**SECURITIES
      AND EXCHANGE COMMISSION**


Washington, D.C. 20549





**FORM
      10-QSB**


(Mark
      One)


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





For
      the
      quarterly period ended January 31, 2008





OR




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





For
      the
      transition period from ______________ to ______________





*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 Incorporation or organization)
            
            (I.R.S.
                Employer Identification Number)164
                West, 25thStreet,
                6thFloor,
                New York
            
            10001(Address
                of principal executive offices)
            
            (Zip
                Code)Registrant's
                telephone number, including area code:
            
            (212)
                924-3442





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





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of "accelerated
      filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act (Check
      one): o





Large
                accelerated filer o
            Accelerated
                filer o
            Non-accelerated
                filer x





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


Yes oNo
x





The
      number of shares outstanding of issuer's common stock, $0.001 par value as
      of
      March 19, 2008: 48, 395,696.










**INDEX**





Page**PART
                I - Financial Information**
            
            
            1**Item
                1: Financial Statements**
            
            
            1**Three
                Months Ended January 31, 2008 and 2007**Condensed
                Consolidated Balance Sheet as of January 31, 2008 (Unaudited) and
                October
                31, 2007 (Audited)
            
            
            1Condensed
                Consolidated Statements of Operations and Comprehensive Loss For
                The Three
                Months Ended January 31, 2008 and 2007 (Unaudited)
            
            
            2Condensed
                Consolidated Statement of Stockholders’ Equity For The Three Months
                Ended January 31, 2008 (Unaudited)
            
            
            3Condensed
                Consolidated Statements of Cash Flows For the Three Months Ended
                January
                31, 2008 and 2007 (Unaudited)
            
            
            4Notes
                to Condensed Consolidated Financial Statements (Unaudited)
            
            
            5**Item
                2: Management's Discussion and Analysis or Plan of Operation**
            
            
            22**Item
                3:****Controls
                and Procedures**
            
            
            30**PART
                II - Other Information**
            
            
            31**Item
                1: Legal Proceedings**
            
            
            31**Item
                2: Unregistered Sales of Equity Securities and Use of Proceeds**
            
            
            31**Item
                3: Defaults Upon Senior Securities**
            
            
            31**Item
                4: Submission of Matters to a Vote of Security Holders**
            
            
            31**Item
                5: Other Information**
            
            
            31**Item
                6: Exhibits**
            
            
            31**Signatures**
            
            
            31





i




**PART
      I. FINANCIAL INFORMATION**




**Item
      1. Financial Statements**





**CODA
      OCTOPUS GROUP, INC.**


**CONDENSED**  **CONSOLIDATED
      BALANCE SHEET**


**JANUARY
      31, 2008 and OCTOBER 31, 2007**


January
                    31,2008
                  (Unaudited)
              
              October
                    31,2007
                  (Audited)ASSETSCurrent
                  assets:Cash
                  and cash equivalents
              
              $
              531,468
              
              $
              916,257Short-term
                  investments, Note 3
              
              
              748,000
              
              
              935,000Accounts
                  receivable, net of allowance for doubtful accounts
              
              
              1,132,000
              
              
              2,720,151Inventory
              
              
              2,738,373
              
              
              2,926,517Due
                  from related parties, Note 12
              
              
              105,685
              
              
              105,685Unbilled
                  receivables, Note 2
              
              
              781,373
              
              
              380,017Other
                  current assets, Note 4
              
              
              615,147
              
              
              691,560Prepaid
                  expenses
              
              
              415,455
              
              
              476,283Total
                  current assets
              
              
              7,067,501
              
              
              9,151,470Property
                  and equipment, net, Note 5
              
              
              403,557
              
              
              422,738Rental
                  equipment, net, Note 5
              
              
              -
              
              
              -Goodwill
                  and other intangible assets, net, Note 6
              
              
              3,958,244
              
              
              4,007,253Total
                  assets
              
              $
              11,429,302
              
              $
              13,581,461LIABILITIES
                  AND STOCKHOLDERS' EQUITYCurrent
                  liabilities:Accounts
                  payable, trade
              
              $
              1,911,275
              
              $
              1,618,250Accrued
                  expenses and other current liabilities
              
