with
SFAS No. 144.


F-9


CODA
OCTOPUS GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


October
31, 2008 and 2007





Stock
Based Compensation




SFAS
No. 123, “Accounting for Stock-Based Compensation”, established and
encouraged the use of the fair value based method of accounting for stock-based
compensation arrangements under which compensation cost is determined using the
fair value of stock-based compensation determined as of the date of the grant or
the date at which the performance of the services is completed and is recognized
over the periods in which the related services are rendered. The statement also
permitted companies to elect to continue using the current intrinsic value
accounting method specified in Accounting Principles Board (“APB”) Opinion
No. 25, “Accounting for Stock Issued to Employees”, to account for
stock-based compensation to employees. Prior to the adoption of SFAS 123(R) we
elected to use the intrinsic value based method for grants to our employees and
directors and have disclosed the pro forma effect of using the fair value based
method to account for our stock-based compensation to employees.





On
December 16, 2004, the Financial Accounting Standards Board (FASB) issued SFAS
No. 123R (revised 2004), “Share-Based Payment” (“Statement 123R”) which is a
revision of SFAS No. 123.




Statement
123R supersedes APB opinion No. 25 and amends SFAS No. 95, “Statement of Cash
Flows”. Generally, the approach in Statement 123R is similar to the approach
described in Statement 123. However, Statement 123R requires all share-based
payments to employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values. Pro-forma
disclosure is no longer an alternative. This statement does not change the
accounting guidance for share based payment transactions with parties other than
employees provided in SFAS No. 123(R). This statement does not address the
accounting for employee share ownership plans, which are subject to AICPA
Statement of Position 93-6, “Employers’ Accounting for Employee Stock Ownership
Plans”. On April 14, 2005, the SEC amended the effective date of the provisions
of this statement. The effect of this amendment by the SEC is that the Company
had to comply with Statement 123R and use the Fair Value based method of
accounting no later than the first quarter of 2006. We implemented SFAS
No. 123(R) on January 1, 2006 using the modified prospective method.
The fair value of each option grant issued after January 1, 2006 is determined
as of grant date, utilizing the Black-Scholes option pricing model, and
amortized over each vesting period.





We use
the fair value method for equity instruments granted to non-employees and use
the Black Scholes model for measuring the fair value. The stock based fair value
compensation is determined as of the date of the grant or the date at which the
performance of the services is completed (measurement date) and is recognized
over the periods in which the related services are rendered.




Comprehensive
Income




SFAS No.
130, "Reporting Comprehensive Income," establishes standards for reporting and
displaying of comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except those
resulting from investments by owners and distributions to owners. Among other
disclosures, SFAS 130 requires that all items that are required to be recognized
under current accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. Comprehensive income includes gains and losses on
foreign currency translation adjustments and is included as a component of
stockholders' equity.





Deferred
Financing Costs




Deferred
financing costs primarily include debt issuance costs incurred by the Company in
connection with the issuance of convertible debt in February 2008 (see Note 12).
Amortization is provided on a straight-line basis over the terms of the
respective debt instruments to which the costs relate and is included in
interest expense. Deferred financing cost expense was $181,596 and $0 in 2008
and 2007, respectively.




Loss
Per Share




We use
SFAS No. 128, “Earnings per Share” for calculating the basic and diluted
loss per share. We compute basic loss per share by dividing net loss and net
loss attributable to common shareholders by the weighted average number of
common shares outstanding. Diluted loss per share is computed similar to basic
loss per share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the potential
shares had been issued and if the additional shares were dilutive. Common
equivalent shares are excluded from the computation of net loss per share if
their effect is anti-dilutive.




Per share
basic and diluted net loss amounted to $0.17 and $0.42 for the years ended
October 31, 2008 and 2007, respectively. For the years ended October
31, 2008 and 2007, 50,583,299 and 36,508,028 potential shares,
respectively, were excluded from the shares used to calculate diluted earnings
per share as their inclusion would reduce net loss per share.


F-10





CODA
OCTOPUS GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


October
31, 2008 and 2007




New
Accounting Pronouncements




In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – Including an Amendment of FASB
Statement No. 115” (“SFAS No. 159”).  SFAS No. 159 permits entities to
choose to measure many financial instruments and certain other items at fair
value.  Most of the provisions of SFAS No. 159 apply only to entities
that elect the fair value option. However, the amendment to SFAS No. 115
“Accounting for Certain Investments in Debt and Equity Securities” applies to
all entities with available-for-sale and trading securities.  SFAS No.
159 is effective as of the beginning of an entity’s first fiscal year that
begins after November 15, 2007.  Early adoption is permitted as of the
beginning of a fiscal year that begins on or before November 15, 2007, provided
the entity also elects to apply the provision of SFAS No. 157, “Fair Value
Measurements”.  The adoption of SFAS No. 159 is not expected to have a
material impact on the Company’s consolidated financial position, results of
operations or cash flows.




In
December 2007, the FASB issued SFAS No. 141(R), “Business
Combinations” (“SFAS No. 141(R)”), which establishes principles and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in an acquiree, including the recognition and
measurement of goodwill acquired in a business combination. SFAS No. 141(R) is
effective as of the beginning of the first fiscal year beginning on or after
December 15, 2008. Earlier adoption is prohibited and the Company is
currently evaluating the effect, if any that the adoption will have on its
consolidated financial position, results of operations or cash
flows.




In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interest
in Consolidated Financial Statements, an amendment of ARB
No. 51” (“SFAS No. 160”), which will change the accounting and
reporting for minority interests, which will be recharacterized as
noncontrolling interests and classified as a component of equity within the
consolidated balance sheets. SFAS No. 160 is effective as of the beginning of
the first fiscal year beginning on or after December 15, 2008. Earlier
adoption is prohibited and the Company is currently evaluating the effect, if
any that the adoption will have on its consolidated financial position, results
of operations or cash flows.




In June
2007, the FASB ratified the consensus in EITF Issue No. 07-3, “Accounting
for Nonrefundable Advance Payments for Goods or Services to be Used in Future
Research and Development Activities” (EITF 07-3), which requires that
nonrefundable advance payments for goods or services that will be used or
rendered for future research and development (R&D) activities be deferred
and amortized over the period that the goods are delivered or the related
services are performed, subject to an assessment of recoverability.
EITF 07-3 will be effective for fiscal years beginning after
December 15, 2007. The Company does not expect that the adoption of
EITF 07-3 will have a material impact on its consolidated financial
position, results of operations or cash flows.




