**UNITED
      STATES**


**SECURITIES
        AND EXCHANGE COMMISSION**
 WASHINGTON,
        D.C. 20549
 
 **FORM
        10-KSB**
 
 **x
        ANNUAL REPORT UNDER
        SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**
 For
        the
        fiscal year ended October 31, 2007
 
 **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, 25** **th** **Street, 6** **th** **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**
 
 ·
              Indicate
                  by check mark if the registrant is a well-known seasoned issuer,
                  as
                  defined in Rule 405 of the Securities Act. Yes o
                  No x
 ·
              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 o No x
 ·
              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. Yes x No
                  o
 ·
              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. o
 ·
              Indicate
                  by check mark whether the registrant is a large accelerated filer,
                  an
                  accelerated filer, or a non-accelerated filer. Non-accelerated
                  filer x
 ·
              Indicate
                  by check mark whether the registrant is a shell company (as defined
                  in
                  Rule 12b-2 of the Act). Yes o
                  No x
 ·
              State
                  issuer's revenues for its most recent fiscal year.
                  $13,853,313
 ·
              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 sold, or the average bid and asked price of such common
                  equity,
                  as of a specified date within the past 60 days. (See definition
                  of
                  affiliate in Rule 12b-2 of the Exchange Act.). Based on the closing
                  sale
                  price on the OTC Bulletin Board on January 31, 2008, the aggregate
                  market
                  value of the registrant's common stock held by non-affiliates was
                  approximately $15,414,866. 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.
 ·
                State
                    the number of shares outstanding of each of the issuer's classes
                    of common
                    equity, as of the latest practicable date: 48,279,056 as of February15, 2008.
 
  **DOCUMENTS
        INCORPORATED BY REFERENCE:**
 None
 
 **TABLE
        OF CONTENTS**
 
 **PART
                  I**ITEM
                  1.
              DESCRIPTION
                  OF BUSINESS
              3ITEM
                  2.
              DESCRIPTION
                  OF PROPERTY
              16ITEM
                  3.
              LEGAL
                  PROCEEDINGS
              17ITEM
                  4.
              SUBMISSION
                  OF MATTERS TO A VOTE OF SECURITY HOLDERS
              17**PART
                  II**ITEM
                  5.
              MARKET
                  FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
              18ITEM
                  6.
              MANAGEMENT'S
                  DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
              20ITEM
                  7.
              FINANCIAL
                  STATEMENTS
              29ITEM
                  8.
              CHANGES
                  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                  DISCLOSURE
              29ITEM
                  8A.
              CONTROLS
                  AND PROCEDURES
              29ITEM
                  8B.
              OTHER
                  INFORMATION
              29**PART
                  III**ITEM
                  9.
              DIRECTORS,
                  EXECUTIVE OFFICERS, PROMOTERS,CONTROL PERSON AND CORPORATE GOVERNANCE;
                  COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
              30ITEM
                  10.
              EXECUTIVE
                  COMPENSATION
              34ITEM
                  11.
              SECURITY
                  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
                  STOCKHOLDER MATTERS
              43ITEM
                  12.
              CERTAIN
                  RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
                  INDEPENDENCE
              44ITEM
                  13.
              EXHIBITS
              48ITEM
                  14.
              PRINCIPAL
                  ACCOUNTANT FEES AND SERVICES
              49SIGNATURES
              50
 
 2
  **FORWARD-LOOKING
        STATEMENTS**
 
 This
        annual report on Form 10-KSB 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. DESCRIPTION OF BUSINESS**
 
 **Overview**
 
 Coda
        Octopus Group, Inc. (“the Company”, “we” or “us”) is engaged in 3-D subsea
        technology and are the developer and patent holder of real-time 3-D 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:
 
 ·
              marine
                  geophysical survey (commercial), which focuses around oil and gas,
                  construction and oceanographic research and exploration, where
                  we market
                  to survey companies, research institutions, salvage companies.
                  This was
                  our original focus, from founding in 1994. Our current products encompass
                  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 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.
 ·
              underwater
                  defense/security, where we market to 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),
                  a Company which had 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 particularly important applications
                  in
                  the fields of port security, defense and undersea oil and gas
                  development.
  In
        addition, through our two engineering services subsidiaries, Martech Systems
        (Weymouth) 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 and pharmaceutical
        industries. These engineering capabilities are increasingly being combined
        with
        our product offerings, bringing opportunities to provide complete systems,
        installation and support.
  3
  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:
 
 ·
              First
                  mover advantage in 3-D 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 a
                  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
                  which was acquired by us in December 2002. These individuals continue
                  to
                  work for us and are actively involved in producing and advancing
                  the
                  EchoscopeTM  which incorporates this
                  patent
 ·
              Early
                  recognition of need for 3-D real-time sonar in defense/security
                  applications. We believe that we are the first to bring to market
                  a
                  product with 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.
 ·
              Expansion
                  into new geographies like North America and Western
                  Europe.
 ·
              Expansion
                  into new commercial markets like commercial marine survey with
                  innovative
                  products.
 
 Further,
        we believe the EchoscopeTM will transform certain segments of the sonar product
        market. In addition, 3-D 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.
 
 We
        also
        believe that our two recent acquisitions and formation of our wireless video
        surveillance subsidiary strengthen our capabilities to produce comprehensive
        security and defense systems 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.
  4
  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 3-D 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.
  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. We have also subsequently,
        in May
        2006, 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.
 
 **Strategy**
 
 Having
        started as a products company, we have leveraged our capabilities, technology
        and market position to allow us to now 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 3-D 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, ie. federal,
        state, government agencies and 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 both our own
        internal research and development of products and through strategically relevant
        acquisitions.
  5
  **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 eight
        separate subsidiary companies, which are described below.
 
 ***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 USA 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 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 (3-D)
        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 3-D images and visualization
        in the subsea environments. The focus of Coda Octopus Omnitech operation
        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.
 
 ***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 market place, 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.
  ***Innalogic,
        Inc.***
 
 Co-located
        with our corporate headquarters at our 25 th Street
        offices in Manhattan, Innalogic, Inc., a Delaware corporation, provides wireless
        encrypted video surveillance products for commercial organizations (domestic
        and
        international) and local and Federal government agencies. Innalogic completed
        in
        the last fiscal year customer contracts ranging in value from $40k to
        $320k.
  6
  ***Miller
        & Hilton*** ***,
        Inc.***  ***d/b/a
        Colmek Systems Engineering (“Colmek”)***
 
 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.
 
 ***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.
 
 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, **Coda** TM
and **Octopus** TM.
        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.
  7
  *Coda
        EchoscopeTM*
 The
        EchoscopeTM is a unique sonar device which embodies a patented invention for a
        method of producing a 3-D Sonar Image that permits real time, three-dimensional
        viewing, imaging and data recording of underwater scenes and objects. The
        3-D
        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 3-D 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.
 
 The
        EchoscopeTM has a very wide range of applications including:
  ·
              inspection
                  of harbor walls.
 ·
              inspection
                  of ship hulls,
 ·
              inspection
                  of bridge pilings;
 ·
              ROV
                  navigation (obstacle avoidance);
 ·
              AUV
                  navigation and target recognition (obstacle
                  avoidance);
 ·
              construction
                  - pipeline touchdown placement and
                  inspection;
 ·
              obstacle
                  avoidance navigation;
 ·
              bathymetry
                  (measurement of water depth to create 3-D terrain
                  models);
 ·
              monitoring
                  underwater construction;
 ·
              underwater
                  intruder detection;
 ·
              dredging
                  and rock dumping;
 ·
              contraband
                  detection;
 ·
              locating
                  and identifying objects undersea, including
                  mines.
 
 Considerable
        interest in the EchoscopeTM has been shown by the United States Coast Guard,
        NAVSEA, the Office for Naval Research (ONR), the Office for Naval Intelligence
        (ONI), the Department of Homeland Security and various other defense agencies
        and as is more fully described later on.
 
 The
        EchoscopeTM, in its simplest form as a stand alone product, is priced at
        $250,000. We have delivered 20 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 (UIS)TM*
 The
        Coda
        Underwater Inspection System or UISTM is the world’s first, and we believe only,
        fully integrated high resolution real-time 3-D inspection system. It delivers
        precise and intuitive 3-D images in real-time, and is designed to inspect
        large
        areas with 100% coverage and 98% probability of detection. We
        are
        currently implementing a substantial order for the US Coast
        Guards.
  At
        the
        heart of every UISTM is the unique EchoscopeTM real-time 3-D 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 3-D 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.
  8
  The
        price
        for this product is approximately $495,000.
  In
          July
          2007, we received a $2.59 million 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.
 
 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 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. In
          addition,
          a further order was made (and completed) for additional development work
          of
          $100,000. Under the option provisions further options may be exercised
          by the US
          Coast Guard under the contract for up to $4,107,132.
 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 Delivery**Option
                  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
              
              Six
                  months from date of exercise**Option
                  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
              
              Six
                  months from date of exercise**Option
                  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
                  end-user
                  to the changes (i.e the presence of something that was not there
                  on the
                  last inspection - example of a harbor wall).
              
              $
              1,122,948
              
              18
                  months from date of exercise**Option
                  4**
                **ADVANCED
                  PROTOTYPE UIS SYSTEM**
              
              Building
                  of up to seven (7) additional UIS Systems to agreed USCG
                  specifications.
              
              $
              3,291,750
              
              Six
                  months from date of exercise**Option
                  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
              
              Six
                  months from date of exercise
 On
        February 19, 2008, a contract amendment was awarded to us. Under this amendment
        a number of the options listed above 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
        US$1,527,149.
  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’, eg. 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 760series 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**
 
 With
        our
        recent acquisitions of Martech Systems (Weymouth) Limited and Colmek Systems
        Engineering, we have moved from being a pure “products” company to being a
        comprehensive provider of systems and solutions.
 
 Both
        these entities focus on producing specific low volume, high value solutions,
        bringing Coda Octopus Group firmly into the services sector in the defense
        and
        homeland security markets. The addition of these design and “bespoking”
capabilities to the Company’s EchoscopeTM product set gives enormous added
        strength to the Business.
  10
  *Martech*
 
 Martech
        Systems, based in Weymouth on the South Coast of England, is a team of highly
        skilled and specialized electronic, software and mechanical design engineers
        providing 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, sometimes less
        than
        a dozen.
 
 Accredited
        to ISO 9001-2000 and Tick-IT, Martech focuses on providing low risk, high
        integrity solutions to difficult engineering problems and applications where
        repeatability and reliability is of paramount importance.
 
 An
        example of the type of business conducted by Martech is a contract with a
        prime
        defense contractor for the design and supply of special type test equipment
        (STTE), which cannot be purchased off the shelf since it is to be used to
        test
        equipment being newly developed. Martech has designed and built numerous
        items
        of STTE to support UK sonar systems. Another 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 also 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 - $1,000,000
        range
        in addition to continuing to seek smaller contracts. During the most recent
        fiscal year approximately 19% of Martech’s revenues were generated through
        services performed for Canberra Harwell Ltd. In addition, approximately 14%
        of
        its sales were made to the Ministry of Defense or its subdivisions.
  *Martech’s
        Competition*
 
 Martech’s
        competition is from the 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
        Strategy*
  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.
        This
        business strategy has worked well, and should continue to work well in the
        foreseeable future.
 
 A
        part of
        Coda Octopus Group, Inc strategy in acquiring Martech is that it will seek
        to
        utilize Martech’s high quality design and manufacturing workforce in its
        pre-existing businesses. As a result of the implementation of this strategy,
        we
        recently moved the production and development of our printer range to
        Martech.
 
 This
        acquisition provides Coda Octopus with a revenue-generating company and an
        enhanced presence in the United Kingdom defense sector. It also provides
        Coda
        Octopus with a backbone of experienced technical resource founded on the
        requirement of producing high quality product that is resilient in adverse
        operating conditions.
 
 In
        short
        Martech can provide Coda Octopus with the skills, practices and knowledge
        to
        expand its foothold in the UK defense sector and ensure that it can substantiate
        its credibility as a defense and homeland security supplier.
 
 11
  *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 to October 31, 2006 were
        $2,969,164.
  Similarly
        to Martech, Colmek Systems Engineering 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. During
        the fiscal year ended October 31, 2007 these companies accounted
        for approximately 41% and 30% of Colmek’s sales, respectively. Colmek is a
        trusted supplier, as well as sometimes being a competitor to these big
        organizations. We trust that these long term relationships will continue
        to
        serve Colmek well.
 
 We
        acquired Colmek for three reasons. First, for access to Colmek’s customer base,
        both Government Agencies and the type of organization indicated above. We
        hope
        to realize synergies between Colmek’s customers and the customers of the
        Company. The second reason was for the intrinsic skills and knowledge that
        Colmek staff can bring to bear on the Coda Octopus business. Third, for the
        synergies with our prior acquisition, Martech Systems, in the UK, essentially,
        a
        buy and build strategy, with basic business synergies to be gained between
        the
        two companies.
 
 Thus,
        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 Martech and Colmek.
 
 **Research
        and Development**
 
 The
        scientists and engineers who worked for OmniTech AS (now operating under
        the
        name of 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 six 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 3-D 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.
 
 We
        have
        recently been investing over $3 million annually in our research and development
        activities and expect to continue this level of investment 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 to October 31, 2007, we spent
        $3,019,090 on research and development.
  12
  **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 systems 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 now located at our facility in St.
        Petersburg, Florida..
 
 **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:
 
 ·
              Coda
                  Octopus Products - eight persons distributed between the UK and
                  Florida,
                  USA
 ·
              Martech
                  Systems (Weymouth) - two full time and one part time based in Weymouth,
                  UK
 ·
              Colmek
                  Systems Engineering - two full time staff, one in California and
                  one in
                  Washington state
 ·
              Innalogic,
                  Inc. - one staff member based in New York City,
                  USA
 ·
              Port
                  Security Group - currently being developed by Group-level
                  staff
 ·
              Group
                  level – one member of staff, based in New York City,
                  USA
 
 We
        plan
        to add into the current structure at least five more staff members during
        the
        current year, and in addition, we are planning to open sales offices in the
        Middle East and Far East, within the next 18-24 months.
 