              
              2,173,398
              
              
              1,937,569Deferred
                  revenues, Note 2
              
              
              542,628
              
              
              593,325Deferred
                  payment related to acquisitions, Note 13
              
              
              763,936
              
              
              763,936Accrued
                  dividends on Series A&B Preferred Stock
              
              
              31,872
              
              
              86,766Due
                  to related parties, Note 12
              
              
              115,779
              
              
              184,425Loans
                  and notes payable, short term, Note 11
              
              
              88,698
              
              
              56,382Total
                  current liabilities
              
              
              5,628,086
              
              
              5,240,653Loans
                  and notes payable, long term, Note 11
              
              
              215,874
              
              
              265,139Total
                  liabilities
              
              
              5,843,960
              
              
              5,505,792Stockholders'
                  equity:Preferred
                  stock, $.001 par value; 5,000,000 shares authorized, 6,287 and
                  6,407Series A issued and outstanding, as of January 31, 2008
and
                  October 31, 2007 respectively
              
              
              6
              
              
              6Common
                  stock, $.001 par value; 100,000,000 shares authorized, 48,279,056
and
                  48,245,768shares issued and outstanding as of January 31, 2008
                  and
                  October 31, 2007 respectively
              
              
              48,279
              
              
              48,246Common
                  Stock subscribed
              
              
              116,640
              
              
              80,000Additional
                  paid-in capital
              
              
              49,979,776
              
              
              49,785,244Accumulated
                  other comprehensive loss
              
              
              (542,758
              )
              
              (238,097
              )Accumulated
                  deficit
              
              
              (44,016,601
              )
              
              (41,599,730
              )Total
                  stockholders' equity
              
              
              5,585,342
              
              
              8,075,669Total
                  liabilities and stockholders' equity
              
              $
              11,429,302
              
              $
              13,581,461





See
      accompanying notes to these unaudited condensed consolidated financial
      statements.




1





**CODA
      OCTOPUS GROUP, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
      LOSS**


**FOR
      THE**  **THREE
      MONTHS ENDED JANUARY 31, 2008 and 2007**


**(UNAUDITED)**




For
                the three months ended January 31, 2008
            
            For
                the three months ended January 31, 2007Net
                revenue
            
            $
            3,127,231
            
            $
            2,701,275Cost
                of revenue
            
            
            1,642,776
            
            
            941,029Gross
                profit
            
            
            1,484,455
            
            
            1,760,246Research
                and development
            
            
            689,193
            
            
            518,393Selling,
                general and administrative expenses
            
            
            3,056,927
            
            
            3,224,659Other
                operating expenses
            
            
            -
            
            
            435,000Operating
                loss
            
            
            (2,261,665
            )
            
            (2,417,806
            )Other
                income (expense)Other
                income (expense)
            
            
            4,857
            
            
            2,098Interest
                expense
            
            
            (113,971
            )
            
            (115,211
            )Total
                other expense
            
            
            (109,114
            )
            
            (113,113
            )Loss
                before income taxes
            
            
            (2,370,779
            )
            
            (2,530,919
            )Provision
                for income taxes
            
            
            -
            
            
            -Net
                loss
            
            
            (2,370,779
            )
            
            (2,530,919
            )Preferred
                Stock Dividends:Series
                A
            
            
            (46,093
            )
            
            (119,815
            )Beneficial
                conversion feature
            
            
            -
            
            
            (800,000
            )Net
                loss applicable to common shares
            
            $
            (2,416,872
            )
            $
            (3,450,734
            )Loss
                per share, basic and diluted
            
            
            (0.05
            )
            
            (0.14
            )Weighted
                average shares outstanding
            
            
            48,250,366
            
            
            24,528,132Comprehensive
                loss:Net
                loss
            
            $
            (2,370,779
            )
            $
            (2,530,919
            )Foreign
                currency translation adjustment
            
            
            (117,661
            )
            
            (35,488
            )Unrealized
                loss on investment
            
            
            (187,000
            )
            
            -Comprehensive
                loss
            
            $
            (2,675,440
            )
            $
            (2,566,407
            )





See
      accompanying notes to these unaudited condensed consolidated financial
      statements.