In
December 2007, the FASB ratified the consensus in EITF Issue No. 07-1,
“Accounting for Collaborative Arrangements” (EITF 07-1). EITF 07-1
defines collaborative arrangements and requires collaborators to present the
result of activities for which they act as the principal on a gross basis and
report any payments received from (made to) the other collaborators based on
other applicable authoritative accounting literature, and in the absence of
other applicable authoritative literature, on a reasonable, rational and
consistent accounting policy is to be elected. EITF 07-1 also provides for
disclosures regarding the nature and purpose of the arrangement, the entity’s
rights and obligations, the accounting policy for the arrangement and the income
statement classification and amounts arising from the agreement. EITF 07-1
will be effective for fiscal years beginning after December 15, 2008, which
will be the Company’s fiscal year 2009, and will be applied as a change in
accounting principle retrospectively for all collaborative arrangements existing
as of the effective date. The Company has not yet evaluated the potential impact
of adopting EITF 07-1 on its consolidated financial position, results of
operations or cash flows.




In March
2008, the FASB” issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities – an amendment to FASB Statement No. 133” (“SFAS No.
161”).   SFAS No. 161 is intended to improve financial standards for
derivative instruments and hedging activities by requiring enhanced disclosures
to enable investors to better understand their effects on an entity’s financial
position, financial performance, and cash flows.  Entities are
required to provide enhanced disclosures about: (a) how and why an entity uses
derivative instruments; (b) how derivative instruments and related hedged items
are accounted for under SFAS No. 133 and its related interpretations; and (c)
how derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows.  It is effective for
financial statements issued for fiscal years beginning after November 15, 2008,
with early adoption encouraged.  The Company is currently evaluating
the impact of SFAS No. 161, if any, will have on its consolidated financial
position, results of operations or cash flows.


F-11




CODA
OCTOPUS GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


October
31, 2008 and 2007




In April
2008, the FASB issued FSP No. SFAS No. 142-3, “Determination of the Useful Life
of Intangible Assets”. This FSP amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under SFAS No. 142, “Goodwill and Other
Intangible Assets”.   The Company is required to adopt FSP 142-3 on
September 1, 2009, earlier adoption is prohibited.  The guidance in
FSP 142-3 for determining the useful life of a recognized intangible asset shall
be applied prospectively to intangible assets acquired after adoption, and the
disclosure requirements shall be applied prospectively to all intangible assets
recognized as of, and subsequent to, adoption.  The Company is
currently evaluating the impact of FSP 142-3 on its consolidated financial
position, results of operations or cash flows.




In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS No. 162”).  SFAS No. 162
identifies the sources of accounting principles and the framework for selecting
the principles used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with generally
accepted accounting principles (the GAAP hierarchy).  SFAS No.
162 will become effective 60 days following the SEC’s approval of the
Public Company Accounting Oversight Board amendments to
AU Section 411, “The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles.”  The Company does not
expect the adoption of SFAS No. 162 to have a material effect on its
consolidated financial position, results of operations or cash
flows.




In May
2008, the FASB issued FASB Statement No. 163, “Accounting for Financial
Guarantee Insurance Contracts ”, which clarifies how FASB Statement No. 60,
“Accounting and Reporting by Insurance Enterprises”,  applies to
financial guarantee insurance contracts issued by insurance enterprises. 
  The standard is effective for financial statements issued for fiscal
years beginning after December 15, 2008, including interim periods in that year.
The Company does not expect the adoption of SFAS 163 to have a material effect
on its consolidated financial statements.




In May
2008, the FASB issued FSP Accounting Principles Board (“APB”) 14-1, “Accounting
for Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement)” (“FSP APB 14-1”).   FSP
APB 14-1 requires the issuer of certain convertible debt instruments that
may be settled in cash (or other assets) on conversion to separately account for
the liability (debt) and equity (conversion option) components of the instrument
in a manner that reflects the issuer’s non-convertible debt borrowing
rate.  FSP APB 14-1 is effective for fiscal years beginning after
December 15, 2008 on a retroactive basis. The Company is currently
evaluating the potential impact, if any, of the adoption of FSP APB 14-1 on
its consolidated financial position, results of operations or cash
flows.




In
June 2008, the FASB issued FSP Emerging Issues Task Force
(EITF) No. 03-6-1, “Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities.” Under the FSP,
unvested share-based payment awards that contain rights to receive
nonforfeitable dividends (whether paid or unpaid) are participating securities,
and should be included in the two-class method of computing EPS. The FSP is
effective for fiscal years beginning after December 15, 2008, and interim
periods within those years. The Company does not expect the adoption of FSP EITF
No. 03-6-1 to have a material effect on its consolidated financial
position, results of operations or cash flows.




Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not, or are not believed by
management to, have a material impact on the Company’s present or future
consolidated financial statements.




Liquidity




As of
October 31, 2008 we have cash and cash equivalents of $3,896,149 and a working
capital deficit of $4,892,341. For the year ended October 31, 2008 we had a net
loss of $7,920,517 and negative cash flow from operations of $6,261,562. We also
have an accumulated deficit of $49,649,815 at October 31, 2008.  (See
Note 16).


F-12


CODA
OCTOPUS GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


October
31, 2008 and 2007




NOTE
2 – RESTRICTED CASH





Under
terms of the Company’s secured convertible debenture dated February 26, 2008, we
maintained a $1,000,000 interest-bearing deposit in a restricted bank account
until such time as advances under an accounts receivable factoring agreement
were repaid in full and the agreement and related liens were
terminated.  As of October 31, 2008, the Company had $1,017,007 in the
restricted cash account, which was  released to the Company in
December 2008 at the time the factoring agreement was terminated and settled in
full.





NOTE
3 - CONTRACTS IN PROGRESS




Costs and
estimated earnings in excess of billings on uncompleted contracts represent
accumulated project expenses and fees which have not been invoiced to customers
as of the date of the balance sheet. These amounts are stated on the balance
sheet as Unbilled Receivables of $518,326 and $380,017 as of October 31, 2008
and 2007, respectively.




Billings
in excess of cost and estimated earnings on uncompleted contracts represent
project invoices billed to customers that have not been earned as of the date of
the balance sheet. These amounts are stated on the balance sheet as Deferred
Revenue of $57,513 and $232,435 as of October 31, 2008 and 2007,
respectively.




Revenue
received for the sale of equipment includes a provision for warranty and is
treated as deferred revenue, along with extended warranty sales. These amounts
are amortized over the 12-month warranty term starting from the date of
sale. These amounts are stated on the balance sheet as Deferred Revenue of
$211,137 and $233,550 as of October 31, 2008 and 2007,
respectively.