 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 3-D 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 out 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:
 
 ·
              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).·
              Price:
                  The maintenance and enhancement of profit margin through value
                  add (as
                  described above).·
              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.·
              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 have a number of external agents and representatives,
        who
        are distributed globally for Coda Octopus Products, within the UK for Martech
        and within the USA for Colmek Systems Engineering and Innalogic.
 
 13
  **Suppliers**
 
 Most
        of
        the materials and components used in our products are readily available in
        the
        market place 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 U.S. Government we may be subject to numerous
        laws and regulations relating to the award, administration and performance
        of
        U.S. Government contracts, including the False Claims Act. Non-noncompliance
        found by any one agency could result in fines, penalties, debarment, or
        suspension from receiving additional contracts with all U.S. Government
        agencies. Given our dependence on U.S. 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 so that we can reach the different
        levels of government and have employed a very experienced individual to develop
        this presence. In addition, we have engaged a number of lobbying firms to
        assist
        us with this task:
  ·
              PMA,
                  a lobbying firm based in Washington, DC, is assisting in reaching
                  congressional members to assit with government funding towards
                  the use of
                  our products in port security
                  applications;
 ·
              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;
 ·
              The
                  Johnson Group, a company based in Washington, DC, is assisting
                  in reaching
                  individual ports and other end-users, as well as helping with funding
                  for
                  these end-users from Homeland
                  Security.
 ·
              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.
 
 **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 3-D Sonar Technology by ensuring that we make
        the
        necessary technological advancement 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.
 
 In
        order
        to ensure the full and effective implementation of our Corporate Patent
        Strategy, a Patent Committee has been established, and the Board has approved
        a
        budget for fiscal year 2007-08 of $400,000 to fully support the strategy’s
        implementation.
  14
  *Patents*
 
 We
        have
        been granted two patents:
 
 ·
              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.·
              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.
 
 *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
  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 Triton Imaging
        International, Inc., a California 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 20% 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 15% of the market. We believe that our market share in
        the
        field of motion sensing equipment is only about 10% at present.
 
 In
        the
        area of grayscale thermal printers, there are two companies besides us who
        compete in this small market. EPC Labs, Mass., USA, have around 40% of the
        market, mainly in the USA; 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 3-D 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.
  15
  *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 99 employees:
 
 ·
              6
                  are employed in research and development in our Bergen
                  facility
 ·
              4
                  are employed in production, marketing and administration at our
                  Edinburgh
                  facility
 ·
              22
                  are employed in software development, marketing and administration
                  at our
                  Edinburgh office
 ·
              9
                  are employed in management and administration at our New York City
                  office
 ·
              7
                  are employed in product development, sales and support in New York
                  City
 ·
              4
                  are employed in sales and marketing at our Florida
                  office
 ·
              2
                  are employed in Government Relations at our Washington
                  office
 ·
              23
                  are employed in Martech in Weymouth, of which 20 are full time
                  employees
                  and 3 are part time (paid on an hourly
                  basis)
 ·
              22
                  are employed in Colmek in Salt Lake City, the main categories of
                  employees
                  being engineers and technician.
  Seventy-Percent
        of our employees have a background in science, technology and engineering,
        with
        a substantial part being educated to degree and PhD level. We expect to relocate
        much of our senior management staff to the US over the next 6 -12 months.
        None
        of our employees are members of any union, and we have not experienced any
        labor
        difficulties in the past.
  **ITEM
        2. DESCRIPTION OF PROPERTY**
 
 New
        York City, New York, USA. Our
        corporate offices are located at 164 West 25 th Street,
        6 th (6F)
        Floor, New York, NY 10001. We lease premises comprising 1,000 sq. ft pursuant
        to
        a renewable lease which expires on November 30, 2007. The lease provides
        for a
        monthly rental of $2,500. We are currently in negotiations with the landlord
        for
        the extension of this lease.
  New
        York City, New York, USA. Our
        wholly owned subsidiary, Innalogic, Inc, has its business premises at 164
        West
        25 th Street,
        6 th (6R)
        Floor, New York, NY 10001. It leases premises adjoining our corporate offices.
        These premises comprise 2,700 sq. ft. pursuant to a renewable lease which
        expires on November 30, 2007, at a rental of $7,250 per month. We are
        currently in negotiations with the landlord for the extension of this lease.
 
 St
        Petersburg, Florida, USA . We
        lease 3,200 sq. ft. of business premises (comprising assembly, testing
        facilities and office space) located at 100 14 th 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,
        2008 and provides for a rental of $44,940 per annum (excluding
        utilities).
 
 Washington,
        DC, USA. We lease
        office premises located at 700 13 th Street,
        N.W, Washington, D.C. 20005 (10 th Floor).
        This space comprises 186 square feet and houses our Government Relations
        operations. The lease provides for a rental of $854.37 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, US A. Our
        wholly owned subsidiary, Miller & Hilton d/b/a Colmek Systems Engineering,
        leases 6,500 sq. ft. 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 $3,795 (with an annual rental
        increase of 3%) . The lease expires in April 2012.
  16
  Edinburgh,
        Scotland, UK. Our
        wholly owned UK subsidiary, Coda Octopus Products Limited, leases business
        premises comprising 4,099 sq. ft. and located at First Floor, Anderson House,
        Breadalbane Street, Edinburgh. 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 £65,583.96 (equivalent to $131,168 based on an exchange rate
        of $2.00) 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.
 
 Edinburgh,
        Scotland, UK. Our
        wholly owned UK Subsidiary, Coda Octopus Products Limited, leases workshop
        and
        manufacturing facilities at Units 3, 8 and 10 Corunna Place, Edinburgh
        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 - equivalent to $3,300 based on
        an exchange rate of $2.00). 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, Martech Systems (Weymouth) Limited also leases business
        premises located at 14 Albany Road, Granby Industrial Estate, Weymouth, Dorset
        DT4 9TH comprising 5,000 sq. ft. This space comprises both office space and
        manufacturing and testing facilities. The lease provides for an annual rent
        of
£29,984.74 (equivalent of $59,969 based on an exchange rate of $2.00) and
        expires on September 30, 2013. The lease provides for an annual rent increase
        of
        3% of the last annual rent.
 
 Bergen,
        Norway. Our
        Norwegian wholly owned Subsidiary, Coda Octopus Omnitech AS, leases an 800
        sq.
        ft. of business premises directly on the waterway connected to Bergen harbor.
        These premises are located at Sandviksboder 77C, 5035 Bergen and house our
        research and development team. They are well located for developing and testing
        new products, and for transport links to the rest of Europe. The lease provides
        for a rental of NOK 165,295 per annum (equivalent of $27,808 based on an
        exchange rate of NOK 5.944 to $1) and expires on July 1, 2008. In light of
        the
        newly acquired lease premises, within 6 months we will terminate the lease
        on
        these premises. We have now moved to the premises stated below and are seeking
        to sub-contract these premises in accordance with our contractual
        obligations.
 
 Bergen,
        Norway. Our
        Norwegian subsidiary, Coda Octopus Omnitech AS, also recently leased 2,370
        sq.
        ft. of business premises in a recently refurbished maritime business center
        directly on the waterway connected to Bergen harbor. This will serve as our
        new
        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 (equivalent of $74,107 based on an exchange rate of NOK 5.944 to $1)
        and
        expires in May 31, 2012. We have the option to terminate this after 5 years
        without incurring any penalties.
 
 **ITEM
        3. LEGAL PROCEEDINGS**
 
 We
        are
        not a party to any material legal proceedings.
 
 **ITEM
        4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**
 
 No
        matters were submitted to a vote of our security holders in the fourth quarter
        of 2007.
  17
  **PART
        II**
 
 **ITEM
        5. MARKET FOR COMMON EQUITY AND 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
        fort 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, 2006
              
              HIGH
              
              LOWFirst
                  Quarter
              
              $
              0.65
              
              $
              0.45Second
                  Quarter
              
              $
              0.75
              
              $
              0.40Third
                  Quarter
              
              $
              1.40
              
              $
              0.65Fourth
                  Quarter
              
              $
              1.50
              
              $
              1.00
  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
              
              $
              0.45
  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 1, 2008,
        we
        had approximately 599 shareholders of record, not including persons who hold
        their shares through a nominee.
 *Recent
          Sales of Unregistered Securities*
 
 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 relevant for the period.
 
 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 (“RBS”) of 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 semi-annually in arrears. The Notes also
          stipulate
          additional interest payments of 2% per annum above the base rate quoted
          by RBS
          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 million constitutes a specific purpose loan and in the
          event
          that we fail to use the proceeds as agreed within 12 months from the closing,
          then, unless alternative investments are approved by the holders of the
          Notes,
          this $6 million must be repaid to the holders within 30 days of the end
          of the
          12 months. 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 within
          which this $1million is retained we will earn interest on this at 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.
  18
 The
          placement agent received two five-year warrants for the purchase of up
          to
          600,000 shares of common stock at an exercise price of $1.30 per share
          with
          respect to 50% of the shares and $1.70 per share with respect to the balance.
          In
          addition, they received a cash commission in the amount of
          $600,000.
 
 The
          members of the Company’s Board of Directors were required to enter into lock-up
          agreements under which they agree not to sell any of their securities in
          excess
          of the agreed amounts during the term of the Note.
 
 The
        issuance of the Notes and warrants constituted a private placement and therefore
        was exempt from registration in accordance with Regulation D of the Securities
        Act of 1933 as amended.
 
 19
  **Item
        6.** **MANAGEMENT'S
        DISCUSSION AND ANALYSIS OR PLAN OF OPERATION**
 
 **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**
 
 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.
 
 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,
        United States and Norway as well as two engineering companies located in
        the
        United States and the United Kingdom.
 The
          consolidated financial statements include the accounts of Coda Octopus
          and our
          domestic and foreign subsidiaries that are more than 50% owned. All significant
          intercompany transactions and balances have been eliminated in the consolidated
          financial statements.
 
 The
          preparation of financial statements in conformity with accounting principles
          generally accepted in the United States of America 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.
 
 **Background**
 
 We
          are
          engaged in 3-D subsea technology and are the developer and patent holder
          of
          real-time 3-D 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:
 
 ·
                marine
                    geophysical survey (commercial), which focuses around oil and
                    gas,
                    construction and oceanographic research and exploration, where
                    we market
                    to survey companies, research institutions, salvage companies.
                    This was
                    our original focus, from original founding in 1994, 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 our 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.
 ·
                underwater
                    defense/ security, where we market to 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, a company which had developed a prototype system,
                    the**Echoscope**TM,
                    a unique, patented instrument which permits 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 particularly important applications
                    in
                    the fields of port security, defense and undersea oil and gas
                    development.
  20
  In
          addition, through our two engineering services subsidiaries, Martech Systems
          (Weymouth) Ltd, based in Weymouth, England, UK, and Colmek Systems Engineering,
          based in Salt Lake City, Utah, USA , 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:
  ·
              First
                  mover advantage in 3-D 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.
 ·
              Early
                  recognition of need for 3-D real-time sonar in defense/security
                  applications.
 ·
              Expansion
                  into new geographies like North America and Western
                  Europe.
 ·
              Expansion
                  into new commercial markets like commercial marine survey with
                  innovative
                  products.
 ·
              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, 3-D 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.
 
 Approximately
        54% of our 2007 revenues of $13,853,313 were attributable to pure products
        business. On a pro-forma basis, adding the acquired business last year (Colmek)
        would have given us revenues of $14,757,876 and around 47% of our revenues
        would
        have been generated from engineering services.
 
 To
        this
        established base of business, we now plan to add other
        sub-sections:
 ·
                  we
                      are now starting to bid (sometimes in partnership, where areas
                      of focus
                      other than underwater sonar andwireless
                      video surveillance capability are demanded) for complete port
                      security and
                      other solutions. We have bid on a small number of these in
                      the last six
                      months and hope for our first successes shortly. We have not
                      yet been
                      awarded any contracts for the purchase of complete solutions.
                      However, in
                      July 2007, we received a $2.59 million order from the U.S.
                      Department of
                      Defense to build and deliver three next- generation Underwater
                      Inspection
                      System (UIS)TM for the US Coast Guard and other potential users, to enable
                      rapid underwater searches in the nation’s ports and waterways. These units
                      were accepted by the US Coast Guard on December 15, 2007. The
                      contract
                      includes additional options which, if fully funded, would require
                      us to
                      deliver an additional seven UISTM systems, or other development options
                      which they may select. Pursuant to a contract amendment on
                      February 19,
                      2008, options with a contract value of US$1,527,149 were exercised.
                      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 competitive
                      bidding
                      process. Although this is not a complete port security system,
                      it
                      represents the first step towards achieving this.·
                  we
                      are currently reviewing the possibility of launching next year,
                      in
                      partnership with others, a services business based on our product
                      set.
                      This business will be port based and will, for example, provide
                      ship hull
                      inspections by way of rental of equipment and provision of
                      a team to
                      operate the equipment for any ship entering that particular
                      port.
  21
  **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 3, "Summary of Significant Accounting Policies"
        of
        our Consolidated Financial Statements.
 
 *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.
  22
  *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 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.
  23
 
 **Results
        of Operations**
 
 ***Comparison
        of fiscal year ended October 31, 2007, compared to fiscal year ended October
        31,
        2006.***
 
 Introduction
 
 Due
        to
        the acquisition of Colmek in April 2007, the financial information presented
        for
        Coda Octopus 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. Also contributing for the first time
        in
        2007 was Innalogic, Inc., a new business formed at the beginning of November
        2006, the start of our fiscal year. 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 2007 compared to those in 2006 may not be a
        meaningful comparison.
 