2





**CODA
      OCTOPUS GROUP, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY**


**FOR
      THE THREE MONTHS ENDED JANUARY 31, 2008**


**(UNAUDITED)**




Three
                Months Ended
            
            Preferred
                Stock
              Series
                A
            
            Preferred
                Stock
              Series
                B
            
            Common
                Stock
            
            Stock
            
            Additional
              Paid-in
            
            Accumulated
                Other
              Comprehensive
            
            AccumulatedJan
                31, 2008
            
            Shares
            
            Amount
            
            Shares
            
            Amount
            
            Shares
            
            Amount
            
            Subscribed
            
            Capital
            
            Loss
            
            Deficit
            
            TotalBalance,
                October 31, 2007
            
            
            6,407
            
            $
            6
            
            
            -
            
            $
            -
            
            
            48,245,768
            
            $
            48,246
            
            
            80,000
            
            $
            49,785,244
            
            $
            (238,097
            )
            $
            (41,599,730
            )
            $
            8,075,669Sale
                of preferred stock
            
            
            200
            
            
            0
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (20,000
            )
            
            20,000
            
            
            
            
            
            
            
            
            -Conversion
                of preferred stock to common
            
            
            (320
            )
            
            0
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            56,640
            
            
            (56,640
            )
            
            
            
            
            
            
            
            -Stock
                issued for compensation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            5,000
            
            
            5
            
            
            
            
            
            3,245
            
            
            
            
            
            
            
            
            3,250Fair
                value of options and warrants issued as compensation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            192,939
            
            
            
            
            
            
            
            
            192,939Preferred
                stock dividendsSeries
                A cash
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (46,093
            )
            
            (46,093
            )Series
                A stock
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            28,288
            
            
            28
            
            
            
            
            
            34,988
            
            
            
            
            
            
            
            
            35,016Accumulated
                other comprehensive lossForeign
                currency translation adjustment
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (117,661
            )
            
            
            
            
            (117,661
            )Unrealized
                loss from marketable securities
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (187,000
            )
            
            
            
            
            (187,000
            )Net
                loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (2,370,779
            )
            
            (2,370,779
            )Balance
                January 31, 2008
            
            
            6,287
            
            $
            6
            
            
            -
            
            $
            -
            
            
            48,279,056
            
            $
            48,279
            
            $
            116,640
            
            $
            49,979,776
            
            $
            (542,758
            )
            $
            (44,016,601
            )
            $
            5,585,342





See
      accompanying notes to these unaudited condensed consolidated financial
      statements.




3


**CODA
      OCTOPUS GROUP, INC.**


**CONDENSED
      CONSOLIDATED STATEMENT OF CASH FLOWS**


**FOR
      THE THREE MONTHS ENDED JANUARY 31, 2008 and 2007**


**(UNAUDITED)**





2008
            
            2007CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                loss
            
            $
            (2,370,779
            )
            $
            (2,530,919
            )Adjustments
                to reconcile net loss to net cashused
                by operating activities:Depreciation
                and amortization
            
            
            97,196
            
            
            68,312Stock
                based compensation
            
            
            196,189
            
            
            1,629,214Dividends
            
            
            46,093
            
            
            -Changes
                in operating assets and liabilities:(Increase)
                decrease in:Accounts
                receivable
            
            
            1,588,151
            
            
            54,296Inventory
            
            
            188,144
            
            
            (393,618
            )Prepaid
                expenses
            
            
            60,827
            
            
            (37,220
            )Other
                receivables
            
            
            (324,943
            )
            
            (181,498
            )Increase
                (decrease) in:Accounts
                payable and accrued expenses
            
            
            478,657
            
            
            (347,147
            )Due
                to related parties
            
            
            (68,646
            )
            
            25,813Net
                cash used in operating activities
            
            
            (109,110
            )
            
            (1,712,767
            )CASH
                FLOWS FROM INVESTING ACTIVITIES:Purchases
                of property and equipment
            
            
            (29,006
            )
            
            (36,840
            )Net
                cash used by investing activities
            
            
            (29,006
            )
            
            (36,840
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Payments
                  for loans payable
            
            
            (16,949
            )
            
            (317,243
            )Proceeds
                from sale of stock
            
            
            -
            
            
            800,000Preferred
                stock dividend paid
            
            
            (64,491
            )
            
            (63,371
            )Net
                cash (used in) provided by financing activities
            
            
            (81,440
            )
            
            419,386Effect
                of exchange rate changes on cash
            
            
            (165,233
            )
            