Deferred
revenue as of October 31, 2007 also included $127,340 of revenues related to a
violation in the terms of a capital lease agreement where the related equipment
was sold. The revenues related to the equipment were deferred until all
conditions of the lease were fulfilled, which was in April 2008. See Note
12.




NOTE
4 - INVESTMENTS





SFAS
No. 157 defines fair value as the price that would be received from selling
an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. When determining the fair value
measurements for assets and liabilities required or permitted to be recorded at
fair value, the Company considers the principal or most advantageous market in
which it would transact and considers assumptions that market participants would
use when pricing the asset or liability, such as inherent risk, transfer
restrictions, and risk of nonperformance. SFAS No. 157 establishes a fair
value hierarchy that requires an entity to maximize the use of observable inputs
and minimize the use of unobservable inputs when measuring fair value. SFAS
No. 157 establishes three levels of inputs that may be used to measure fair
value:




Level 1 -
Quoted prices in active markets for identical assets or
liabilities.




Level 2 -
Observable inputs other than Level 1 prices such as quoted prices for similar
assets or liabilities; quoted prices in markets with insufficient volume or
infrequent transactions (less active markets); or model-derived valuations in
which all significant inputs are observable or can be derived principally from
or corroborated by observable market data for substantially the full term of the
assets or liabilities.




Level 3 -
Unobservable inputs to the valuation methodology that are significant to the
measurement of fair value of assets or liabilities.




To the
extent that valuation is based on models or inputs that are less observable or
unobservable in the market, the determination of fair value requires more
judgment. In certain cases, the inputs used to measure fair value may fall into
different levels of the fair value hierarchy. In such cases, for disclosure
purposes, the level in the fair value hierarchy within which the fair value
measurement is disclosed is determined based on the lowest level input that is
significant to the fair value measurement.


F-13


CODA
OCTOPUS GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


October
31, 2008 and 2007




Items
recorded or measured at fair value on a recurring basis in the accompanying
financial statements consisted of the following items as of October 31,
2008:




Quoted Prices
                    in Active
                    Markets for
                    Identical
                    Instruments
                  
                  
                  Significant
                    Other
                    Observable
                    Inputs
                  
                  
                  Significant
                    Unobservable
                    InputsTotal
                  
                  
                  Level
      1
                  
                  
                  Level
      2
                  
                  
                  Level
      3Assets:Short
      term Investment
                  
                  $
                  153,000
                  
                  
                  $
                  153,000Total
                  
                  $
                  153,000
                  
                  
                  $
                  153,000
                  
                  
                  $
                  -
                  
                  
                  
                  -




With the
exception of assets and liabilities included within the scope of FSP FAS No.
157-2, the Company adopted the provisions of SFAS No. 157 prospectively
effective as of the beginning of the year ended October 31, 2008.  For
financial assets and liabilities included within the scope of FSP FAS No. 157-2,
the Company will be required to adopt the provisions of SFAS No. 157
prospectively as of the year beginning October 31, 2009.  The adoption
of SFAS No. 157 did not have a material impact on our financial position or
results of operations, and the Company do not believe that the adoption of FSP
FAS No. 157-2 will have a material impact on our financial position or results
of operations.




The fair
value of the assets, short term investments, at October 31, 2008 was grouped as
Level 1 valuation as the market price was readily available, and there has been
no change to the fair value of the securities at October 31, 2008.




During
the year ended October 31, 2007, the Company received marketable securities in
settlement of $533,147 loan and $316,853 of accounts receivable. As of October
31, 2007, the Company had an investment of $935,000 that was considered
available-for-sale for financial reporting purposes which included an unrealized
gain of $85,000 included in the determination of comprehensive loss. As of
October 31, 2008, this investment had a value of $153,000, with an unrealized
loss of $782,000 included in the determination of comprehensive
loss.




NOTE
5 - OTHER CURRENT ASSETS




Other
current assets on the balance sheet total $407,080 and $691,560 at October 31,
2008 and 2007 respectively. These totals comprise the following:





2008
                    
                    
                    2007Deposits
                    
                    $
                    110,548
                    
                    
                    $
                    191,352Value
      added tax (VAT) receivable
                    
                    
                    262,090
                    
                    
                    
                    293,934Other
      receivables
                    
                    
                    34,442
                    
                    
                    
                    206,274Total
                    
                    $
                    407,080
                    
                    
                    $
                    691,560


F-14


CODA
OCTOPUS GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


October
31, 2008 and 2007




NOTE
6 - FIXED ASSETS




Property
and equipment at October 31, 2008 and 2007 is summarized as
follows:




2008
                    
                    
                    2007Machinery
      and equipment
                    
                    $
                    1,076,950
                    
                    
                    $
                    983,115Accumulated
      depreciation
                    
                    
                    (721,041
                    )
                    
                    
                    (560,377
                    )Net
      property and equipment assets
                    
                    $
                    355,909
                    
                    
                    $
                    422,738




Depreciation
expense recorded in the statements of operations for the years ended October 31,
2008 and 2007 is $176,147 and $101,802, respectively.




Rental
equipment at October 31, 2008 and 2007 is summarized as follows:




2008
                    
                    
                    2007Rental
      equipment
                    
                    $
                    240,876
                    
                    
                    $
                    240,876Accumulated
      depreciation
                    
                    
                    (240,876
                    )
                    
                    
                    (240,876
                    )Net
      rental equipment assets
                    
                    $
                    -
                    
                    
                    $
                    -




Depreciation
expense recorded in the statements of operations for the years ended October 31,
2008 and 2007 is nil and $120,851, respectively.




NOTE
7 - INTANGIBLE ASSETS AND GOODWILL




The
Company has adopted SFAS No. 142, Goodwill and Other Intangible Assets, whereby
the Company periodically tests its intangible assets for impairment. On an
annual basis, and when there is reason to suspect that their values have been
diminished or impaired, these assets are tested for impairment, and write-downs
will be included in results from operations.