 *Revenue* .
        Total
        revenue for the 2007 Period and the 2006 Period was $13,853,313 and
        $7,291,291, respectively, representing an increase of 90.0%. Compared with
        the
        2006 Period, contributions from Martech (acquired in June of 2006 and
        contributing $661,589 in that year) were $2,492,895 and from Colmek were
        $2,439,241 in the 2007 Period (against nil for 2006). The contribution from
        Innalogic was $1,166,681 in 2007 (a new business which did not contribute
        in
        2006). Subtracting the contribution from the acquisitions and the new business,
        there was a 17% increase in our original businesses. This was due to a strong
        demand for our traditional products in the geophysical and hydrographic survey
        markets.
 
 *Gross
        Margins* .
        Margins
        were weaker in the 2007 Period at 53.8% compared with 64.2% for the 2006
        Period,
        reflecting a different mix of sales in the new businesses. These new businesses
        represented 44% of our business in 2007 and are not expected to contribute
        as
        high a percentage going forward as our UIS systems business (with a higher
        margin) gains traction.
  *Research
        and Development (R&D)* .
        R&D
        spending decreased slightly to $3,019,090 in the 2007 Period from $3,130,821
        in the 2006 Period as we continue 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.
 
 *Selling,
        General and Administrative Expenses (SG&A)* .
        SG&A expenses for the 2007 Period increased to $12,385,250 from $7,453,946
        during the 2006 Period. Of the 2007 costs, $3,318,460 was attributable to
        non-cash charges relating to stock and options issued, compared to $2,005,056
        in
        the 2006 Period, an increase of $1,313,404. Excluding non-cash charges, the
        SG&A for the 2007 Period would have been $9,066,790, compared to $5,448,890
        for the 2006 Period, an increase of $3,617,900 or 66.3%. Of this increase,
        $2,508,463 was attributable to the acquisition of Martech, Colmek and the
        formation of Innalogic. This meant that core comparable expenses increased
        by
        $1,109,437 or 16.9% over the 2006 Period.
 
 Key
        areas
        of expenditure include wages and salaries, where we spent $4,715,936 or 38%
        of
        our SG&A costs (2006 Period was $3,196,429 or 43%), due to the additions of
        Martech, Colmek and Innalogic; legal and professional fees, including
        accounting, audit and investment banking services, where we spent $851,450,
        or
        6.8% of our SG&A costs compared to the 2006 Period spending of $1,272,086,
        or 17% - this reduction is due to reduced costs for investment banking, legal
        fees and accounting; travel costs decreased as a percentage to $560,472 or
        4.5%
        of SG&A in 2007 from $397,137 and 5.33% of SG&A in 2006, with the
        increased outlay due to the increased staff from acquisitions; rent for our
        various locations increased to $519,162 (4.2% of SG&A) in 2007 from $86,330
        (1.16% of SG&A) in 2006, with this increase due to the acquired businesses
        and moving offices in England, Scotland, Norway and New York, which gave
        duplicate rent costs for certain periods; and marketing increased to $471,049
        (3.8% of SG&A) in 2007 from $315,265 (4.23% of SG&A) in 2006, due to the
        growth in the business through acquisition.
 
 *Other
        Operating*  *Expenses* .
        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. This compares with $447,750 of similar fees
        incurred during 2006.
 
 *Operating
        Loss* .
        As a
        result of the foregoing, the Company incurred a loss from operations of
        $8,384,069 during the 2007 Period, compared to a loss from operations of
        $6,352,816 during the 2006 Period. Removing non-cash expenses and non-recurring
        expenses, the comparison shows a loss from operations of $4,505,492 for 2007
        against a loss of $3,900,010 for 2006, an increase of $605,482 or 15.5%.
        This
        increased loss is entirely attributable to increased SG&A expenses for the
        period.
 
 *Interest
        Expense* .
        Interest expense for the 2007 Period increased to $6,568,140 from $1,200,678
        during the 2006 Period. Of the 2007 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, against $784,873 in 2006. Removing this item,
        the
        comparison shows $462,222 for 2007 against the $418,817 recorded in 2006,
        or an
        increase of $43,405.
 
 
 24
 
 *Dividends
        and Other Stock Charges* .
        During
        the 2007 Period, dividends of $388,969 were declared in the 2007 Period on
        preferred stock (most of the preferred stock was converted into common stock
        prior to the end of the 2007 Period), compared to $384,044 in the 2006 Period.
        The 2007 amount includes 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 $12,096,014
        or $0.50 per share for the 2006 Period, based on an average of 24,030,423
        shares
        outstanding over the period.
 
 **Liquidity
        and Capital Resources**
 
 The
        Company generated a deficit in cash flow from operations of $10,088,405 in
        the
        2007 Period. This deficit is due to increases in inventory of $975,125, accounts
        receivable of $1,800,802, other receivables of $672,216 and decreases in
        payables and accrued expenses of $1,033,074.
 
 Cash
        from
        the sale of our securities was also used in our investing activities, with
        $288,803 spent on property, plant and equipment and patents in the 2007 Period.
        In addition, we acquired a business, Miller & Hilton, Inc. d/b/a Colmek
        Systems Engineering (“Colmek”) for a cash outlay of $800,000 during the period.
        During the period, $884,405 of debt was also repaid, and $1,818,100 of preferred
        stock was redeemed.
 
 With
        the
        $12,000,000 debt financing supplied in February by the institutional investor
        for, amongst other specified uses, 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 fully expect to improve our cash flow results
        in
        fiscal 2008. We expect this financing to be adequate to allow the company
        to
        carry on its business for the next 12 months.
 
 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. While we believe
          we have
          sufficient cash on hand as of February 21, 2008 to meet our working capital
          needs and requirements for the next twelve (12) months, we may seek additional
          financing, which may take the form of debt, convertible debt or equity,
          in order
          to provide the additional working capital and funds for expansion. 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 will require approval from the holders
          of the
          convertible loan note under the financing concluded by us on February 21,
          2008.
          Under the terms of this transaction we can neither sell new securities
          including
          common stock, nor incur further indebtedness above $2 million during the
          term of
          this transaction without the prior approval of the holders of the loan
          note.
          Furthermore, we will no longer be able to finance our receivables after
          February
          2009 without prior approval from the holders of the loan
          note.
  25
  Our
        plan
        to move from loss to profit is based upon intensifying our focus on port
        security. We believe that in the post 9/11 era there are significant growth
        opportunities available in the market segment in which we operate because
        of
        increased government expenditures aimed at enhancing security. As part of
        this
        plan, in July 2007, we received a $2.59 million order 27: from the U.S.
        Department of Defense to build and deliver over a period of six months three
        next-generation Coda Underwater Inspection System, or 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, which,
        if
        exercised, would require us to make technical enhancements to the existing
        system and deliver a further seven UISTM systems as further detailed on page 23.
        Pursuant to a contract amendment on February 19, 2008, options with a contract
        value of US$1,527,149 were exercised.
 
 In
        the
        short term, our plan involves, specifically:
 
 ·
              Continue
                  to sell our current range of products into a mixture of commercial
                  and
                  government markets, increasing sales of these products over the
                  course of
                  this financial year - we are expecting previous growth trends broadly
                  to
                  continue over the course of the
                  year;
 ·
              Start
                  to sell complete turnkey systems based around our leading EchoscopeTM 3-D
                  technology, to open markets in law enforcement and inspection -
                  a great
                  deal of our R&D expenditure has been directed towards the launch of
                  these systems earlier this year, and we expect to sell a small
                  number of
                  high-value systems before the end of the current financial
                  year;
 ·
              Complete
                  additional government sales in the
                  US;
 ·
              Gain
                  our first port security solution contracts through the provision
                  of our
                  unique 3-D technology and other products and services, enabling
                  us to
                  provide complete solutions;
 ·
              Integrate
                  our latest acquisition, Colmek Systems Engineering, which will
                  add to
                  profitability this year through its current order book and
                  performance;
 ·
              Continue
                  to review and refocus our cost base where necessary to achieve
                  a cost base
                  commensurate with our current level of
                  activity.
 
 Through
        these measures, we aim to move from cash negative for last year to cash
        positive. We also aim to move from heavily loss-making for the past 18 months
        to
        profitability in the final two quarters of this year and at least break-even
        for
        the year, prior to any non-cash charges made to our income statement. Based
        on
        this, we aim to be profitable over the course of the next year. Although
        we
        intend to pursue aggressively our plans as set forth in the previous paragraph,
        there can be no assurance that we will be successful in our attempt to make
        the
        company profitable.
 
 **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
        the
        beginning of this year, 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
            translatio n of the
            Company’s UK operations’ pound sterling denominated balance sheets into US
            dollars, as of
            October 31, 2007, has been affected by the weakening of the US dollar
            against
            the British pound sterling from $1.91 at October 31, 2006, to $2.08 at
            October
            31, 2007, an approximate 8% depreciation 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, 2007 and 2006 were $1.98 and $1.81, respectively.
 
 The
            translation of the Company’s Norwegian operation’s Kroner denominated balance
            sheets into US dollars, as of October 31, 2007, has not been materially
            affected
            by the currency fluctuations of the US dollar against the Kroner from
            $0.153 as
            of October 31, 2006, to $0.186 as of October 31, 2007, an approximate
            21% 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, 2007 and 2006 were $0.167 and $0.154,
            respectively.
 26
 The
            impact of these currency fluctuations is shown below:
  **Pound
                      Sterling**
                  
                  **Norwegian
                      Kroner****Actual
                      Results**
                  
                  **Constant
                      Rates**
                  
                  **Actual
                      Results**
                  
                  **Constant
                      Rates**
                  
                  **Total
                      Effect**Revenues
                  
                  $
                  11,256,485
                  
                  $
                  (10,268,005
                  )
                  $
                  1,058,181
                  
                  $
                  (978,214
                  )
                  $
                  1,068,447Costs
                  
                  
                  11,824,358
                  
                  
                  (10,786,011
                  )
                  
                  1,057,910
                  
                  
                  (977,964
                  )
                  
                  1,118,293Profits/(Losses)
                  
                  
                  (567,873
                  )
                  
                  517,994
                  
                  
                  271
                  
                  
                  (250
                  )
                  
                  (49,858
                  )Assets
                  
                  
                  11,347,451
                  
                  
                  (10,422,812
                  )
                  
                  758,499
                  
                  
                  (625,504
                  )
                  
                  1,057,634Liabilities
                  
                  
                  11,922,351
                  
                  
                  (10,950,866
                  )
                  
                  442,274
                  
                  
                  (364,726
                  )
                  
                  1,049,033Net
                      Assets/(Liabilities)
                  
                  
                  (574,900
                  )
                  
                  528,054
                  
                  
                  316,225
                  
                  
                  (260,778
                  )
                  
                  8,601
 
 This
            table shows that the effect of constant exchange rates, versus the actual
            exchange rate fluctuations, resulted in a increase in losses for the
            year of
            $49,858 and an increase in net assets of $8,601. Both of these amounts
            are
            immaterial overall in our financial results.
 
 It
            is the
            opinion of the Company that inflation has not had a material effect on
            its
            operations.
 **Financing
        Activities**
  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.
  27
  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.
  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 million constitutes
        a specific purpose loan and in the event that we fail to use the proceeds
        as
        agreed within 12 months from the closing, then, unless alternative investments
        are approved by the holders of the Notes, this $6 million must be repaid
        to the
        holders within 30 days of the end of the 12 months. 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 within
        which this $1million is retained we will earn interest on this at 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.
  **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.
  28
  **ITEM
        7. FINANCIAL STATEMENTS**
 
 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
        8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
        DISCLOSURE**
 
 None.
 
 **ITEM
        8A.** **CONTROLS
        AND PROCEDURES**
  **Evaluation
        of Disclosure Controls and Procedures**
  As
          of the
          end of the period covered by this Annual Report, we conducted an evaluation,
          under the supervision and with the participation of our chief executive
          officer
          and chief financial officer, of our disclosure controls and procedures
          (as
          defined in Rules Rules
          13a-14(c) and 15d-14(c) of the Exchange Act). Based
          on
          this evaluation, our Chief Executive Officer and Chief Financial Officer
          concluded that our disclosure controls and procedures were not effective
          in
          ensuring that information required to be disclosed by us in our periodic
          reports
          is recorded, processed, summarized and reported, within the time periods
          specified for each report and that such information is accumulated and
          communicated to our management, including our principal executive and principal
          financial officers, or persons performing similar functions, as appropriate
          to
          allow timely decisions regarding required disclosure. Our management is
          in the process of identifying deficiencies with respect to our disclosure
          controls and procedures and implementing corrective measures, which includes
          the
          establishment of new internal policies related to financial
          reporting.
  **Changes
        in Internal Controls**
  There
        have not been any significant changes in our internal controls that could
        significantly affect those controls subsequent to the date of their last
        valuation.
 
 **Limitations
        on the Effectiveness of Controls**
 
 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.
        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 a company have been detected. Our disclosure controls
        and
        procedures are designed to provide reasonable assurance of achieving its
        objectives. Our Principal Executive Officer and Principal Financial Officer
        concluded that the Company's disclosure controls and procedures are effective
        at
        that reasonable assurance level.
  **We
        May Not Be Able to Implement Section 404 of the Sarbanes-Oxley Act of 2002
        on a
        Timely Basis.**
 The
          SEC,
          as directed by Section 404 of the Sarbanes-Oxley Act, adopted rules generally
          requiring each public company to include a report of management on the
          company's
          internal controls over financial reporting in its annual report on Form
          10-KSB
          that contains an assessment by management of the effectiveness of the company's
          internal controls over financial reporting. This requirement will first
          apply to
          our annual report on Form 10-KSB for the fiscal year ending October 31,
          2008.
          Under current rules, commencing with our annual report for the fiscal year
          ending October 31, 2009 our independent registered accounting firm must
          attest
          to and report on management's assessment of the effectiveness of our internal
          controls over financial reporting.
 
 We
          have
          not yet developed a Section 404 implementation plan. We have in the past
          discovered, and may in the future discover, areas of our internal controls
          that
          need improvement. How companies should be implementing these new requirements
          including internal control reforms to comply with Section 404's requirements
          and
          how independent auditors will apply these requirements and test companies'
          internal controls, is still reasonably uncertain.
 