            (24,948
            )Net
                (decrease) in cash
            
            
            (384,789
            )
            
            (1,355,169
            )Cash
                and cash equivalents, beginning of period
            
            
            916,257
            
            
            1,377,972Cash
                and cash equivalents, end of period
            
            $
            531,468
            
            $
            22,803Cash
                paid for:Interest
            
            $
            113,971
            
            $
            115,211Income
                taxes
            
            
            -
            
            
            -




Supplemental
      Disclosures:





During
      the Three Months ended January 31, 2008, 33,288 shares of common stock were
      issued as payment of $3,250 of compensation that was earned and $35,016 of series
      A
      preferred stock dividends that were due.





During
      the Three Months ended January 31, 2007, 1,361,000 shares of common stock were
      issued as payment of $1,422,659 of compensation that was
      earned.





See
      accompanying notes to these unaudited condensed consolidated financial
      statements.





4





**CODA
      OCTOPUS GROUP, INC.**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**UNAUDITED**




**NOTE
      1 - SUMMARY OF ACCOUNTING POLICIES**




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




**General**





The
      accompanying unaudited condensed consolidated financial statements have been
      prepared in accordance with accounting principles generally accepted in the
      United States of America for interim financial information and in accordance
      with instructions
      to SEC form 10Q-SB. Accordingly, they do not include all of the
      information and footnotes required by generally accepted accounting principles
      for complete financial statements.





In
      the
      opinion of management, all adjustments (consisting of normal recurring accruals)
      considered necessary for a fair presentation have been included. Accordingly,
      the results from operations for the three month period ended January 31, 2008,
      are not necessarily indicative of the results that may be expected for the
      year
      ended October 31, 2008. The unaudited condensed financial statements should
      be
      read in conjunction with the consolidated October 31, 2007 financial statements
      and footnotes thereto included in the Company’s 10K-SB filed on February 26,
      2008 with the Securities Exchange Commission (SEC).





**Business
      and Basis of Presentation**




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




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




**Use
      of Estimates**




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




**Revenue
      Recognition**




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




5




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.




**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
      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.




**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.




6




**Accounts
      Receivable**




We
      periodically review our trade receivables in determining our allowance for
      doubtful accounts. Allowance for doubtful accounts was nil for the period ended
      January 31, 2008 and $17,910 for the year ended October 31, 2007.




**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 January 31, 2008 and October 31,
      2007:




**2008**
            
            **2007**Raw
                materials
            
            $
            1,589,320
            
            $
            1,789,051Work
                in process
            
            
            305,139
            
            
            334,813Finished
                goods
            
            
            843,914
            
            
            802,653Total
                inventory
            
            $
            2,738,373
            
            $
            2,926,517




**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 period ended January 31, 2008 or
      the
      year ended October 31, 2007.




**Research
      and Development**




Research
      and development costs consist of expenditures for the present and future patents
      and technology, which cannot be capitalized. 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 period ended January 31, 2008 or the year
      ended October 31, 2007.




**Marketing**




We
      charge
      the costs of marketing to expense as incurred. For the period ended January
      31,
      2008 marketing costs were $214,894.




7




**Other
      Operating Expenses**




We
      incurred costs of nil and $435,000 as non-recurring fees and expenses in
      connection with our financings and acquisitions for the period ended January
      31,
      2008 and the period
      ended January 31, 2007respectively, which were 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.




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.




8




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 $0.05 and $0.14 for the periods
      ended January 31, 2008 and 2007, respectively. For the period ended January
      31,
      2008 and year ended October 31, 2007, 37,834,628 and 36,508,028 potential
      shares, respectively, were excluded from the shares used to calculate diluted
      earnings per share as their inclusion would reduce net loss per
      share.




**Liquidity**




As
      of
      January 31, 2008 we have cash and cash equivalents of $531,468 and positive
      working capital of $1,439,415. For the period ended January 31, 2008 we had
      a
      net loss of $2,370,779
      and negative cash flow from operations of $109,110.
      We also have an accumulated deficit of $44,016,601at January 31, 2008 (see
      Note
      15).




**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 $781,373 and $380,017 as of January 31, 2008
      and October 31, 2007 respectively.