The
identifiable intangible assets acquired and their carrying value at October 31,
2008 and 2007 is:




2008
                      
                      
                      2007Customer
      relationships (weighted average life of 10 years)
                      
                      $
                      694,503
                      
                      
                      $
                      694,503Non-compete
      agreements (weighted average life of 3 years)
                      
                      
                      198,911
                      
                      
                      
                      198,911Patents
      (weighted average life of 10 years)
                      
                      
                      63,695
                      
                      
                      
                      48,530Licenses
      (weighted average life of 2 years)
                      
                      
                      100,000
                      
                      
                      
                      100,000Total
      amortized identifiable intangible assets - gross carrying
      value
                      
                      
                      1,057,109
                      
                      
                      
                      1,041,944Less
      accumulated amortization
                      
                      
                      (324,661
                      )
                      
                      
                      (134,266
                      )Net
                      
                      
                      732,448
                      
                      
                      
                      907,678Residual
      value
                      
                      $
                      732,448
                      
                      
                      $
                      907,678


F-15


CODA
OCTOPUS GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


October
31, 2008 and 2007




Our
acquisition of Colmek resulted in the valuation of Colmek’s customer
relationships and covenants not to compete as intangible assets (see Note 14),
which have an estimated useful life of 10 years and 3 years respectively, and as
such are being amortized monthly over that period. Goodwill of $2,038,669
represented the excess of the purchase price over the fair value of the net
tangible and intangible assets acquired.




Estimated
future annual amortization expense as of October 31, 2008 is as
follows:




2009
                    
                    $
                    167,3372010
                    
                    
                    86,2272011
                    
                    
                    74,1722012
                    
                    
                    74,1722013
      and thereafter
                    
                    
                    330,540Total
                    
                    $
                    732,448




Amortization
of patents, customer relationships, non-compete agreements and licenses included
as a charge to income amounted to $189,621 and $115,005 for the years ended
October 31, 2008 and 2007, respectively. Goodwill is not being
amortized.




As a
result of the acquisitions of Martech and Colmek, the Company has goodwill in
the amount of $3,099,575 as of October 31, 2008 and 2007. The changes in the
carrying amount of goodwill for the years ended October 31, 2008 and 2007 are
recorded below.




2008
                    
                    
                    2007Beginning
      goodwill balance at November 1
                    
                    $
                    3,099,575
                    
                    
                    $
                    1,060,906Goodwill
      recorded upon acquisition
                    
                    
                    -
                    
                    
                    
                    2,038,669Balance
      at October 31
                    
                    $
                    3,099,575
                    
                    
                    $
                    3,099,575




Considerable
management judgment is necessary to estimate fair value. We enlist the
assistance of a valuation consultant to determine the values of our intangible
assets and goodwill, both at the dates of acquisition and at specific dates
annually. Based on various market factors and projections used by management,
actual results could vary significantly from managements'
estimates.




NOTE
8 - CAPITAL STOCK




The
Company is authorized to issue 150,000,000 shares of common stock with a par
value of $.001 per share. As of October 31, 2008 and 2007, the Company has
issued and outstanding 48,853,664 shares and 48,245,768 shares of common stock
respectively. The Company is also authorized to issue 5,000,000 shares of
preferred stock with a par value of $.001 per share. We have designated 50,000
preferred shares as Series A preferred stock and have designated 50,000
preferred shares as Series B preferred stock. The remaining 4,900,000 shares of
preferred stock is undesignated. There were 6,287 and 6,407 preferred shares
outstanding at October 31, 2008 and 2007, all of which were Series
A.




Series A Preferred
Stock




We
designated 50,000 shares of our preferred stock, par value $.001, as Series A
Preferred Stock. The Series A Preferred Stock ranks senior to all classes of
common and preferred stock. The Series A Preferred Stock has a dividend rate of
12% per year. The Series A Preferred Stock and accrued dividends is convertible
at the option of the holder into shares of our common stock at a conversion
price of $1.00 per share, and at the option of the Company when the stock price
reaches or exceeds $3.00.


F-16


CODA
OCTOPUS GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


October
31, 2008 and 2007




During
the year ended October 31, 2007 we did not issue any Series A Preferred Stock.
We converted 17,234 shares of Series A Preferred Stock into 2,878,418 shares of
common stock, along with 2,878,418 warrants at prices ranging from $1.30 to
$1.70. At October 31, 2007, the total of Series A Preferred Stock outstanding is
6,407 shares, convertible into 1,050,310 shares of common stock. During the
year ended October 31, 2008, we issued 200 shares of Series A Preferred Stock,
which were subscribed for in March 2007 and converted 320 shares of Series A
Preferred Stock into 32,000 shares of common stock.





During
the year ended October 31, 2008, 120 shares of Series A preferred stock were
converted into common stock, which was foregone in lieu of payment for services
provided by the company.





Series B Preferred
Stock




We
designated 50,000 shares of our preferred stock, par value $.001, as Series B
Preferred Stock. The Series B Preferred Stock ranks junior to our issued and
outstanding Series A preferred Stock and senior to all classes of common stock.
The Series B Preferred Stock has a dividend rate of 8% per year. The Series B
Preferred Stock and accrued dividends are convertible at the option of the
holder into shares of our common stock at a conversion price of $1.00 per share.
As of October 31, 2008 and 2007, we had no shares of Series B Preferred Stock
outstanding.




During
the year ended October 31, 2007, we sold 8,000 preferred Series B stock units,
each unit consisting of one share of our Series B Preferred Stock, 100 Series A
warrants, 100 Series B warrants, and  81.25 shares of common
stock (650,000 shares of common stock in total). Each Series A warrant and
Series B warrant is exercisable into shares of our common stock for a period of
five years at exercise prices of $1.30 and $1.70 per share, respectively. Gross
and net proceeds from the sale of the units were $800,000.




In
accordance with EITF No. 00-27, “Application of EITF Issue No. 98-5,
‘Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Rates’, to Certain convertible
Instruments”, a portion of the proceeds of our stock sales were allocated
to the warrants based on their relative fair value.




For the
sale of Series B Preferred Stock, this totaled $546,566 using the Black
Scholes option pricing model. Further, we attributed a beneficial conversion
feature of $253,434 to the Series B preferred shares based upon the
difference between the conversion price of those shares and the closing price of
our common shares on the date of issuance, limited to the proceeds attributable
to the sale of the preferred shares. The weighted average assumptions used in
the Black Scholes model are as follows:  (1) dividend yield of
0%; (2) expected volatility of 304%, (3) risk-free interest rate
of 4.90%, and (4) expected life of 2 years as the conversion
feature and warrants are immediately exercisable. Both the fair value of the
warrants and the beneficial conversion feature aggregating $800,000 were
recorded as a dividend and are included in the accompanying financial
statements.




Also
during the year ended October 31, 2007, 30,819 shares of Series B Preferred
Stock were converted into 3,081,900 shares of common stock. In addition, 18,181
shares of Series B Preferred Stock were redeemed at a price of $110 per share,
which included the dividend accrued from the previous year, with the remainder
booked as a redemption premium.


F-17


CODA
OCTOPUS GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


October
31, 2008 and 2007




Common
Stock




During
the years ended October 31, 2008 and 2007 we issued 452,937 and 1,742,280 shares
of common stock, valued at $263,476 and $1,926,268 per supplementary cash flow
information respectively, to employees, directors and consultants for
services.