 We
          expect
          that we will need to hire and/or engage additional personnel and incur
          incremental costs in order to complete the work required by Section 404.
          We may
          not be able to complete a Section 404 plan on a timely basis. Additionally,
          upon
          completion of a Section 404 plan, we may not be able to conclude that our
          internal controls are effective, or in the event that we conclude that
          our
          internal controls are effective, our independent accountants may disagree
          with
          our assessment and may issue a report that is qualified. Any failure to
          implement required new or improved controls, or difficulties encountered
          in
          their implementation, could harm our operating results or cause us to fail
          to
          meet our reporting obligations.
  **ITEM
        8B. OTHER INFORMATION**
 
 None.
  29
  **PART
        III**
 
 **ITEM
        9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE
        GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
        ACT**
 
 **Directors
        and Executive Officers**
 
 The
        following persons are our executive officers and directors as of the date
        hereof:
  **Name**
                
                **Age**
                
                **Position(s)**Jason
                    Reid
                
                41
                
                President,
                    Chief Executive Officer and DirectorPaul
                    Nussbaum
                
                60
                
                Chairman
                    of the Board of DirectorsRodney
                    Peacock
                
                61
                
                DirectorJody
                    E. Frank
                
                55
                
                Chief
                    Financial OfficerBlair
                    Cunningham
                
                38
                
                Chief
                    Technology OfficerAnthony
                    Davis
                
                41
                
                President
                    US OperationsFrank
                    B. Moore
                
                72
                
                Senior
                    Vice President - Government RelationsGeoff
                    Turner
                
                54
                
                President
                    European OperationsAngus
                    Lugsdin
                
                31
                
                Senior
                    Vice President, Market DevelopmentScott
                    Debo
                
                37
                
                President
                    and CEO , Colmek Systems Engineering
 
 ***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., Innalogic, Inc., Port
        Security Group, Inc. and Martech Systems (Weymouth) Limited. 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. In the past, he also served as a director of Slimmer Clubs
        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.
  ***Rodney
        Peacock*** has
        served as a 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
  ***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 of 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.
        Mr. Cunningham is also a Director of the Company’s subsidiaries, Martech and
        Coda Octopus (UK) Holdings Limited. 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, Martech and Coda Octopus (UK)
        Holdings Limited. 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 to1994, 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. Mr. Moore is also a Director of our key subsidiary,
        Colmek.
        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, Martech and Coda Octopus (UK) Holdings
        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*** *,* who 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 hi BSC in Marine Geography from University of Wales in
          1998.
  31
  ***Scott***  ***Debo*** who is
        employed by our key subsidiary Colmek Systems Engineering (“Colmek”), has been
        President and CEO of Colmek since June 2001. With a background in finance,
        marketing and management, Mr. DeBo has improved and created new opportunities
        for Colmek through the development of a focussed marketing effort combined
        with
        increased focus on reducing cost per job taken on by Colmek, creating an
        activity based costing system and guiding the Company through various quality
        improvements including ISO-9001; 2000 compliancy and Raytheon Six Sigma
        training. Prior to working for Colmek, Mr. Debo was Director of Government
        Relations for Arcanvs Inc. from March 2000 until March 2001, and he was Project
        Manager for Evergreen Development from January 1999 to March 2000. Mr. DeBo
        holds a Masters Degree in Business Administration in both private and public
        management from Williamette University as well as a Bachelor of Science Degree
        from Oregon State University. Prior to receiving his MBA, Mr. DeBo was Director
        of Operations for an adventure travel provider, and worked as a foreign market
        entry consultant for several firms. Mr. DeBo also works a NCAA Division 1
        men’s
        basketball official.
 
 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.
 
 ***Removal
        of Directors***
 
 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 :
 
 ·
              Being
                  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.·
              oversee
                  management’s preparation of the Company’s financial statements and
                  management’s conduct regarding the accounting and financial reporting
                  processes;·
              oversee
                  management’s maintenance of internal controls and procedures for financial
                  reporting;·
              oversee
                  the Company’s compliance with applicable legal and regulatory
                  requirements, including without limitation, those requirements
                  relating to
                  financial controls and reporting;·
              oversee
                  the independent auditor’s qualifications and
                  independence;·
              oversee
                  the performance of the independent auditors, including the annual
                  independent audit of the Company’s financial
                  statements;·
              prepare
                  the report required by the rules of the SEC to be included in the
                  Company’s proxy statement; and·
              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.
  32
  The
        members of the Audit Committee are Paul Nussbaum, who serves as Chairman
        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. Mr. Nussbaum 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.
 
 ***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 fiscal 2006 Employees, Directors,
            Officers and Consultants Stock Option and Stock Award Plan (the “2006
            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.
  33
  **ITEM
        10. EXECUTIVE COMPENSATION**
 The
          Summary Compensation Table shows certain compensation information for services
          rendered for the fiscal years ended October 31, 2007 and 2006 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 2007 and 2006
          of
          $1.9840 and $1.8097 to GBP 1 Pound, respectively.
 
 **Name
                    and Principal Position**
                
                
                **Year**
                
                
                **Salary**
                
                
                **Bonus**
                
                
                **Restricted
                    Stock**
                  **Awards**
                
                
                
                **Option**
                  **Awards**
                
                
                
                **All
                    Other**
                  **Compensation**
                
                
                **Total****($)**
                
                
                **($)**
                
                
                **($)**
                
                
                
                **($)
                    (2)**
                
                
                
                **($)
                    (3)**
                
                
                **($)**Jason
                    Reid
                  *President
                    & Chief Executive Officer*
                
                
                2007
                  2006
                
                
                350,000
                  250,000
                
                
                -0-
                  -0-
                
                
                100,000
                  100,000
                (5)
                  (6)
                
                
                -0-
                  -0-
                
                
                
                50,385
                  12,667
                
                
                400,385
                  362,667Blair
                    Cunningham (1)
                  *Chief
                    Technology Officer*
                
                
                2007
                  2006
                
                
                175,000
                  144,072
                
                
                -0-
                  -0-
                
                
                50,000
                  43,750
                (7)
                  (8)
                
                
                -0-
                  -0-
                
                
                
                18,866
                  20,249
                
                
                243,866
                  208,071Anthony
                    Davis (1)
                  *President
                    US Operations*
                
                
                2007
                  2006
                
                
                175,000
                  163,796
                
                
                -0-
                  -0-
                
                
                50,000
                  43,750
                (7)
                  (8)
                
                
                -0-
                  -0-
                
                
                
                11,962
                  10,858
                
                
                236,962
                  218,404Jody
                    Frank
                  *Chief
                    Financial Officer*
                
                
                2007
                  2006
                
                
                104,808
                  -0-
                (4)
                
                -0-
                  -0-
                
                
                12,908
                  -0-
                (9)
                
                
                281,243
                  -0-
                (10)
                
                
                1,750
                  -0-
                
                
                400,709
                  -0-
 
 (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, 2006.
 (3)
          All
          other compensation consisted of car allowances, re-location expenses, disability
          payments, health insurance, pension benefits and/or pay for vacation not
          taken.
 (4)
          Jody
          Frank is
          getting paid at the annual rate of $350,000.
          However, he started his employment with the company in July 2007, hence
          the
          values shown are pro-rated for this period.
 (5)
          Comprising 80,317 shares valued at $100,000.
 (6)
          Comprising 140,000 shares valued at $100,000.
 (7)
          Comprising 40,159 shares valued at $50,000.
 (8)
          Comprising 50,000 shares values at $43,750.
 (9)
          Comprising 12,908 shares valued at $14,400.
 (10)
          Comprising 237,500 options issued at $1.30, and vesting 34% on immediately,
          33%
          in 2008 and 33% in 2009.
 34
 
 (3)
              Comprising
                  400,000 options valued based on the date of issue using Black Scholes
                  method and booked in our accounts as an expense.(4)
              Comprising
                  200,000 options valued based on the date of issue using Black Scholes
                  method and booked in our accounts as an expense.(5)
              Comprising
                  150,000 options valued based on the date of issue using Black Scholes
                  method and booked in our accounts as an expense.(6)
              Comprising
                  150,000 options valued based on date of issue using Black Scholes
                  method
                  and booked in our accounts as an expense.(7)
              Comprising
                  150,000 options valued based on date of issue using Black Scholes
                  method
                  and booked in our accounts as an expense.(8)
                (8(a)
              Comprising
                  140,000 shares valued at $100,000 and(9)
              Comprising
                  50,000 shares, half of which is valued at $0.50 and half at
                  $1.25(10)
              Comprising
                  50,000 shares, half of which is valued at $0.50 and half at
                  $1.25(11)
              Comprising
                  25,000 shares valued at $1.25
  **OUTSTANDING
        EQUITY AWARDS AT FISCAL YEAR-END 2007***
 **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
                *President
                  and Chief Executive Officer*
              
              
              400,000
              
              
              
              
              
              $
              1.00
              
              
              May
                  2010Blair
                  Cunningham
                *Chief
                  Technology Officer*
              
              
              200,000
              
              
              
              
              
              $
              1.00
              
              
              May
                  2010Anthony
                  Davis
                *President
                  US Operations*
              
              
              150,000
              
              
              
              
              
              $
              1.00
              
              
              May
                  2010Geoff
                  Turner
                *President
                  European Operations*
              
              
              150,000
              
              
              
              
              
              $
              1.00
              
              
              November 2010Frank
                    Moore
                  *Senior**VP**Government**Relations*
              
              
              100,500
              
              
              49,500
              **
              
              $
              1.00
              
              
              May
                    2011Angus
                    Lugsdin
                  *Senior
                    VP Market Development*
              
              
              100,000
              
              
              
              
              
              $
              1.00
              
              
              May
                    2010
 
 *
        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.
  **
        Options vest May 1, 2008.
 
 35
  **DIRECTOR
          COMPENSATION**  *****
 **(During
          Last Completed Fiscal Year)**
 Name
                      (a)
                    
                    Fees
                        Earned or Paid
                      in
                        Cash
                      ($)
                      (b)
                    
                    
                    
                    Stock
                        Awards ($)
                      (c)
                    
                    
                    
                    Option
                        Awards ($)
                      (d)
                        (4)
                    
                    Total
                      ($)
                      (j)Paul
                        Nussbaum
                    
                    $
                    30,000
                    
                    
                    (2)
                    
                    $
                    30,000
                    
                    
                    (5)
                    
                    $
                    109,573
                    (4a)
                    $
                    169,573Rodney
                        Peacock
                    
                    $
                    20,000
                    
                    
                    (3)
                    
                    $
                    20,000
                    
                    
                    (6)
                    
                    $
                    73,049
                    (4b)
                    $
                    113,049
 *
          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 $45,000 and $3,750 per
                    board
                    meeting attended. Half of these amounts is payable in the Company’s
                    Stock(3)
                Consists
                    of an annual retainer in the amount of $25,000 and $3,750 per
                    board
                    meeting attended. Half of these amounts is payable in the Company’s
                    Stock.(4a)
                Comprising
                    75,000 options valued based on date of issue using Black Scholes
                    method
                    and booked into our accounts as an expense.(4b)
                Comprising
                    50,000 options valued based on date of issue using Black Scholes
                    method
                    and booked into our accounts as an expense.(5)
                Consist
                    of 24,095 shares.(6)
                Consist
                    of 15,532 shares.
 *Compensation
        of Directors*
 
 Pursuant
        to Agreements dated January 26, 2005 with our non-employee directors, Paul
        Nussbaum and Rodney Peacock, each receives 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 are reimbursed for expenses incurred in connection
        with attending board and committee meetings. Our board chairman receives
        an
        annual retainer of $40,000 and Mr. Peacock receives 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
        will
        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 current annual
        retainer $45,000 and similarly Mr. Peacock was awarded an increase on his
        annual
        retainer of $5,000 making his current annual retainer of $25,000. Both Mr.
        Nussbaum and Mr. Peacock payments made under the retainers are half cash
        and
        half common stock.
  For
        the
        fiscal year 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. Half of this amount is payable in the Company’s stock.
  36
 
 **Employment
        Agreements**
 
 *Jason
        Reid*
 
 On
        April
        1, 2005, the Company entered into an Employment Agreement with Jason Reid.
        The
        Agreement commenced on April 1, 2005 and 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, we are paying Mr. Reid 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
        1
        November 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 to, at the Company’s cost, to the benefit
        of a disability insurance policy or plan during his employment.
 
 For
        the
        current fiscal year, the Compensation Committee decided that whilst 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. 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 commenced on July 1, 2005 and 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, we are paying Mr. Davis 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 1 November 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 New York 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 to, at the Company’s cost, to the benefit of a disability insurance
        policy or plan during his employment.
  37
 
 *Blair
        Cunningham*
 
 On
        July
        1, 2005, the Company entered into an Employment Agreement with Blair Cunningham.
        The Agreement commenced on July 1, 2005 and 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, we are paying Mr. Cunningham 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 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 1 November 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 New York 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 to, at the Company’s cost, to the
        benefit of a disability insurance policy or plan during his
        employment.
  *Frank
        B. Moore*
 
 On
        May 1,
        2006, the Company entered into an Employment Agreement with Frank B. Moore.
        The
        Agreement commenced on May 1, 2006 and has an indefinite term until terminated
        pursuant to said Agreement. Mr. Moore agreed to serve as Senor Vice-President,
        Government Relations. Pursuant to said Agreement, we are paying Mr. Moore
        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 1 November 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 to, at the Company’s cost, to the benefit of a disability insurance
        policy or plan during his employment.
  *Angus
        Lugsdin*
 
 On
        July 1
        2005, the Company entered into an Employment Agreement with Mr. Angus Lugdin.
        The Agreement commenced on July 1, 2005 and 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. Lugdin has been promoted to Senior Vice President, Market
        Development and the said employment agreement is deemed amended from 1 November
        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 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.
  38
 
 *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.
 