Billings
      in excess of cost and estimated earnings on uncompleted contracts represent
      project invoices billed to customers that have not been earned as of the date
      of
      the balance sheet. These amounts are stated on the balance sheet as Deferred
      Revenue of $317,441 and $232,435 as of January 31, 2008 and October 31, 2007
      respectively.




Revenue
      received as part of sales of equipment includes a provision for warranty and
      is
      treated as deferred revenue, along with extended warranty sales, with these
      amounts amortized over 12 months from the date of sale. These amounts are stated
      on the balance sheet as Deferred Revenue of $225,187 and $233,550 as of January
      31, 2008 and October 31, 2007 respectively.




9




Deferred
      revenue at January 31, 2008 and October 31, 2007 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
      11.




**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 worth
      $850,000 in settlement of a $533,147 loan and $316,853 of accounts receivable.
      As of January 31, 2008, the value of the investment, which is available-for-sale
      for financial reporting purposes, was $748,000, compared with $935,000 at
      October 31, 2007. This includes an unrealized loss of $102,000 which has been
      included in the determination of comprehensive loss.




**NOTE
      4 - OTHER CURRENT ASSETS**




Other
      current assets on the balance sheet total $615,147 and $691,560 at January
      31,
      2008 and October 31, 2007 respectively. These totals comprise the
      following:





**2008**
            
            **2007**Deposits
            
            $
            302,369
            
            $
            191,352Value
                added tax (VAT)
            
            
            265,644
            
            
            293,934Other
                receivables
            
            
            47,134
            
            
            206,274Total
            
            $
            615,147
            
            $
            691,560




**NOTE
      5 - FIXED ASSETS**




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




**2008**
            
            **2007**Machinery
                and equipment
            
            $
            1,012,121
            
            $
            983,115Accumulated
                depreciation
            
            
            (608,564
            )
            
            (560,377
            )Net
                property and equipment assets
            
            $
            403,557
            
            $
            422,738




Depreciation
      expense recorded in the statement of operations for the periods ended January
      31, 2008 and October 31, 2007 is $48,187 and $101,802,
      respectively.




10




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




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




Depreciation
      expense recorded in the statement of operations for the periods ended January
      31, 2008 and October 31, 2007 is nil and $120,851, 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 January
      31,
      2008 and October 31, 2007 is:




**2008**
            
            **2007**Customer
                relationships (weighted average life of 10 years)
            
            $
            694,503
            
            $
            694,503Non-compete
                agreements (weighted average life of 3 years)
            
            
            198,911
            
            
            198,911Patents
            
            
            48,530
            
            
            48,530Licenses
            
            
            100,000
            
            
            100,000Total
                amortized identifiable intangible assets - gross carrying
                value
            
            
            1,041,944
            
            
            1,041,944Less
                accumulated amortization
            
            
            (183,275
            )
            
            (134,266
            )**Net**
            
            
            **858,669**
            
            
            **907,678****Residual
                value**
            
            **$**
            **858,669**
            
            **$**
            **907,678**




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 January 31, 2008 is as follows:




2008
            
            $
            146,4272009
            
            
            165,2802010
            
            
            84,7112011
            
            
            72,6562012
                and thereafter
            
            
            389,055**Total**
            
            **$**
            **858,669**




11


Amortization
        of patents, customer relationships, non-compete agreements and licenses included
        as a charge to income amounted to $49,009 and $115,005
        for the period ended January 31, 2008 and year ended October 31, 2007,
        respectively. Goodwill is not being amortized.
  As
        a
        result of the acquisitions of Martech and Colmek, the Company has goodwill
        in
        the amount of $3,099,575 as of January 31, 2008 and October 31, 2007. The
        changes in the carrying amount of goodwill for the periods ended January
        31,
        2008 are recorded below.




**2008**
            
            **2007**Beginning
                goodwill balance at November 1, 2007
            
            $
            3,099,575
            
            $
            1,060,906Goodwill
                recorded upon acquisition
            
            
            -
            
            
            -**Period
                End Balance**
            
            **$**
            **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 January 31, 2008 and 2007, the Company has
      issued and outstanding 48,279,056 shares and 26,312,980 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 6,287 and 23,641 preferred shares
      outstanding at January 31, 2008 and 2007 respectively, 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.