During
the year ended October 31, 2008 we also issued 38,319 shares as dividends on
Series A Preferred Stock valued at $41,537.





During
the year ended October 31, 2008, 60,000 shares of common stock were issued to an
investor, which were subscribed for during the year to October 31,
2007.





During
the year ending October 31, 2007 we sold 15,025,000 shares of common stock,
valued at $1 each, with a further 60,000 shares subscribed for during the year
and issued subsequent to the year end. These shares were issued alongside
7,542,500 Series A warrants and 7,542,500 Series B warrants, along with
2,400,000 warrants convertible into common stock at a price of $1.00 as part of
placement agent fees. Each Series A warrant is convertible into common stock at
a price of $1.30, and each Series B warrant is convertible into common stock at
$1.70, and each warrant has a life of 5 years. The gross amount raised was
$15,025,000, with $13,764,530 raised net.




During
the year ended October 31, 2007 a further 650,000 shares of common stock were
sold as part of a unit with Series B Preferred Stock.




During
the year ending October 31, 2007 we issued 532,090 shares of common stock,
valued at $792,814, as part payment in our acquisition of Miller & Hilton,
Inc, d/b/a Colmek Systems Engineering, with a further 42,910 shares payable
within 12 months.




During
the year ending October 31, 2007 a total of 34,100 shares of common stock were
issued on the exercise of 34,100 stock options, with a conversion value of $1.00
each. The amount received was $34,100.




During
the year ending October 31, 2007 a total of 3,081,900 shares of common stock
were issued on conversion of 30,819 shares of Series B Preferred Stock. In
addition, 2,878,418 shares of common stock were issued on conversion of 17,234
shares of Series A Preferred Stock.




These
transactions results in outstanding common stock of 48,853,664 at October 31,
2008, compared to 48,245,768 at October 31, 2007.





Other Equity
Transactions




During
the year ended October 31, 2008, we issued in the aggregate 1,870,000 common
share purchase options to employees and consultants, with exercise prices of
$1.30 to $1.50. The initial fair value of the options was $872,170 using the
Black Scholes method at the date of grant of the options based on the following
assumptions: (1) risk free interest rate of 3.43%-5.25%; (2) dividend yield of
0%; (3) volatility factor of the expected market price of our common stock of
222% - 246%; and (4) an expected life of the options of 2 years. The fair value
of the options has been expensed in this period. In accordance with EITF 96-18,
the fair value of consultant vesting options will be recomputed at each
reporting period and any increase will be charged to expense. Due to staff
departures, 50,000 options were cancelled, all of which had exercise prices of
$1.70. During the year ended October 31, 2008, $257,547 was charged to
expense.





During
the year ended October 31, 2007, we issued in the aggregate 1,500,000 common
share purchase options to employees and consultants, with exercise prices of
$1.00 to $1.80. The initial fair value of the options was $1,828,811 using the
Black Scholes method at the date of grant of the options based on the following
assumptions: (1) risk free interest rate of 4.90%-5.25%; (2) dividend yield of
0%; (3) volatility factor of the expected market price of our common stock of
252% - 328%; and (4) an expected life of the options of 2 years. The fair value
of the options has been expensed in this period. In accordance with EITF 96-18,
the fair value of consultant vesting options will be recomputed at each
reporting period and any increase will be charged to expense. Due to staff
departures, 330,000 options were cancelled, all of which had exercise prices of
$1.00 to $1.50. Also during the year, a total of 34,100 options were exercised
at $1.00. During the year ended October 31, 2007, $1,036,454 was charged to
expense. During the year ended October 31, 2008, $590,444 was charged to
expense, with a further $24,179 charged to expense for options issued during the
year ended October 31, 2006 which vested during the year ended October 31,
2008


F-18




CODA
OCTOPUS GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


October
31, 2008 and 2007




NOTE
9 - WARRANTS AND STOCK OPTIONS




Transactions
involving stock options and warrants issued are summarized as
follows:




2008
                      
                      
                      2007Number
                      
                      
                      Weighted
                        Average Exercise
                        Price
                      
                      
                      Number
                      
                      
                      Weighted
                        Average Exercise
                        PriceOutstanding
      at beginning of the period
                      
                      
                      36,519,318
                      
                      
                      $
                      1.29
                      
                      
                      
                      13,410,000
                      
                      
                      $
                      1.29Granted
      during the period
                      
                      
                      1,870,000
                      
                      
                      
                      1.36
                      
                      
                      
                      23,473,418
                      
                      
                      
                      1.44Exercised
      during the period
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (34,100
                      )
                      
                      
                      1.00Terminated
      during the period
                      
                      
                      (50,000
                      )
                      
                      
                      1.70
                      
                      
                      
                      (330,000
                      )
                      
                      
                      1.22Outstanding
      at the end of the period
                      
                      
                      38,339,318
                      
                      
                      $
                      1.39
                      
                      
                      
                      36,519,318
                      
                      
                      $
                      1.39Exercisable
      at the end of the period
                      
                      
                      37,161,417
                      
                      
                      $
                      1.39
                      
                      
                      
                      35,467,518
                      
                      
                      $
                      1.39




The
number and weighted average exercise prices of stock purchase options and
warrants outstanding as of October 31, 2008 are as follows:




Range of
                                                            Exercise Prices
                                                          
                                                          Number Outstanding
                                                          
                                                          
                                                          Weighted Average Contractual
                                                            Life (Yrs)
                                                          
                                                          
                                                          Total Vested0.50
                                                          
                                                          
                                                          750,000
                                                          
                                                          
                                                          
                                                          2.50
                                                          
                                                          
                                                          
                                                          750,0000.58
                                                          
                                                          
                                                          400,000
                                                          
                                                          
                                                          
                                                          2.41
                                                          
                                                          
                                                          
                                                          400,0001.00
                                                          
                                                          
                                                          5,845,900
                                                          
                                                          
                                                          
                                                          2.57
                                                          
                                                          
                                                          
                                                          5,789,8001.30
                                                          
                                                          
                                                          16,106,709
                                                          
                                                          
                                                          
                                                          3.28
                                                          
                                                          
                                                          
                                                          15,196,9591.50
                                                          
                                                          
                                                          525,000
                                                          
                                                          
                                                          
                                                          3.10
                                                          
                                                          
                                                          
                                                          435,2501.70
                                                          
                                                          
                                                          14,651,709
                                                          
                                                          
                                                          
                                                          3.16
                                                          
                                                          
                                                          
                                                          14,549,4091.80
                                                          
                                                          
                                                          60,000
                                                          
                                                          
                                                          
                                                          3.90
                                                          
                                                          
                                                          
                                                          40,000Totals
                                                          
                                                          
                                                          38,339,318
                                                          
                                                          
                                                          
                                                          3.10
                                                          
                                                          
                                                          
                                                          37,161,417


F-19


CODA
OCTOPUS GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


October
31, 2008 and 2007




NOTE
10 - INCOME TAXES




The
Company has adopted Financial Accounting Standard No. 109 which requires the
recognition of deferred tax liabilities and assets for the expected future tax
consequences of events that have been included in the financial statement or tax
returns. Under this method, deferred tax liabilities and assets are determined
based on the difference between financial statements and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Temporary differences between taxable
income reported for financial reporting purposes and income tax purposes are
insignificant.