 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
        has
        granted him five year options to purchase 150,000 shares of common stock
        with
        34% having invested on November 1, 2005 and with 33% vesting on each 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 Remuneration 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 and with
        effect
        from 1 November 2006 we are paying Taktos Limited $178,000 for his
        services.
 
 *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. Mr. Frank agreed to serve as Chief Financial Officer. 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.
  *Scott
        DeBo*
 
 On
        April
        6, 2007, our key subsidiary, Colmek Systems Engineering, entered into an
        Employment Agreement with Mr. Scott DeBo. The Agreement commenced on April
        6,
        2007 and has an indefinite term until terminated pursuant to said Agreement.
        Mr.
        DeBo agreed to serve as President and Chief Executive Officer of Colmek.
        Pursuant to said Agreement, we are paying Mr. DeBo a base annual salary of
        approximately $135,000 which is subject to increase at the discretion of
        the
        Colmek Compensation Committee. He is also entitled to certain incentive bonus
        for each fiscal year based upon certain performance related measures such
        as
        revenues and net profits achieved in the fiscal year by Colmek and ascertained
        from Colmek audited financials for the fiscal year in question.
  39
 
 Mr.
        DeBo
        is entitled to receive $40,000 shares of the Company’s common stock annually for
        services performed and a company car. He 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 indemnification to the maximum extent permitted by law against
        all
        costs and expenses incurred by him, including cost of his legal counsel.
        Mr.
        DeBo is also entitled to participate in all Colmek’s 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.
 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.
  *Termination
        provisions of the Employment Agreements of Messrs. Reid, Davis, Moore,
        Cunningham and DeBo*
 
 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”):
  ·
              the
                  unpaid portion of his or her base salary;
 ·
              reimbursement
                  for out-of-pocket expenses;
 ·
              continued
                  insurance benefits to the extent required by
                  law;
 ·
              payment
                  of any vested but unpaid rights as required by any bonus or incentive
                  pay
                  or stock plan or any other employee benefit plan;
                  and
 ·
              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:
 
 ·
              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;
 ·
              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;
                  and
 ·
              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.
  40
  *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.
  *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 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.
  41
  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.
 
 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 ten 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.
 
 As
        of
        October 31, 2007, we had granted non-qualified options to purchase an aggregate
        of 4,535,900 shares of its common stock at exercise prices ranging from $1.00
        per share to $1.80 per share, of which 3,484,100 have vested.
  42
 *New
            Stock Option Plan*
 
 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 Plan by the Company. In particular, until
            the
            redemption of the notes, the Company may only adopt new stock option
            plans on
            substantially similar to terms to its existing stock option plan 2006
            and it may
            not issue stock options at a price which is less than
            $1.05.
  **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, 2007, all reporting persons timely filed all such
          reports
 
 **ITEM
        11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
        MANAGEMENT** **AND RELATED STOCKHOLDER MATTERS**
 
 The
        following table sets forth information as of February 15, 2008 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 48,279,056 shares issued and
        outstanding as of February 15, 2008.
 
 Unless
        otherwise indicated, the address of each beneficial owner is in care of the
        Company, 164 West 25 th Street,
        6 th 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
                    Stock**Jason
                    Reid (3)
                
                
                23,726,643
                
                
                46.
                    1
                %Paul
                    Nussbaum (4)
                
                
                644,095
                
                
                1.3
                %Rodney
                    Peacock (5)
                
                
                517,064
                
                
                *Blair
                    Cunningham (6)
                
                
                490,159
                
                
                *Anthony
                    Davis (7)
                
                
                390,159
                
                
                *Frank
                    B. Moore (8)
                
                
                215,159
                
                
                *Geoff
                    Turner (9)
                
                
                190,159
                
                
                *Scott
                    Debo (10)
                
                
                157,492
                
                
                *Jody
                    Frank (11)
                
                
                187,908
                
                
                *Angus
                      Lugsdin (13)
                
                
                237,587Vision
                    Opportunity Master Fund Limited (12 )
                  317
                    Madison Avenue, Suite 1220
                  New
                    York, NY 10017
                
                
                5,157,472
                
                
                9.9
                %***All
                    Directors and Executive Officers as a Group (eight
                    persons):***
                
                
                26,756,425
                
                
                50.
                    3
                %
  *
 
          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
          15, 2008 a nd
          (ii)
          shares of restricted stock, including restricted stock awards issuable
          within 60
          days of February 15, 2008.
 (3)  Includes
          the following: (i) 400,000 shares issuable upon exercise of options, (ii)
          19,523,251 shares and 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, and (iii) 280,720 shares and 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; includes 511,266 shares
          held by Mr. Jason Reid, and (iv) includes 172,540 held by Mr. Reid’s wife and
          (v) includes 23,364 shares earned during the quarter ended October 31,
          2007 that
          have not been issued to date.
 (4)  Includes
          275,000 shares
          issuable upon exercise of options and 60,000 shares issuable upon the exercise
          of two five year warrants and 7,009 shares earned during the quarter ended
          October 31, 2007 that have not been issued to date .
 (5)  Includes
          250,000 shares issuable upon exercise of options and
          4,673 shares earned during the quarter ended October 31, 2007 that have
          not been
          issued to date
 (6)  Includes
          200,000 shares issuable upon exercise of options and 50,000 shares held
          by
          Softworks Limited of which Mr. Cunningham is a director and 11,682 shares
          earned
          during the quarter ended October 31, 2007 that have not been issued to
          date.
 (7)  Includes
          150,000 shares issuable upon exercise of options and 11,682 shares earned
          during
          the quarter ended October 31, 2007 that have not been issued to
          date.
 (8)  Includes
          150,000 shares issuable upon exercise of options and 11,682 shares earned
          during
          the quarter ended October 31, 2007 that have not been issued to
          date.
 (9)  Includes
          150,000 shares issuable upon exercise of options and 11,682 shares earned
          during
          the quarter ended October 31, 2007 that have not been issued to
          date.
 (10)  Includes
          80,000 shares issuable upon exercise of options and 9,346 shares earned
          during
          the quarter ended October 31, 2007 that have not been issued to
          date.
 (11)Consist
          of 175,000 shares issuable upon exercise of options, 1,226 shares issued
          in
          quarter ended July 31,2007 and 11,682 shares earned during the quarter
          ended
          October 31, 2007 that have not been issued to date. Does not include 350,000
          shares issuable upon options, 175,000 of which will vest in March 2008,
          and the
          balance of which will vest in March 2009.
   43
   (12)  Includes
          746,572 shares issuable upon exercise of warrants. Does not include 8,453,428
          additional shares issuable upon exercise of warrants that it is not permitted
          to
          exercise under the terms of the warrants. The warrants contain a provision
          that
          limits exercise of the warrants to the extent that its 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.
 (13)
          Includes 100,000 shares issuable upon exercise of options and 11,682 shares
          earned during the quarter ended October 31, 2007 that have not been issued
          to
          date.
 
 **ITEM
          12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
          INDEPENDENCE**
 
 Since
        August 2004, our principal 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.
  44
 
 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.
 
 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 remain outstanding and in this regard we are 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
        is
        due to be paid on June 26, 2007 (first anniversary of closing). This amount
        is
        guaranteed by Coda Octopus Group, Inc. The Dollar amount disclosed is subject
        to
        exchange rate fluctuations. 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 is due to be
        paid
        on April 6, 2008 (first anniversary of closing). We also are also under an
        obligation to issue up to another 42,910 shares as part of the purchase price.
        This is also subject to the pledge. This amount is guaranteed by the Company
        and
        is secured by a pledge in favor of the Colmek sellers, and is 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 United States
        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). .
 45
 *Other
        Transactions with our President and Chief Executive Officer and his
        Affiliates.*
  Since
          the
          beginning of our last fiscal year we have been party to the following additional
          transactions involving Jason Reid, our President and Chief Executive Officer,
          and his affiliates:
 
 ·
                At
                    October 31, 2005 we owed $70,584 to Weight Management Group Limited,
                    a UK
                    Company of which Mr. Reid is Director and Principal Stockholder,
                    for
                    certain services provided, including insurance, healthcare, recharged
                    expenses, vehicle contract hire and administrative services.
                    This balance
                    increased by approximately $5,566 as a result of fluctuating
                    exchange
                    rates, to $76,150 by October 31, 2006.
                  
                  Since
                    October 31, 2006, the amount outstanding to Weight Management
                    Group
                    Limited has been transferred to Weight Management (UK) Ltd (see
                    below),
                    leaving no balance outstanding with this company at October 31,
                    2007.
 
 ·
                As
                    of October 31, 2005, we owed an amount of $351,302 to Softworks
                    Limited,
                    a Scottish company of which Mr. Reid is a Director and Principal
                    Stockholder and of which Blair Cunningham, one of our executive
                    officers,
                    is a Director.   During the year ended October 31, 2005,
                    Softworks Limited provided to us consultancy and programming
                    services
                    valued at $218,488, including services provided by Mr. Blair
                    Cunningham
                    and associated expenses for these services. Between November
                    2005 and July
                    2006, we provided Softworks Limited with technical support services
                    valued at $85,056.  Softworks Limited also loaned us a cash sum
                    of $19,667 over the course of that year. We also received cash
                    totaling $69,108 in connection with receivables assigned to us by
                    Softworks Limited. A total of $520,289 was repaid to Softworks
                    Limited on our behalf by Dr R M Reid and Graham Reid, both family
                    members of Jason Reid, in consideration for which we issued to
                    these
                    individuals 4,029.70 shares of Series A Preferred Stock. Of the
                    remaining outstanding amount, $51,121 was converted into 500
                    shares of
                    Series A Preferred Stock with an estimated fair value of $20,000,
                    which
                    has since been converted into 50,000 shares of our common stock.  In
                    consideration for this early conversion, we also issued warrants
                    to
                    purchase 50,000 shares of common stock at a price ranging from
                    $1.30 and
                    $1.70. These warrants were valued at approximately $54,455. Allowing
                    for a
                    currency translation gain of $783, this left a balance due to
                    Softworks of
                    $1,316, which we repaid in cash on July 31, 2007. There is no
                    balance
                    outstanding between the two companies at October 31,
                    2007.
 
 ·
                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:
  ·
                  A
                        dividend of $30,622 due to Fairwater for an earlier Series
                        A preferred
                        stock investment (since converted into shares of our common
                        stock) was
                        added to the amount owed by us in April 2006, which was paid
                        in June
                        2006;·
                  An
                        additional $10,491 in cash was loaned to us by Fairwater
                        Technology Group
                        in April 2006; and·
                  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.·
                  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.
 46
  ·
                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:
  ·
                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, we supplied to Weight Management software
                    development and support services totaling $42,418.·
                We
                    subsequently repaid $98,940 in cash, leaving $54,236 outstanding
                    and due
                    to Weight Management at October 31, 2006.·
                This
                    amount has subsequently been further repaid through the provision
                    of
                    services by us to Weight Management to the value of $51,646,
                    with a
                    balance of $76,150 also transferred from Weight Management Group
                    (see
                    above). As at October 31, 2007 we are indebted to Weight
                    Management in an amount of $78,740.·
                Agreement
                      was made by the Company in September 2007 that an amount of
                      $60,000 would
                      be repaid to this company in January
                      2008.
  ·
                At
                    October 31, 2005, owed $6,554 to Green Meadows Food Limited,
                    a United
                    Kingdom Company, of which Mr. Reid is a Director, in connection
                    with the
                    sub-lease of a photocopier to us. Pursuant to this transaction
                    a further
                    $3,331 was invoiced to us during the year, and the whole amount
                    outstanding was settled in cash in April 2006, leaving no balance
                    outstanding at October 31, 2007.·
                At
                    October 31, 2005, we owed $170,297 to Mr. Reid and Mr. Ashley
                    Reid (the
                    latter being a family member of Mr. Reid) pursuant to a loan
                    transaction.
                    This amount was repaid by the Company between January and April
                    2007,
                    leaving no balance outstanding at October 31, 2007.·
                At
                    October 31, 2006, Mr. Reid owed a balance of $104,720 to the
                    Company. This
                    amount increased by $965 in the past twelve months 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 is equivalent to the
                    amount owed
                    to Mr. Reid’s company, Fairwater Technology Group (see
                    above).
 
 All
          of
          the foregoing transactions were approved by our Board of Directors. Mr.
          Reid
          abstained from deliberations and voting on these transactions.
  47
 ITEM
        13.
        EXHIBITS
 
 **Exhibit Number**
              
              **Description**2.1
              
              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*3.2
              
              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
                  Codaoctopus
  10.12
              
              Amendment
                  to Securities Purchase Agreements dated March 21, 2007 between
                  Vision
                  Opportunity Master Fund Ltd. and Codaoctopus*10.13
              
              Securities
                  Repurchase Agreement dated April 10, 2007 between Codaoctopus 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*
  48
 ________________
 *****Incorporated by reference to the Company’s Registration Statement on Form
                    SB-2 (SEC File No.143144)10.16
                
                Subscription
                    Agreement dated February 21, 2008, between the Company and The
                    Royal Bank
                    of Scotland10.17
                
                Form
                    of Loan Note Instrument dated February 21, 200810.18
                
                Form
                    of Loan Note Certificate10.19
                
                Security
                    Agreement dated February 21, 200810.20
                
                Floating
                    Charge executed by Coda Octopus R&D Limited dated February 21,
                    200810.21
                
                Floating
                    Charge executed by Coda Octopus Products Limited dated February 21,
                    200810.22
                
                Form
                    of Guarantee10.23
                
                Intercreditor
                    Deed dated February 20, 2008 between the Company, The Royal Bank
                    of
                    Scotland and Faunus Group International10.24
                
                Debenture
                    issued by Martech Systems (Weymouth)
                    Limited31.1
                
                Chief
                  Executive
                  Officer Certification31.2
                
                Chief Financial
                  Officer Certification32
                
                Certification
                  Pursuant
                  to 18 U.S.C. Section
                  1350
  **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
          2007
          and 2006 were $268,992 and $92,314, 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 2007 and 2006 were $ 134,562 and $ 0,
          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 2007 and 2006 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, 2007, were approved by the Company's audit
          committee.
 