During
      the period ended January 31, 2008 we issued 200 shares of Series A Preferred
      Stock. We converted 320 shares of Series A Preferred Stock into 56,640 shares
      of
      common stock, which are subscribed for but not yet issued .
      At
      January 31, 2008, the total of Series A Preferred Stock outstanding is 6,287
      shares, convertible into 1,013,670 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.




12




During
      the year ended October 31, 2007 we did not issue any further shares of Series
      A
      Preferred Stock. However, we did convert 17,234 shares of Series A Preferred
      Stock into 2,878,418 shares of common stock and 1,439,209 warrants with a
      conversion price of $1.30 and 1,439,209 warrants with a conversion price of
      $1.70. At October 31, 2007, the total of Series A Preferred Stock outstanding
      was 6,407 shares, convertible into 1,050,310 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 January 31, 2008, we have no shares of Series B Preferred Stock
      outstanding.




During
      the period ended January 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.





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.




13




Common
      Stock




During
      the period ending January 31, 2008 we issued 5,000 shares of common stock,
      valued at $3,250, to employees, directors and consultants for services. We
      also
      issued 28,288 shares of common stock as dividend payments due to holders of
      Series A Preferred stock, which had accrued over the period August 2006 to
      October 2007, valued at $35,017.




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.
      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.




Other
      Equity Transactions




During
      the period ended January 31, 2008, we issued in the aggregate 245,000 common
      share purchase options to employees and consultants, with exercise prices of
      $1.30 to $1.50. The initial fair value of the options was $136,411using the Black Scholes method at the date of grant of the options based
      on the following assumptions: (1) risk free interest rate of 5.25%; (2) dividend
      yield of 0%; (3) volatility factor of the expected market price of our common
      stock of 238% - 246%; and (4) an expected life of the options of 2 years. The
      fair value of the vested 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.




Also
      during the period ended January 31, 2008, a further 67,000 common share purchase
      options which were issued to employees in 2005 and 2006 vested, with $56,528
      charged to expense.




During
      the period 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 period ended October 31, 2007, $1,036,454 was charged
      to
      expense.




14




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:




Three
                months ended
              January
                31, 2008
            
            Year
                ended
              October
                31, 2007Number
            
            Weighted
                Average Exercise Price
            
            Number
            
            Weighted
                Average Exercise PriceOutstanding
                at beginning of the period
            
            
            36,519,318
            
            $
            1.39
            
            
            13,410,000
            
            $
            1.29Granted
                during the period
            
            
            245,000
            
            
            1.32
            
            
            23,473,418
            
            
            1.44Exercised
                during the period
            
            
            -
            
            
            -
            
            
            (34,100
            )
            
            1.00Terminated
                during the period
            
            
            -
            
            
            -
            
            
            (330,000
            )
            
            1.22Outstanding
                at the end of the period
            
            
            36,764,318
            
            $
            1.39
            
            
            36,519,318
            
            $
            1.39Exercisable
                at the end of the period
            
            
            35,754,517
            
            $
            1.39
            
            
            35,467,518
            
            $
            1.39




15




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




Range
                of
              Exercise
                Prices
            
            Number
                Outstanding
            
            Weighted
                Average Contractual Life (Yrs)
            
            Total
                Vested0.50
            
            
            750,000
            
            
            3.25
            
            
            750,0000.58
            
            
            400,000
            
            
            3.16
            
            
            400,0001.00
            
            
            5,845,900
            
            
            3.32
            
            
            5,634,7001.30
            
            
            14,781,709
            
            
            3.99
            
            
            14,375,2091.50
            
            
            525,000
            
            
            3.85
            
            
            410,4991.70
            
            
            14,401,709
            
            
            3.98
            
            
            14,164,1091.80
            
            
            60,000
            
            
            4.65
            
            
            20,000Totals
            
            
            36,764,318
            
            
            3.85
            
            
            35,754,517




**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 $32,375,000 which expire through 2028, subject to limitations
      of Section 382 of the Internal Revenue Code, as amended. The deferred tax asset
      related to the carry forward is approximately $11,005,000. 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 $10,795,000, with no expiration. The deferred tax asset
      related to the carry-forward is approximately $3,235,000. 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 January 31, 2008 and October 31, 2007 are as
      follows:




**Non-Current**
            
            **2008**
            
            **2007**Net
                Operating Loss Carry Forward
            
            **$**
            **11,005,000**
            
            **$**
            **10,455,000**Valuation
                Allowance
            
            
            **(11,005,000**
            **)**
            
            **(10,455,000**
            **)**Net
                Deferred Tax Asset
            
            **$**
            **-**
            
            **$**
            **-**





16




**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.




**Factoring
      Agreement**




We
      factor
      certain of our receivables pursuant to a factoring agreement. Advances received
      pursuant to the agreement are secured by our accounts receivable.