For
income tax reporting purposes, the Company's aggregate U.S. unused net operating
losses approximate $41,710,000 which expire through 2028, subject to limitations
of Section 382 of the Internal Revenue Code, as amended. The deferred tax asset
related to the carry forward is approximately $14,185,000. The Company has
provided a valuation reserve against the full amount of the net operating loss
benefit, because in the opinion of management based upon the earning history of
the Company, it is more likely than not that the benefits will not be
realized.




For
income tax reporting purposes, the Company's aggregate UK unused net operating
losses approximate $7,643,000, with no expiration. The deferred tax asset
related to the carry-forward is approximately $2,300,000. The Company has
provided a valuation reserve against the full amount of the benefits, because in
the opinion of management based upon the earning history of the Company, it is
more likely than not that the benefits will not be realized.




Income
tax expense for 2008 and 2007 represents income taxes on our Norwegian
subsidiary.




Components
of deferred tax assets as of October 31, 2008 and 2007 are as
follows:




Non-Current
                    
                    2008
                    
                    
                    2007Net
      operating losses carried forward
                    
                    $
                    16,485,000
                    
                    
                    $
                    10,455,000Valuation
      allowance
                    
                    
                    (16,485,000
                    )
                    
                    
                    (10,455,000
                    )Net
      deferred tax asset
                    
                    $
                    -
                    
                    
                    $
                    -




NOTE
11 - CONTINGENCIES AND COMMITMENTS




Litigation




The
Company is currently engaged in a lawsuit involving the former Chief Executive
Officer of its subsidiary, Coda Octopus Colmek, Inc .  The former CEO
claims breach of his employment contract, tortuous interference with his
contract, termination in violation of public policy and failure to pay wages
when due. He has filed a complaint on November 10, 2008 and an amended complaint
on December 10, 2008. We have answered the amended complaint on December 22,
2008 denying the allegations, raising affirmative defenses and intend to defend
ourselves vigorously.  We believe that the final disposition should
not have a material adverse effect on our financial position or results of
operations.





We may
become subject to other legal proceedings and claims, which arise in the
ordinary course of our business. Although occasional adverse decisions or
settlements may occur, we believe that the final disposition of any matters
should not have a material adverse effect on our financial position or results
of operations.


F-20


CODA
OCTOPUS GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


October
31, 2008 and 2007




Factoring
Agreement




Until
October 31, 2008, we factored certain of our receivables pursuant to a number of
factoring agreements with Faunus Group International (“FGI”). Advances received
pursuant to the agreement are secured by our accounts receivable and other
assets of the Company.




An
initial factoring agreement was entered into on August 17, 2005 between FGI and
Coda Octopus Group, Inc., for a maximum borrowing in the US of up to $1 million.
Subsequent agreements were added in November 2006 covering our UK businesses,
Martech Systems Ltd and Coda Octopus Products Ltd.




Over the
course of the year ended October 31, 2008, we factored invoices totaling
$7,545,200 in receivables and we received $5,828,550 in proceeds from FGI. This
compares with 2007, where we factored invoices totaling $5,088,665 in
receivables and we received $3,961,695 in proceeds from FGI.




Under the
arrangement, FGI typically advanced to the Company 80% of the total amount of
accounts receivable factored. FGI retained 20% of the outstanding factored
accounts receivable as a reserve, which it holds until the customer pays the
factored invoice to FGI. The cost of funds for the accounts receivable portion
of the borrowings with FGI was 1.85% for the initial 30 day credit period, up to
a maximum of 45 days; thereafter, an additional fee of 0.5% was charged for each
10 day period.




On
February 20, 2008, FGI, RBS and us entered into an intercreditor agreement
regulating the priority of each creditor’s debts.





As of
October 31, 2008 all FGI agreements were terminated and advances repaid in
full.




Operating
Leases




We occupy
our various office and warehouse facilities pursuant to both term and
month-to-month leases. Our term leases expire at various times through September
2013. Future minimum lease obligations are approximately $1,389,094, with the
minimum future rentals due under these leases as of October 31, 2008 as
follows:




2009
                    
                    $
                    443,7812010
                    
                    
                    411,3072011
                    
                    
                    359,1092012
                    
                    
                    121,4992013
      and thereafter
                    
                    
                    53,398Total
                    
                    $
                    1,389,094




Concentrations




We had no
concentrations of purchases of over 5% during either of the years ended 2008 and
2007. We had a sales concentration of over 5% for each of the years ended
October 31, 2008 and 2007 due to a sale to a customer for $1,557,130 and
$2,294,279 respectively.


F-21


CODA
OCTOPUS GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


October
31, 2008 and 2007





NOTE
12 - NOTES AND LOANS PAYABLE




A summary
of notes payable at October 31, 2008 and 2007 is as follows:




2008
                          
                          
                          2007The
      Company has a secured convertible debenture for $12M with a life of 7
      years from February 26, 2008, maturing at 130% of face value, and with
      interest payable every six months, starting in February 2009, at a rate of
      8.5%; During the term, the debentures are convertible into our common
      stock at the option of the Noteholders at a conversion price of $1.05. We
      may also force the conversion of these Notes into our common stock after
      two years in the event that we obtain a listing on a national exchange and
      our stock price closes on 40 consecutive trading days at or above $2.50
      between the second and third anniversaries of this agreement; $2.90
      between the third and fourth anniversaries of this agreement; and $3.50
      after the fourth anniversary of this agreement or where the daily volume
      weighted average price of our stock as quoted on OTCBB or any other US
      National Exchange on which our securities are then listed has, for at
      least 40 consecutive trading days closed at the agreed price. the Company
      has failed to comply with certain  covenants contained in the
      debenture agreement (see Note 16)
                          
                          $
                          12,348,493
                          
                          
                          $
                          -The
      Company, through its UK subsidiary Coda Octopus Products Ltd has a 7 year
      unsecured loan note for £100,000; interest rate of 12% annually; repayable
      at borrower’s instigation or convertible into common stock when the share
      price reaches $3.
                          