 49
  **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:
              February
                  26, 2008
              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-KSB, 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
              
              February
                  26, 2008(Principal
                  Executive Officer)*/s/*
              *Jody
                  Frank*
              
              Chief
                  Financial Officer
              
              February
                  26, 2008(Principal
                  Financial and Accounting Officer)*/s/*
              *Paul
                  Nussbaum*
              
              Chairman
              
              February
                  26, 2008*/s/*
              *Rodney
                  Peacock*
              
              Director
              
              February
                  26, 2008
  50


CODA
            OCTOPUS GROUP, INC.
 
 INDEX
            TO
            FINANCIAL STATEMENTS
  PAGEREPORT
                    OF
                    INDEPENDENT REGISTERED CERTIFIED
                  
                  F-1PUBLIC
                      ACCOUNTING FIRM.CONSOLIDATED
                      BALANCE SHEETSOCTOBER
                      31, 2007 and 2006
                  
                  
                  F-2CONSOLIDATED
                      STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSSFOR
                      THE YEARS ENDED OCTOBER 31, 2007 and 2006
                  
                  
                  F-3CONSOLIDATED
                      STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITYFOR
                      THE TWO YEARS ENDED OCTOBER 31, 2007
                  
                  
                  F-4CONDENSED
                      CONSOLIDATED STATEMENT OF CASH FLOWSFOR
                      YEARS ENDED OCTOBER 31, 2007 and 2006
                  
                  
                  F-5NOTES
                      TO CONSOLIDATED FINANCIAL STATEMENTS
                  
                  
                  F-6
                      - F-21
 51
  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 it's wholly owned subsidiaries (the “Company”), as of October 31, 2007 and
          2006, and the related consolidated statements of stockholder's equity,
          operations and comprehensive loss and cash flows for each of the two years
          in
          the period ended October 31, 2007. 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). 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 1 to the consolidated financial statements, the Company
          adopted the provisions of Statement of Financial Accounting Standards No.
          123(R), “Share-Based Payments”, effective January 1, 2006.
  In
          our
          opinion, the financial statements referred to above present fairly, in
          all
          material respects, the financial position of Coda Octopus Group Inc. and
          it's
          wholly owned subsidiaries as of October 31, 2007 and 2006, and the results
          of
          its operations and its cash flows for each of the two years in the period
          ended
          October 31, 2007 in conformity with accounting principles generally accepted
          in
          the United States of America.
 
 /S/RBSM
                    LLPNew
                    York, New York
                RBSM
                    LLPJanuary 16,
                    2008 except
                    for the fourth paragraph of Note 15,
                    as
                      to which the date is February 26, 2008
 
 F-1
  CODA
        OCTOPUS GROUP, INC.
 CONSOLIDATED
        BALANCE SHEETS
 OCTOBER
        31, 2007 and 2006
 ASSETS
                    
                    2007
                    
                    2006Current
                        assets:Cash
                        and cash equivalents
                    
                    $
                    916,257
                    
                    $
                    1,377,972Short-Term
                        Investments, Note 3
                    
                    
                    935,000
                    
                    
                    -Accounts
                        receivable, net of allowance for doubtful accounts
                    
                    
                    2,720,151
                    
                    
                    1,120,968Inventory
                    
                    
                    2,926,517
                    
                    
                    1,951,392Tax
                        credit receivable
                    
                    
                    -
                    
                    
                    234,593Due
                        from MSGI Security Solutions, Inc.
                    
                    
                    -
                    
                    
                    533,147Due
                        from related parties, Note 12
                    
                    
                    105,685
                    
                    
                    104,720Unbilled
                        receivables, Note 2
                    
                    
                    380,017
                    
                    
                    -Other
                        current assets, Note 4
                    
                    
                    691,560
                    
                    
                    103,296Prepaid
                        expenses
                    
                    
                    476,283
                    
                    
                    159,969Total
                        current assets
                    
                    
                    9,151,470
                    
                    
                    5,586,057Property
                        and equipment, net, Note 5
                    
                    
                    422,738
                    
                    
                    155,730Rental
                        equipment, net, Note 5
                    
                    
                    -
                    
                    
                    120,851Goodwill
                        and other intangible assets, net, Note 6
                    
                    
                    4,007,253
                    
                    
                    1,071,700Total
                        assets
                    
                    $
                    13,581,461
                    
                    $
                    6,934,338LIABILITIES
                        AND STOCKHOLDERS' EQUITYCurrent
                        liabilities:Accounts
                        payable, trade
                    
                    $
                    1,618,250
                    
                    $
                    1,997,817Accrued
                        expenses and other current liabilities
                    
                    
                    1,937,569
                    
                    
                    2,219,568Deferred
                        revenues, Note 2
                    
                    
                    593,325
                    
                    
                    323,350Deferred
                        payment related to acquisitions, Note 13
                    
                    
                    763,936
                    
                    
                    381,680Accrued
                        dividends on Series A & B Preferred Stock
                    
                    
                    86,766
                    
                    
                    304,394Due
                        to related parties, Note 12
                    
                    
                    184,425
                    
                    
                    302,877Loans
                        and notes payable, short term, Note 11
                    
                    
                    56,382
                    
                    
                    1,119,496Total
                        current liabilities
                    
                    
                    5,240,653
                    
                    
                    6,649,182Loans
                        and notes payable, long term, Note 11
                    
                    
                    265,139
                    
                    
                    -Total
                        liabilities
                    
                    
                    5,505,792
                    
                    
                    6,649,182Stockholders'
                        equity:Preferred
                        stock, $.001 par value; 5,000,000 shares authorized,6,407
                        and 23,641 shares Series A issued and outstanding, as ofOctober
                        31, 2007 and 2006 respectively
                    
                    
                    6
                    
                    
                    24Nil
                        and 41,000 shares Series B issued and outstanding as ofOctober
                        31, 2007 and 2006 respectively
                    
                    
                    -
                    
                    
                    41Common
                        stock, $.001 par value; 100,000,000 sharesauthorized,
                        48,245,768 and 24,301,980 shares issued and outstandingas
                        of October 31, 2007 and 2006 respectively
                    
                    
                    48,246
                    
                    
                    24,302Common
                        Stock subscribed
                    
                    
                    80,000
                    
                    
                    153,750Additional
                        paid-in capital
                    
                    
                    49,785,244
                    
                    
                    25,858,307Accumulated
                        other comprehensive loss
                    
                    
                    (238,097
                    )
                    
                    (292,821
                    )Accumulated
                        deficit
                    
                    
                    (41,599,730
                    )
                    
                    (25,458,447
                    )Total
                        stockholders' equity
                    
                    
                    8,075,669
                    
                    
                    285,156Total
                        liabilities and stockholders' equity
                    
                    $
                    13,581,461
                    
                    $
                    6,934,338
  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, 2007 and 2006
  2007
                
                2006Net
                    revenue
                
                $
                13,853,313
                
                $
                7,291,291Cost
                    of revenue
                
                
                6,398,042
                
                
                2,611,590Gross
                    profit
                
                
                7,455,271
                
                
                4,679,701Research
                    and development
                
                
                3,019,090
                
                
                3,130,821Selling,
                    general and administrative expenses
                
                
                12,385,250
                
                
                7,453,946Other
                    operating expenses
                
                
                435,000
                
                
                447,750Operating
                    loss
                
                
                (8,384,069
                )
                
                (6,352,816
                )Other
                    expenseOther
                    income
                
                
                87,143
                
                
                3,012Interest
                    expense
                
                
                (6,655,283
                )
                
                (1,203,690
                )Total
                    other expense
                
                
                (6,568,140
                )
                
                (1,200,678
                )Loss
                    before income taxes
                
                
                (14,952,209
                )
                
                (7,553,494
                )Provision
                    for income taxes
                
                
                106
                
                
                5,676Net
                    loss
                
                
                (14,952,315
                )
                
                (7,559,170
                )Preferred
                    Stock Dividends:Series A
                
                
                (281,289
                )
                
                (309,914
                )Series B
                
                
                (107,680
                )
                
                (74,130
                )Beneficial Conversion Feature
                
                
                (800,000
                )
                
                (4,152,800
                )Net
                    Loss Applicable to Common Shares
                
                $
                (16,141,284
                )
                $
                (12,096,014
                )Loss
                    per share, basic and diluted
                
                
                (0.42
                )
                
                (0.50
                )Weighted
                    average shares outstanding
                
                
                38,476,352
                
                
                24,030,423Comprehensive
                    loss:Net
                    loss
                
                $
                (14,952,315
                )
                $
                (7,559,170
                )Foreign
                    currency translation adjustment
                
                
                (30,276
                )
                
                (282,704
                )Unrealized
                    Gain on Investment
                
                
                85,000
                
                
                -Comprehensive
                    loss
                
                $
                (14,897,591
                )
                $
                (7,841,874
                )
  The
        accompanying footnotes are an integral part of these consolidated financial
        statements.
 F-3
  CODA
        OCTOPUS GROUP, INC.
 CONSOLIDATED
          STATEMENTS OF CHANGES IN STOCKHOLDERS'
          EQUITY
 FOR
          THE TWO YEARS ENDED OCTOBER 31, 2007 and
          2006
  Preferred
                      Stock Series A
                  
                  
                  Preferred
                      Stock Series B
                  
                  
                  Common
                      StockShares
                  
                  
                  Amount
                  
                  
                  Shares
                  
                  
                  Amount
                  
                  
                  Shares
                  
                  
                  Amount
                  
                  
                  Stock
                      Subscribed
                  
                  
                  Additional
                      Paid-in Capital
                  
                  
                  Accumulated
                      Other Comprehensive loss
                  
                  
                  Accumulated
                      Deficit
                  
                  
                  TotalBalance,
                      October 31, 2005
                  
                  
                  15,000
                  
                  $
                  15
                  
                  
                  -
                  
                  $
                  -
                  
                  
                  23,667,656
                  
                  $
                  23,668
                  
                  $
                  -
                  
                  $
                  13,837,534
                  
                  $
                  (10,117
                  )
                  $
                  (13,362,433
                  )
                  $
                  488,667Sale
                      of preferred stock
                  
                  
                  2,947
                  
                  
                  3
                  
                  
                  41,000
                  
                  
                  41
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  4,564,056
                  
                  
                  
                  
                  
                  
                  
                  
                  4,564,100Preferred
                      stock issued for debt
                  
                  
                  5,694
                  
                  
                  6
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  809,622
                  
                  
                  
                  
                  
                  
                  
                  
                  809,628Sale
                      of shares for cash
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  
                  -Shares
                      issued for compensation
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  634,324
                  
                  
                  634
                  
                  
                  -
                  
                  
                  316,528
                  
                  
                  
                  
                  
                  
                  
                  
                  317,162Common
                      stock subscribed
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  153,750
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  153,750Fair
                      value of options and warrants issued as compensation and for
                      financing
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2,177,767
                  
                  
                  
                  
                  
                  
                  
                  
                  2,177,767Beneficial
                      conversion feature ofpreferred
                      stock, Series A
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  52,800
                  
                  
                  
                  
                  
                  
                  
                  
                  52,800preferred
                      stock, Series B
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  4,100,000
                  
                  
                  
                  
                  
                  
                  
                  
                  4,100,000Preferred
                      dividend, beneficial conversion featureSeries
                      A
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (52,800
                  )
                  
                  (52,800
                  )Series
                      B
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (4,100,000
                  )
                  
                  (4,100,000
                  )Preferred
                      dividendSeries
                      A
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (309,914
                  )
                  
                  (309,914
                  )Series
                      B
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (74,130
                  )
                  
                  (74,130
                  )Foreign
                      currency translation adjustment
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (282,704
                  )
                  
                  
                  
                  
                  (282,704
                  )Net
                      loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (7,559,170
                  )
                  
                  (7,559,170
                  )Balance,
                      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
                  )
                  
                  (17
                  )
                  
                  
                  
                  
                  
                  
                  
                  2,878,418
                  
                  
                  2,878
                  
                  
                  
                  
                  
                  (2,861
                  )
                  
                  
                  
                  
                  
                  
                  
                  (0
                  )Series
                      B
                  
                  
                  
                  
                  
                  
                  
                  
                  (30,819
                  )
                  
                  (31
                  )
                  
                  3,081,900
                  
                  
                  3,082
                  
                  
                  
                  
                  
                  (3,051
                  )
                  
                  
                  
                  
                  
                  
                  
                  0Redemption
                      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 as compensation
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,428,597
                  
                  
                  
                  
                  
                  
                  
                  
                  1,428,597Fair
                      value of options and warrants issued as financing
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  6,105,918
                  
                  
                  
                  
                  
                  
                  
                  
                  6,105,918Preferred
                      stock dividendsSeries
                      A
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (281,288
                  )
                  
                  (281,288
                  )Series
                      B
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (107,680
                  )
                  
                  (107,680
                  )Beneficial
                      conversion feature of preferred stock, Series B
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  800,000
                  
                  
                  
                  
                  
                  (800,000
                  )
                  
                  -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
                  )
                  $
                  8,075,669
  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 TWO YEARS ENDED OCTOBER 31, 2007 and
              2006
 2007
                    
                    2006CASH
                        FLOWS FROM OPERATING ACTIVITIES:Net
                        loss
                    
                    $
                    (14,952,315
                    )
                    $
                    (7,559,170
                    )Adjustments
                        to reconcile net loss to net cashused
                        by operating activities:Depreciation
                        and amortization
                    
                    
                    337,658
                    
                    
                    137,189Stock
                        based compensation
                    
                    
                    3,318,460
                    
                    
                    2,005,056Financing
                        costs
                    
                    
                    6,105,918
                    
                    
                    784,873Bad
                        debt expense
                    
                    
                    17,910
                    
                    
                    16,008Changes
                        in operating assets and liabilities:(Increase)
                        decrease in:Accounts
                        receivable
                    