                          
                          162,700
                          
                          
                          
                          200,000The
      Company, through its US subsidiary Coda Octopus Innalogic, Inc., had a
      capital lease for equipment for monthly payments of $2,369.74 for 24
      months. The Company at year end has sold the equipment and thus violated
      the terms of the lease that prohibit sale of equipment under the capital
      lease. The Company has deferred revenue of $127,340 at October 31, 2007 in
      relation to this capital lease. See Note 2. This capital lease was repaid
      in April 2008.
                          
                          
                          -
                          
                          
                          
                          41,091The
      Company has an unsecured revolving line of credit with a US bank through
      its US subsidiary Coda Octopus Colmek, Inc., for $50,000 with an interest
      rate of 12.5% annually; repayable at borrower’s instigation. The facility
      was repaid and closed during 2008.
                          
                          
                          -
                          
                          
                          
                          17,181The
      Company through its US subsidiary Coda Octopus Colmek, Inc., had an
      outstanding loan note payable for the financing of a truck over 60 months;
      monthly payments of $897.18; annual interest rate of 10.99%. The vehicle
      was disposed of during 2008 and the loan repaid in full.
                          
                          
                          -
                          
                          
                          
                          29,145The
      Company through its US subsidiary Coda Octopus Colmek, Inc., has an
      unsecured loan note payable to a director and former officer of the
      Company, which is being repaid in the short term.
                          
                          
                          10,104
                          
                          
                          
                          34,104Total
                          
                          $
                          12,521,297
                          
                          
                          $
                          321,521Less:
      current portion
                          
                          
                          12,358,597
                          
                          
                          
                          56,382Total
      long-term portion
                          
                          $
                          162,700
                          
                          
                          $
                          265,139


F-22


CODA
OCTOPUS GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


October
31, 2008 and 2007




In
connection with the secured convertible debenture noted above, we carry
$1,513,297 deferred financing costs as an asset on the consolidated balance
sheet at October 31, 2008, which represents $1,694,893 in financing closing
costs we incurred, net of $181,596 in amortization expense for the year ended
October 31, 2008.  We amortize deferred financing costs over the
debenture’s 7-year term using the straight line method.





NOTE
13 - RELATED PARTY TRANSACTIONS




The
Company’s current Chief Executive Officer, and entities controlled by the Chief
Executive Officer, have advanced funds to the Company for travel related and
working capital purposes.  No formal repayment terms or arrangements
existed.




Advances
are non interest bearing and are due on demand. At the end of the year ending
October 31, 2008, $41,904 was due to related parties, compared with $184,425 for
the year ending October 31, 2007.




We are
also owed by related parties a sum of $54,166 as at October 31, 2008, compared
with $105,685 for the year ended October 31, 2007.




NOTE
14 - ACQUISITIONS




Acquisition of Martech
Systems (Weymouth) Limited




On June
26, 2006, we acquired all of the issued and outstanding capital stock of Martech
Systems (Weymouth) Limited, a UK company (“Martech”). Martech specializes in
engineering projects and sales to the UK Ministry of Defense. The acquisition
was made to expand our engineering and related services, along with the sale of
products, to the UK government. The purchase price was approximately $1,536,000,
payable as follows: approximately $1,180,000 in cash at closing; approximately
$364,000 in cash one year after closing, which was accrued as $382,000 as at
October 31, 2006, due to exchange rate movements, and was paid in June 2007. The
shares of common stock issued in conjunction with the merger were not registered
under the Securities Act of 1933. The acquisition of Martech was accounted for
using the purchase method in accordance with SFAS 141, “Business Combinations”.
The results of operations for Martech have been included in the Consolidated
Statements of Operations since the date of acquisition.


F-23


CODA
OCTOPUS GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


October
31, 2008 and 2007




In
accordance with SFAS No. 141, the total purchase price was allocated to the
estimated fair value of assets acquired and liabilities assumed. The estimate of
fair value of the assets acquired was based on management’s estimate. The total
purchase price was allocated to the assets and liabilities acquired as
follows:




Current
      assets acquired
                  
                  $
                  993,817Equipment,
      net
                  
                  
                  37,126Goodwill
                  
                  
                  998,591Current
      liabilities assumed
                  
                  $
                  (493,262
                  )Purchase
      price
                  
                  $
                  1,536,272




The total
cost of the acquisition has been allocated to the assets acquired and the
liabilities assumed based upon their respective fair values in accordance with
SFAS No. 141. Goodwill of $998,591 represented the excess of the purchase price
over the fair value of the net tangible and intangible assets acquired. The
goodwill recognized in the acquisition result primarily from the acquisition of
the assembled workforce.




Acquisition of Colmek
Systems Engineering




On April
6, 2007, we completed the acquisition of Miller & Hilton d/b/a Colmek
Systems Engineering, a Utah corporation (“Colmek”). The total purchase price was
$2,356,750, with additional associated costs and outlays of $158,470, consisting
of cash paid at the closing of the transaction in the amount of $800,000 and the
issuance of 532,090 shares of our common stock, and $700,000 and 42,910 shares
that are due and payable on the first anniversary of the closing date evidenced
by secured promissory notes to the former Colmek shareholders. Under the terms
of the stock purchase agreements, we have pledged the Colmek shares as
collateral security for the performance of our deferred payment obligations
under the notes. At the date of issuance of the 532,090 shares these were valued
at $792,814. The shares of common stock issued in conjunction with the merger
were not registered under the Securities Act of 1933. The acquisition of Colmek
was accounted for using the purchase method in accordance with SFAS 141. The
results of operations for Colmek have been included in the Consolidated
Statements of Operations since the date of acquisition. In April 2008, a cash
amount of $763,936 was paid in full settlement of the deferred balance due at
closing.




In
accordance with SFAS No. 141, the total purchase price was allocated to the
estimated fair value of assets acquired and liabilities assumed. The estimate of
fair value of the assets acquired was based on management’s and an independent
appraiser’s estimates. The total purchase price was allocated to the assets and
liabilities acquired as follows:




Current
      assets acquired
                  
                  $
                  231,043Equipment,
      net
                  
                  
                  80,007Current
      liabilities assumed
                  
                  
                  (727,913
                  )Customer
      relationships acquired
                  
                  
                  694,503Non-compete
      agreements acquired
                  
                  
                  198,911Goodwill
      acquired
                  
                  
                  2,038,669Total
      purchase price
                  
                  $
                  2,515,220


F-24


CODA
OCTOPUS GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


October
31, 2008 and 2007




The
intangible assets of $893,414 at the date of acquisition consisted of customer
relationships and non-compete agreements. The intangible assets acquired have an
estimated useful life of 10 and 3 years, respectively, and as such will be
amortized monthly over those periods. Goodwill of $2,038,669 represented the
excess of the purchase price over the fair value of the net tangible and
intangible assets acquired, plus the associated costs and outlays.




The
following unaudited pro forma results of operations for the year ended October
31, 2007 assume that the acquisitions of Colmek and Martech had occurred on
November 1, 2006. These unaudited pro forma results are not necessarily
indicative of the actual results of operations that would have been achieved nor
are they necessarily indicative of future results of operations.




2007Revenue
                  
                  $
                  14,757,876Net
      loss
                  
                  
                  (15,259,562
                  )Loss
      per common share
                  
                  $
                  (0.43
                  )




NOTE
15 - SEGMENT INFORMATION




Due to
the nature of our businesses, we are operating in two reportable segments, which
are managed separately based upon fundamental differences in their operations.
Martech, Colmek, and Innalogic operate as contractors, and the balance of our
operations are comprised of product sales.




Segment
operating income is total segment revenue reduced by operating expenses
identifiable with the business segment. Corporate includes general corporate
administrative costs.





The
Company evaluates performance and allocates resources based upon operating
income. The accounting policies of the reportable segments are the same as those
described in the summary of accounting policies.





There are
inter-segment sales.




The
following table summarizes segment asset and operating balances by reportable
segment.




Contracting
                  
                  
                  Products
                  
                  
                  Corporate
                  
                  
                  TotalsRevenues
                  
                  $
                  5,859,259
                  
                  
                  $
                  9,269,121
                  
                  
                  $
                  1,840,542
                  
                  
                  $
                  16,968,922Operating
      income/(loss)
                  
                  
                  (1,418,649
                  )
                  
                  
                  2,266,490
                  
                  
                  
                  (7,549,484
                  )
                  
                  
                  (6,701,643
                  )Identifiable
      assets
                  
                  
                  5,450,331
                  
                  
                  
                  4,384,945
                  
                  
                  
                  7,204,009
                  
                  
                  
                  17,039,284Capital
      expenditure
                  
                  
                  26,922
                  
                  
                  
                  58,064
                  
                  
                  
                  57,981
                  
                  
                  
                  142,967Selling,
      general & administrative
                  
                  
                  3,586,636
                  
                  
                  
                  2,414,753
                  
                  
                  
                  7,202,865
                  
                  
                  
                  13,204,254Depreciation
      & amortization
                  
                  
                  263,632
                  
                  
                  
                  76,216
                  
                  
                  
                  207,519
                  
                  
                  
                  547,367Interest
      expense
                  
                  
                  123,941
                  
                  
                  
                  307,700
                  
                  
                  
                  1,107,083
                  
                  
                  
                  1,538,724





The
Company’s reportable business segments operate in two geographic locations.
Those geographic locations are:





* United
States


* United
Kingdom





The
Company evaluates performance and allocates resources based upon operating
income. The accounting policies of the reportable segments are the same as those
described in the summary of accounting policies. There are no inter-segment
sales.


F-25


CODA
OCTOPUS GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


October
31, 2008 and 2007





Information
concerning principal geographic areas is presented below according to the area
where the activity is taking place.





2008
                            
                            
                            2007Revenues:United
      States
                            
                            $
                            7,362,966
                            
                            
                            $
                            7,129,507United
      Kingdom
                            
                            
                            9,605,956
                            
                            
                            
                            6,723,806Total
      Revenues
                            
                            $
                            16,968,922
                            
                            
                            $
                            13,853,313Assets:United
      States
                            
                            $
                            4,357,042
                            
                            
                            $
                            5,529,261United
      Kingdom
                            
                            
                            5,478,233
                            
                            
                            
                            6,597,202Corporate
      and other
                            
                            
                            7,204,009
                            
                            
                            
                            1,454,998Total
      Assets
                            
                            $
                            17,039,284
                            
                            
                            $
                            13,581,461





NOTE
16 - SUBSEQUENT EVENTS




In
November 2008, we issued 43,694 shares of common stock which were due as
compensation relating to the year ended October 31, 2008 and were subscribed for
in the Company’s balance sheet as of October 31, 2008.





In
November 2008, the Company started a new subsidiary, Coda Octopus Tactical
Intelligence, Inc. in an effort to improve the Company’s operational and
training reach in the sectors in which it competes.





In
December 2008, following the repayment of FGI in October 2008, all security
granted in favor of FGI was rescinded, allowing the Company’s convertible
debenture holder to perfect its’ security over the assets of the Company, as
envisaged in the transaction entered into in February 2008.





In
December 2008, the Company made an addition to its trading entity, Coda Octopus
Martech Ltd, of the assets of Dragon Design Ltd, a company based next door to
our Martech business in Weymouth. Management believes the companies have
complementary skills and capabilities that can enhance revenues and
opportunities to our existing Weymouth operation.  The Company paid an
initial £56,000 ($84,000) with the same amount due in December 2009 if certain
profit targets are met.




Amendment to Convertible
Debentures





Under the
terms of the $12M convertible debenture issued in February 2008 (see Note 12) ,
the Company agreed to allocate a minimum of $6M of the proceeds for purposes of
capital expenditures and acquisitions, with the balance of the proceeds,
approximately $6M to be utilized for working capital purposes. If the Company
fails to comply with these covenants, the debenture holders would be able to
demand payment within a specified period of time.




As of
October 31, 2008, the Company exceeded the $6M limit for working capital
purposes, and therefore was not in compliance under the terms of the
debentures.  On March 16, 2009, the Company and the Noteholder have
entered into a Cash Control Framework Agreement, pursuant to which it is assumed
that, subject to the Company being fully compliant with the terms of this
agreement and those set out in the Transaction Documents entered into between
the Company and the Noteholder on February 21, 2008, no adverse actions will be
taken by the Noteholder. The agreement provides, among other things, for the
placement of approximately $2.15 million into a segregated cash
account.  Under the terms of the agreement, we may request the release of
funds from the account from time to time for working capital purposes subject to
the Noteholder's consent and agreed upon terms and conditions. Under the terms
of the agreement, we must also adhere to a  cost cutting program which
involves reducing selling, general and administrative expenses and research and
development and capital expenditures by an annualized $3.35
million.


F-26