                    
                    (1,800,802
                    )
                    
                    491,922Inventory
                    
                    
                    (975,125
                    )
                    
                    (482,882
                    )Prepaid
                        expenses
                    
                    
                    (316,367
                    )
                    
                    89,953Other
                        receivables
                    
                    
                    (672,216
                    )
                    
                    2,260,315Increase
                        (decrease) in:Accounts
                        payable and accrued expenses
                    
                    
                    (1,033,074
                    )
                    
                    1,855,467Due
                        to related parties
                    
                    
                    (118,452
                    )
                    
                    523,076Net
                        cash (used in) / provided by operating activities
                    
                    
                    (10,088,405
                    )
                    
                    121,807CASH
                        FLOWS FROM INVESTING ACTIVITIES:Purchases
                        of property and equipment
                    
                    
                    (288,803
                    )
                    
                    (138,172
                    )Purchases
                        of intangible assets
                    
                    
                    (118,475
                    )
                    
                    (6,543
                    )Acquisitions
                    
                    
                    (1,358,470
                    )
                    
                    (1,154,590
                    )Cash
                        acquired in acquisitions
                    
                    
                    35,515
                    
                    
                    195,684Net
                        cash used by investing activities
                    
                    
                    (1,730,233
                    )
                    
                    (1,103,621
                    )CASH
                        FLOWS FROM FINANCING ACTIVITIES:Repayment
                        of loans
                    
                    
                    (884,405
                    )
                    
                    (2,106,342
                    )Proceeds
                        from sale of stock
                    
                    
                    14,677,980
                    
                    
                    4,564,100Redemption
                        of preferred stock
                    
                    
                    (1,818,100
                    )
                    
                    -Preferred
                        stock dividend
                    
                    
                    (637,476
                    )
                    
                    (79,650
                    )Net
                        cash provided by financing activities
                    
                    
                    11,337,999
                    
                    
                    2,378,108Effect
                        of exchange rate changes on cash
                    
                    
                    18,924
                    
                    
                    (161,258
                    )Net
                        (decrease) increase in cash
                    
                    
                    (461,715
                    )
                    
                    1,235,036Cash
                        and cash equivalents, beginning of period
                    
                    
                    1,377,972
                    
                    
                    142,936Cash
                        and cash equivalents, end of period
                    
                    $
                    916,257
                    
                    $
                    1,377,972Cash
                        paid for:Interest
                    
                    $
                    549,365
                    
                    $
                    418,817Income
                        taxes
                    
                    
                    -
                    
                    
                    -Supplemental
                        Disclosures:During
                        the twelve months ended October 31, 2007, 1,742,280 shares
                        of common
                        stockwere
                        issued as payment of $1,926,268 of compensation that was
                        earned.During
                        the twelve months ended October 31, 2006, 634,324 shares
                        of common
                        stockwere
                        issued as payment of $317,162 of compensation that was
                        earned.The
                        acquisitions figure consists of the acquisitions of Martech
                        in 2006 and
                        Colmekin
                        2007:Current
                        assets acquired
                    
                    $
                    195,528
                    
                    $
                    798,133Cash
                        acquired
                    
                    
                    35,515
                    
                    
                    195,684Equipment
                        acquired
                    
                    
                    80,007
                    
                    
                    37,126Goodwill
                        and intangible assets
                    
                    
                    2,773,613
                    
                    
                    998,591Liabilities
                        assumed
                    
                    
                    (727,913
                    )
                    
                    (493,264
                    )Deferred
                        note payable
                    
                    
                    (763,936
                    )
                    
                    (381,680
                    )Amount
                        paid in common stock
                    
                    
                    (792,814
                    )
                    
                    -Associated
                        costs of acquisition
                    
                    
                    158,470
                    
                    
                    -Cash
                        Paid for Acquisition
                    
                    $
                    958,470
                    
                    $
                    1,154,590Acquisition
                        of Martech - deferred payment
                    
                    $
                    400,000
                    
                    $
                    -Total
                    
                    $
                    1,358,470
                    
                    $
                    1,154,590
  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, 2007 and 2006**
 **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 as The Panda Project,
        Inc.
        (“Panda”). We changed our name in August, 2004, subsequent to the reverse
        acquisition described below. 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.
  Effective
        July 12, 2004, Panda acquired all of the issued and outstanding common stock
        of
        Coda Octopus Ltd, now known as Coda Octopus Products Ltd (“COPL”) a U.K.
        operating company, which also owned United States and Norwegian subsidiaries.
        As
        a result of this transaction, COL’s former shareholders obtained control of
        Panda, a shell corporation with no operations. In accordance with Statement
        of
        Financial Accounting Standards (SFAS) No. 141, Coda was the acquiring entity,
        while the transaction was accounted for using the purchase method of accounting,
        in substance the acquisition was a recapitalization of Coda’s capital structure.
        For accounting purposes, this acquisition has been treated as a reverse
        acquisition of Panda. The Company did not recognize any goodwill or any
        intangible assets in connection with the transaction.
  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, 2007 and 2006**
 **Foreign
        Currency Translation**
  Coda
        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 $17,910 and $16,008 for the years ended October
        31,
        2007 and 2006 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.
  **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, 2007 and
        2006:
  **2007**
              
              **2006**Raw
                  materials
              
              $
              1,789,051
              
              $
              1,064,655Work
                  in process
              
              
              334,813
              
              
              389,042Finished
                  goods
              
              
              802,653
              
              
              497,695Total
                  inventory
              
              $
              2,926,517
              
              $
              1,951,392
  F-7
  **CODA
          OCTOPUS GROUP, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **October
          31, 2007 and 2006**
  **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, 2007 and
        2006.
  **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 year ended October 31, 2007.
  **Marketing**
  We
        charge
        the costs of marketing to expense as incurred. For the years ended October
        31,
        2007 and 2006, marketing costs were $471,049 and $275,285,
        respectively.
  **Other
        Operating Expenses**
  We
        incurred costs of $435,000 and $447,750 as non-recurring fees and expenses
        in
        connection with our financings and acquisitions for October 31, 2007 and
        2006
        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.
  **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.
  F-8
  **CODA
          OCTOPUS GROUP, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **October
          31, 2007 and 2006**
  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 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 did not have any unvested amounts of stock
        based compensation grants issued and outstanding at the date of
        implementation.
  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.
  **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 $0.42 and $0.50 for the years ended
        October 31, 2007 and 2006, respectively. For the years ended October
        31, 2007 and 2006, 36,508,028 and 21,638,728 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-9
  **CODA
          OCTOPUS GROUP, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **October
          31, 2007 and 2006**
 **Liquidity**
  As
        of
        October 31, 2007 we have cash and cash equivalents of $916,257 and positive
        working capital of $3,910,817. For the year ended October 31, 2007 we had
        a net
        loss of $14,952,315 and negative cash flow from operations of $10,088,405.
        We
        also have an accumulated deficit of $41,599,730 at October 31,
        2007.
  **NOTE
        2 - 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 $380,017 and nil as of October 31, 2007
        and
        2006 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 $232,435 and nil as of October 31, 2007 and 2006
        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 12 months from the date of sale. These amounts are
        stated on the balance sheet as Deferred Revenue of $233,550 and $323,350
        as of
        October 31, 2007 and 2006 respectively.
  Deferred
        revenue also includes $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 are being deferred until all conditions of the lease
        are fulfilled. See Note 10.
  **NOTE
        3 - INVESTMENTS**
 
 Securities
        which the Company does not have the intent to hold are classified as available
        for sale. Marketable securities that are bought and held principally for
        the
        purpose of selling them in the near term are classified as trading securities
        and are reported at fair value, with unrealized gains and losses recognized
        in
        earnings. Marketable equity securities are classified as available-for-sale
        and
        are carried at fair market value, with the unrealized gains and losses, net
        of
        tax, included in the determination of comprehensive income and reported in
        shareholder's equity.
 
 The
        fair
        value of all securities is determined by quoted market prices. Gains or losses
        on securities sold are based on the specific identification method. 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 is to be
        available-for-sale for financial reporting purposes. This includes an unrealized
        gain of $85,000 which has been included in the determination of comprehensive
        loss.
  **NOTE
        4 - OTHER CURRENT ASSETS**
  Other
        current assets on the balance sheet total $691,560 and $103,296 at October
        31,
        2007 and 2006 respectively. These totals comprise the following:
 
 **2007**
              
              **2006**Deposits
              
              $
              191,352
              
              $
              15,152Value
                  added tax (VAT)
              
              
              293,934
              
              
              42,164Other
                  receivables
              
              
              206,274
              
              
              45,980Total
              
              $
              691,560
              
              $
              103,296
  F-10
 **CODA
          OCTOPUS GROUP, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **October
          31, 2007 and 2006**
  **NOTE
        5 - FIXED ASSETS**
  Property
        and equipment at October 31, 2007 and 2006 is summarized as
        follows:
  **2007**
              
              **2006**Machinery
                  and equipment
              
              $
              983,115
              
              $
              614.305Accumulated
                  depreciation
              
              
              (560,377
              )
              
              (458,575
              )Net
                  property and equipment assets
              
              $
              422,738
              
              $
              155,730
  Depreciation
        expense recorded in the statement of operations for the years ended October
        31,
        2007 and 2006 is $101802 and $52,396, respectively.
  Rental
        equipment at October 31, 2007 and 2006 is summarized as follows:
  **2007**
              
              **2006**Rental
                  equipment
              
              $
              240,876
              
              $
              240,876Accumulated
                  depreciation
              
              
              (240,876
              )
              
              (120,025
              )Net
                  rental equipment assets
              
              $
              -
              
              $
              120,851
  Depreciation
        expense recorded in the statement of operations for the years ended October
        31,
        2007 and 2006 is $120,851 and $79,879, respectively.
  **NOTE
        6 - 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,
        2007 and 2006 is:
  **2007**
              
              
              **2006**Customer
                  relationships (weighted average life of 10 years)
              
              $
              694,503
              
              $
              -Non-compete
                  agreements (weighted average life of 3 years)
              
              
              198,911
              
              
              -Patents
              
              
              48,530
              
              
              30,055Licenses
              
              
              100,000
              
              
              -Total
                  amortized identifiable intangible assets - gross carrying
                  value
              
              
              1,041,944
              
              
              30,055Less
                  accumulated amortization
              
              
              (134,266
              )
              
              (19,261
              )**Net**
              
              
              **907,678**
              
              
              **10,794****Residual
                  value**
              
              **$**
              **907,678**
              
              **$**
              **10,794**
  F-11
 **CODA
          OCTOPUS GROUP, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **October
          31, 2007 and 2006**
 Our
        acquisition of Colmek resulted in the valuation of Colmek’s customer
        relationships and covenants not to compete as intangible assets (see Note
        10),
        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
        amortization expense as of October 31, 2007 is as follows:
  2008
              
              $
              195,1572009
              
              
              164,7192010
              
              
              83,6102011
              
              
              71,5552012
                  and thereafter
              
              
              392,637Total
              
              $
              907,678
  Amortization
          of patents, customer relationships, non-compete agreements and licenses
          included
          as a charge to income amounted to $115,005 and $4,914 for the years ended
          October 31, 2007 and 2006, 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 and $1,060,906 as of October 31, 2007 and 2006
        respectively. The changes in the carrying amount of goodwill for the years
        ended
        October 31, 2007 and 2006 are recorded below.
  **2007**
              
              
              **2006**Beginning
                  goodwill balance at November 1
              
              $
              1,060,906
              
              $
              62,315Goodwill
                  recorded upon acquisition
              
              
              2,038,669
              
              
              998,591**Balance
                  at October 31**
              
              **$**
              **3,099,575**
              
              **$**
              **1,060,906**
  Considerable
        management judgment is necessary to estimate fair value. We enlist the
        assistance of an independent 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
        7 - CAPITAL STOCK**
  The
        Company is authorized to issue 100,000,000 shares of common stock with a
        par
        value of $.001 per share. As of October 31, 2007 and 2006, the Company has
        issued and outstanding 48,245,768 shares and 24,301,980 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 6,407 preferred shares outstanding
        at October 31, 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-12
  **CODA
          OCTOPUS GROUP, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **October
          31, 2007 and 2006**
 During
        the year ended October 31, 2007 we did not issue any further 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.
  We
        have
        issued, subsequent to the year end, 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, 2006 we sold 2,947 shares of our Series A Preferred
        Stock for cash proceeds of $464,100. We also issued 5,694 shares of our Series
        A
        Preferred Stock for debt outstanding to related and other parties aggregating
        $809,628. Of the debt converted, approximately $577,000 was outstanding at
        October 31, 2005. Each share of preferred stock is denominated either in
        Pounds
        Sterling or US Dollars, convertible into 177 shares or 100 shares of common
        stock respectively. We attributed a beneficial conversion feature of $52,800
        to
        certain of the Series A preferred shares issued during the year ended October
        31, 2006, based upon the difference between the conversion price of those
        shares
        and the closing price of our common shares on the date of issuance. The
        beneficial conversion feature was recorded as a dividend and is included
        in the
        accompanying financial statements. At October 31, 2006, the total of Series
        A
        Preferred Stock outstanding is 23,641 shares, convertible into 3,928,728
        shares
        of common stock.
  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, 2007, we have no shares of Series B Preferred Stock
        outstanding, compared to 41,000 outstanding as of October 31, 2006.
  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, 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.
  During
        the year ended October 31, 2006 we sold 41,000 preferred Series B stock units,
        each unit consisting of one share of our Series B Preferred Stock, 100 Series
        A
        warrants and 100 Series B warrants. 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 proceeds
        from
        the sale of the units were $4,100,000.
  F-13
  **CODA
          OCTOPUS GROUP, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **October
          31, 2007 and 2006**
 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 were allocated to the warrants based on their relative
        fair value, which totaled $2,919,412 using the Black Scholes option pricing
        model. Further, we attributed a beneficial conversion feature of $1,180,589
        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 367%, (3) weighted
        average risk-free interest rate of 4.86%, 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
        $4,100,000 were recorded as a dividend and are included in the accompanying
        financial statements.
  Common
        Stock
  During
        the year ending October 31, 2007 we issued 1,742,280 shares of common stock,
        valued at $2,043,613, to employees, directors and consultants for
        services.
  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.
  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 48,245,768 at October
        31,
        2007, compared to 24,301,980 at October 31, 2006.
  Subsequent
        to the year end, a further 60,000 shares of common stock have been issued
        to an
        investor, which were subscribed for during the year to October 31,
        2007.
  Other
        Equity Transactions
  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.
  F-14
  **CODA
          OCTOPUS GROUP, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **October
          31, 2007 and 2006**
 During
        the year ended October 31, 2006, we issued in the aggregate 1,315,000 common
        share purchase options to employees and consultants. The options were issued
        with exercise prices of $1.00 and $1.50. Of these awards, 598,000 vested
        immediately and the balance vests over various periods through April 2008.
        The
        initial fair value of the options was $922,311 using the Black Scholes method
        at
        the date of grant of the options based on the following assumptions ranges:
        (1)
        risk free interest rate of 4.25% - 5.1%; (2) dividend yield of 0%; (3)
        volatility factor of the expected market price of our common stock of 328%
        -
        563%; and (4) an expected life of the options of 2 years. The fair value
        of the
        options is being expensed over the vesting 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. During the
        years
        ended October 31, 2007 and 2006, $222,816 and $675,316 respectively were
        charged
        to expense.
  During
        the year ended October 31, 2005, we issued in the aggregate 2,350,000 common
        share purchase options to employees and consultants. The options were issued
        with an exercise price of $1.00. Of these awards, 888,500 vested immediately
        and
        the balance vests over various periods through May, 2007. The initial fair
        value
        of the options was $1,257,600 using the Black Scholes method at the date
        of
        grant of the options based on the following assumptions ranges: (1) risk
        free
        interest rate of 4.5%; (2) dividend yield of 0%; (3) volatility factor of
        the
        expected market price of our common stock of 679%; and (4) an expected life
        of
        the options of 2 years. The fair value of the options is being expensed over
        the
        vesting 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. During the years ending October 31, 2007 and
        2006,
        $169,327 and $430,039 respectively were charged to expense.
  **NOTE
        8 - WARRANTS AND STOCK OPTIONS**
  Transactions
        involving stock options and warrants issued are summarized as follows:
  2007
              
              2006Number
              
              Weighted
                  Average Exercise Price
              
              Number
              
              Weighted
                  Average Exercise PriceOutstanding
                  at beginning of the period
              
              
              13,410,000
              
              $
              1.29
              
              
              2,350,000
              
              $
              1.00Granted
                  during the period
              
              
              23,473,418
              
              
              1.44
              
              
              11,060,000
              
              
              1.35Exercised
                  during the period
              
              
              (34,100
              )
              
              1.00
              
              
              -
              
              
              -Terminated
                  during the period
              
              
              (330,000
              )
              
              1.22
              
              
              -
              
              
              -Outstanding
                  at the end of the period
              
              
              36,519,318
              
              $
              1.39
              
              
              13,410,000
              
              $
              1.29Exercisable
                  at the end of the period
              
              
              35,467,518
              
              $
              1.39
              
              
              12,084,000
              
              $
              1.31
  The
        number and weighted average exercise prices of stock purchase options and
        warrants outstanding as of October 31, 2007 are as follows:
  Range
                  of
                Exercise
                  Prices
              
              
              Number
                  Outstanding
              
              
              Weighted
                  Average Contractual Life (Yrs)
              
              
              Total
                  Vested0.50
              
              
              750,000
              
              
              3.50
              
              
              750,0000.58
              
              
              400,000
              
              
              3.42
              
              
              400,0001.00
              
              
              5,845,900
              
              
              3.57
              
              
              5,585,2001.30
              
              
              14,566,709
              
              
              4.23
              
              
              14,220,2091.50
              
              
              495,000
              
              
              4.05
              
              
              328,0001.70
              
              
              14,401,709
              
              
              4.23
              
              
              14,164,1091.80
              
              
              60,000
              
              
              4.90
              
              
              20,000Totals
              
              
              36,519,318
              
              
              4.10
              
              
              35,467,518
  F-15
 **CODA
          OCTOPUS GROUP, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **October
          31, 2007 and 2006**
 **NOTE
        9 - 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 $30,750,000 which expire through 2027, subject to limitations
        of Section 382 of the Internal Revenue Code, as amended. The deferred tax
        asset
        related to the carry forward is approximately $10,455,000. 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 $10,235,000, with no expiration. The deferred tax asset
        related to the carry-forward is approximately $3,070,000. 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.
  Income
        tax expense for 2007 represents income taxes on our Norwegian
        subsidiary.
  Components
        of deferred tax assets as of October 31, 2007 and 2006 are as
        follows:
  **Non-Current**
              
              **2007**
              
              **2006**Net
                  Operating Loss Carry Forward
              
              **$**
              **10,455,000**
              
              **$**
              **2,429,000**Valuation
                  Allowance
              
              
              **(10,455,000**
              **)**
              
              **(2,429,000**
              **)**Net
                  Deferred Tax Asset
              
              **$**
              **-**
              
              **$**
              **-**
  **NOTE
        10 - CONTINGENCIES AND COMMITMENTS**
  **Litigation**
  We
        may
        become subject to 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, results of operations
        or
        liquidity.
  F-16
  **CODA
          OCTOPUS GROUP, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **October
          31, 2007 and 2006**
 **Factoring
        Agreement**
  We
        factor
        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.
        This agreement can be cancelled with three months’ notice before each
        anniversary date. Subsequent agreements were added in November 2006 covering
        our
        UK businesses, Martech Systems Ltd and Coda Octopus Products Ltd, both of
        which
        are on the same terms as the original agreement, except for the initial term,
        which is a minimum of two years and these new agreements stipulate certain
        fees
        for termination prior to the two years.
  Over
        the
        course of the year, we factored invoices totaling $5,088,665 in receivables
        and
        we received $3,961,695 in proceeds from FGI. This compares with 2006, where,
        we
        factored invoices totaling $5,503,518 in receivables and we received $5,172,774
        in proceeds from FGI.
  Under
        the
        arrangement, FGI typically advances to the Company 80% of the total amount
        of
        accounts receivable factored. FGI retains 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 is 1.85% for the initial 30 day credit period,
        up to
        a maximum of 45 days; thereafter, an additional fee of 0.5% is charged for
        each
        10 day period.
  On
        February 20, 2008, FGI, RBS and us entered into an
        intercreditor agreement regulating the priority of each creditors
        debts.
  **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 $1,707,667, with
        the
        minimum future rentals due under these leases as of October 31, 2007 as
        follows:
  2008
              
              $
              463,0622009
              
              
              377,0902010
              
              
              360,1212011
              
              
              329,5492012
                  and thereafter
              
              
              177,846Total
              
              $
              1,707,667
  **Concentrations**
  We
        had no
        concentrations of purchases of over 5% during either of the years ended 2007
        and
        2006. We had a sales concentration of over 5% for the year ended 2007 due
        to a
        sale to a customer for $2,294,279.
  **NOTE
        11 - NOTES AND LOANS PAYABLE**
  A
        summary
        of notes payable at October 31, 2007 and 2006 is as follows:
  **2007**
              
              **2006**The
                  Company, through its UK subsidiary Coda Octopus Products Ltd has
                  a 7 year
                  unsecured loan note; interest rate of 12% annually; repayable at
                  borrower’s instigation or convertible into common stock when the share
                  price reaches $3.
              
              $
              200,000
              
              $
              -
  F-17
 **CODA
          OCTOPUS GROUP, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **October
          31, 2007 and 2006**
 The
                  Company had outstanding balances under our UK bank revolving credit
                  facility of $1,119,496 as of October 31, 2006.This balance was
                  fully
                  repaid in the following year. The advances bear interest at 2.0%
                  over UK
                  Bank Base Rate and are due on demand. The advances were secured
                  by a bond
                  and a security interest in the assets of our subsidiary, Coda Octopus
                  Products Ltd, exclusive of accounts receivable.
              
              
              -
              
              
              1,119,496The
                  Company, through its US subsidiary Innalogic, Inc., has 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 in relation to this capital lease.
                  See
                  Note 2.
              
              
              41,091
              
              
              -The
                  Company has an unsecured revolving line of credit with a US bank
                  through
                  its US subsidiary Colmek Systems Engineering, for $50,000 with
                  an interest
                  rate of 12.5% annually; repayable at borrower’s instigation.
              
              
              17,181
              
              
              -The
                  Company through its US subsidiary Colmek Systems Engineering, has
                  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%.
              
              
              29,145
              
              
              -The
                  Company through its US subsidiary Colmek Systems Engineering, has
                  an
                  unsecured loan note payable to a director and former officer of
                  the
                  Company.
              
              
              34,104
              
              
              -Total
              
              $
              321,521
              
              $
              1,119,496Less:
                  current portion
              
              
              56,382
              
              
              1,119,496Total
                  long-term portion
              
              $
              265,139
              
              $
              -
  **NOTE
        12 - RELATED PARTY TRANSACTIONS**
  We
        are
        indebted to various related parties for advances for payments of operating
        expenses and dividends. These related parties include our biggest shareholder
        and other entities controlled by our parent. Advances are non interest bearing
        and are due on demand. At the end of the year ending October 31, 2007, $184,425
        was due to related parties, compared with $302,877 for the year ending October
        31, 2006.
  We
        are
        also owed by related parties a sum of $105,685 as at October 31, 2007, compared
        with $104,720 for the year ended October 31, 2006.
  **NOTE
        13 - 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 U K 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-18
  **CODA
          OCTOPUS GROUP, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **October
          31, 2007 and 2006**
 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
        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-19
  **CODA
          OCTOPUS GROUP, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **October
          31, 2007 and 2006**
 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 acquisition of Colmek occurred on November 1, 2006
        and
        for the year ended October 31, 2006 assume that the acquisition of Colmek
        and
        Martech had occurred on November 1, 2005 . 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.
  **2007**
              
              **2006**Revenue
              
              $
              14,757,876
              
              $
              11,587,523Net
                  loss
              
              
              (15,259,562
              )
              
              (7,410,114
              )Loss
                  per common share
              
              
              (0.43
              )
              
              (0.50
              )
  **NOTE
        14 - 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
        no inter-segment sales.
  The
        following table summarizes segment asset and operating balances by reportable
        segment.
  **Contracting**
              
              **Products**
              
              **Corporate**
              
              **Totals**Revenues
              
              $
              6,298,817
              
              $
              7,434,159
              
              $
              120,337
              
              $
              13,853,313Operating
                  profit/(loss)
              
              
              (35,559
              )
              
              2,207,177
              
              
              (10,555,687
              )
              
              (8,384,069
              )Identifiable
                  assets
              
              
              6,336,133
              
              
              5,384,297
              
              
              1,861,031
              
              
              13,581,461Capital
                  expenditure
              
              
              198,932
              
              
              132,476
              
              
              75,870
              
              
              407,278Selling,
                  general & administrative
              
              
              2,510,386
              
              
              1,884,954
              
              
              7,989,910
              
              
              12,385,250Depreciation
                  & amortization
              
              
              147,677
              
              
              46,707
              
              
              143,274
              
              
              337,658Interest
                  expense
              
              
              108,741
              
              
              388,091
              
              
              6,158,451
              
              
              6,655,283
 
 The
        Company’s reportable business segments operate in two geographic locations.
        Those geographic locations are:
 
 *
        United
        States
 *
        United
        Kingdom
  F-20
 **CODA
          OCTOPUS GROUP, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **October
          31, 2007 and 2006**
 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.
 
 Information
        concerning principal geographic areas is presented below according to the
        area
        where the activity is taking place.
 
 **2007**
              
              **2006**Revenues:United
                  States
              
              $
              7,129,507
              
              
              5,271,230United
                  Kingdom
              
              
              6,723,806
              
              
              2,020,061Total
                  Revenues
              
              $
              13,853,313
              
              
              7,291,291Assets:United
                  States
              
              $
              5,529,261
              
              
              329,765United
                  Kingdom
              
              
              6,597,202
              
              
              4,556,969Corporate
                  and other
              
              
              1,454,998
              
              
              2,047,604Total
                  Assets
              
              $
              13,581,461
              
              
              6,934,338
 
 **NOTE
        15 - SUBSEQUENT EVENTS**
  In
        January 2008, we issued 28,288 shares of common stock for dividends on series
        A
        preferred stock accrued between April 2006 and October 2007, and already
        accounted for within those periods.
  In
        January and February 2008, we issued 200 shares of series A preferred stock,
        which were subscribed for in March 2007. We also converted 320 shares of
        series
        A preferred stock into 32,000 shares of common stock, leaving 6,287 series
        A
        preferred shares outstanding, convertible into 1,013,670 shares of common
        stock.
  In
        February 2008, we issued 60,000 shares of common stock to an investor. These
        shares were subscribed for in February 2007 and received warrant coverage
        of 50%
        at $1.30 and 50% at $1.70, with these warrants issued before the end of October
        2007.
  On
        February 21, 2008 we closed a $12 million convertible secured loan note
        financing (Loan Note Financing”) We
        received approximately $10.5 million after deducting for related expenses
        and
        reserves. The terms of the Loan Note Financing can be summarized as a 7
        year loan note, convertible at the option of the note holder into the Company’s
        common stock at a conversion price of $1.05, with a coupon of 8.5% and a
        redemption premium of 30%. The Company can also force the conversion of the
        notes into the Company’s common stock according to the following schedule: after
        2 years when the Company’s stock price closes above 2.50; after three years,
        $2.90; after 4 years $3.50; provided in each case that the stock closes at
        or
        above the specified price for 40 consecutive trading days. At contractual
        closing, one million of the proceeds were pursuant to the terms of the agreement
        withheld to secure the performance of certain obligations of the Company.
        Upon
        performance of these, this amount will be released to us.
  F-21