An
      initial factoring agreement was entered into on August 17, 2005 between Faunus
      Group International, Inc. (“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.




Over
      the
      course of the period to January 31, 2008, we factored invoices totaling
      $1,052,687 in receivables and we received $842,150 in proceeds from FGI. This
      compares with the year to October 31, 2007, where we factored invoices totaling
      $5,088,665 in receivables and we received $3,961,695 in proceeds from
      FGI.




Under
      the
      arrangement, FGI typically 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.




**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 $1,522,256, with the
      minimum future rentals due under these leases as of January 31, 2008 as
      follows:




2008
            
            $
            450,5062009
            
            
            366,6792010
            
            
            350,4932011
            
            
            321,2832012
                and thereafter
            
            
            33,295Total
            
            $
            1,522,256





17




**Concentrations**




We
      had no
      concentrations of purchases of over 5% during either of the period ended January
      31, 2008 and year ended October 31, 2007. We had a sales concentration of over
      5% for the period ended January 31, 2008 and year ended October 31, 2007 due
      to
      a sale to a customer for $402,131 and $2,294,279, respectively.




**NOTE
      11 - NOTES AND LOANS PAYABLE**




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




**2008**
            
            **2007**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
            
            $
            200,000The
                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.
            
            
            35,314
            
            
            41,091The
                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.
            
            
            14,181
            
            
            17,181The
                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%.
            
            
            26,973
            
            
            29,145The
                Company through its US subsidiary Colmek Systems Engineering, has
                an
                unsecured loan note payable to a director and former officer of the
                Company.
            
            
            28,104
            
            
            34,104Total
            
            $
            304,572
            
            $
            321,521Less:
                current portion
            
            
            88,698
            
            
            56,382Total
                long-term portion
            
            $
            215,874
            
            $
            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 this shareholder. Advances are non interest
      bearing and are due on demand. At the end of the period ending January 31,
      2008,
      $115,779 was due to related parties, compared with $184,425 for the year ending
      October 31, 2007.




18




We
      are
      also owed by related parties a sum of $105,685 at January 31, 2008 and October
      31, 2007.




**NOTE
      13 - ACQUISITIONS**




*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.




19




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




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 period ended
      January 31, 2007 assume that the acquisition of Colmek occurred on November
      1,
      2006. These unaudited pro forma results are not necessarily indicative of the
      actual results of operations that would have been achieved nor are they
      necessarily indicative of future results of operations. There is no change
      to
      the period to January 31, 2008.




**2007**Revenue
            
            $
            3,373,963Net
                loss
            
            
            (2,528,407
            )Loss
                per common share
            
            
            (0.16
            )




**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 is comprised of product sales.




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




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





There
      are
      inter-segment sales between our engineering contracting businesses and our
      products businesses.




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




**Contracting**
            
            **Products**
            
            **Corporate**
            
            **Totals**Revenues
            
            $
            1,293,458
            
            $
            1,770,954
            
            $
            62,819
            
            $
            3,127,231Operating
                profit/(loss)
            
            
            (426,846
            )
            
            404,750
            
            
            (2,239,569
            )
            
            (2,261,665
            )Identifiable
                assets
            
            
            5,504,706
            
            
            2,627,258
            
            
            3,399,339
            
            
            11,531,303Capital
                expenditure
            
            
            2,861
            
            
            23,054
            
            
            3,090
            
            
            29,006Selling,
                general & administrative
            
            
            893,291
            
            
            626,916
            
            
            1,536,720
            
            
            3,056,927Depreciation
                & amortization
            
            
            64,921
            
            
            18,764
            
            
            13,511
            
            
            97,196Interest
                expense
            
            
            29,173
            
            
            78,453
            
            
            6,345
            
            
            113,971





20




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





*
      United
      States




*
      United
      Kingdom





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





Information
      concerning principal geographic areas is presented below according to the area
      where the activity is taking place for the period ending January 31, 2008 and
      the year ending October 31, 2007:




**2008**
            
            **2007**Revenues:United
                States
            
            $
            1,632,476
            
            $
            7,129,507United
                Kingdom
            
            
            1,431,936
            
            
            6,723,806Corporate
                and other
            
            
            62,819
            
            
            -Total
                Revenues
            
            $
            3,127,231
            
            $
            13,853,313Assets:United
                States
            
            $
            4,463,518
            
            $
            5,529,261United
                Kingdom
            
            
            3,668,445
            
            
            6,597,202Corporate
                and other
            
            
            3,399,339
            
            
            1,454,999Total
                Assets
            
            $
            11,531,303
            
            $
            13,581,462





**NOTE
      15 - SUBSEQUENT EVENTS**




In
      January 2008, we converted 320 shares of series A preferred stock into 56,640
      shares of common stock, which are subscribed for at January 31, 2007, but not
      issued. The 56,640 shares of common stock were issued in March
      2008.




In
      March
      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 secured convertible bond financing.
      The terms of this financing can be summarized as a 7 year bond, convertible
      into
      common stock at $1.05 at any time over this period, with a coupon of 8.5% and
      a
      redemption premium of 30%. The company can force conversion into common stock
      according to the following schedule: after 2 years, when the stock price closes
      above $2.50; after 3 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. The
      bonds
      are secured by all of our assets and all of our subsidiaries’ assets, subject
      only to the security interest in favor of our factor.




21




**Item
      2. 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**





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.





The
      consolidated financial statements include the accounts of Coda Octopus and
      our
      domestic and foreign subsidiaries that are more than 50% owned and controlled
      except that the financial statements, including Colmek, which was acquired
      on
      April 6, 2007. All significant intercompany transactions and balances have
      been
      eliminated in the consolidated financial statements.





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





**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 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.




22




·
            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.





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, 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 the Western hemisphere.·
            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 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.





Approximately
      54% of our 2007 revenues of $13,853,313 were attributable to the sale of
      products. On a pro forma basis, adding the acquired businesses last year would
      have given us revenues of $14,757,876 and around 49% of our revenues would
      have
      been generated from engineering contracting services. For the three months
      to
      January 31, 2008, our revenues were $3,127,231, with approximately 57% of this
      attributable to our products business, and the remainder to our acquired
      engineering services businesses.





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 and wireless 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.




23




·
            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.





**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 accounting
      principles generally accepted in the United States of America requires our
      management to make estimates and assumptions that affect the reported amounts
      of
      assets and liabilities and the disclosure of contingent assets and liabilities
      at the date of the financial statements and the reported amounts 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.




24





*Recoverability
      of Deferred Costs*





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





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





*Stock-Based
      Compensation Expense*





Stock
      Based Compensation — SFAS No. 123, “Accounting for Stock-Based Compensation”,
      establishes and encourages 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 permits 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. We use the fair value method
      for equity instruments granted to employees and 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.





**Results
      of Operations**





Introduction





Activities
      pursuant to the acquisition of Miller and Hilton Inc. d/b/a Colmek System
      Engineering (“Colmek”) on April 6, 2007 are not included in the three months
      ending January 31, 2007, as the period ended before the acquisition date. The
      three month period ending January 31, 2008 includes revenues and expenses of
      Colmek for that period.





***Comparison
      of Three Months Ended January 31, 2008 (“2008 Period”) compared to Three Months
      Ended January 31, 2007 (“2007 Period”)***





Revenues .
      Total
      revenues for the 2008 period and the 2007 period were $3,127,231 and $2,701,275
      respectively. This represented an increase of $425,956 or 15.8%. Contributions
      from Colmek in the quarter were $971,373 against no revenues in the same period
      in 2007, as it was acquired in April 2007. Of the $545,417 decrease in
      like-for-like revenues, this was down to reduced revenues at both Innalogic
      and
      Martech, though these effects are expected to be temporary. A key missing item
      was the expected US Coast Guard which was not confirmed until after the end
      of
      the quarter, but which was originally expected in our first quarter. This
      difference is around $750,000.




25





Margins .
      Gross
      margins were weaker in the 2008 period at 47.5% compared with 65.2% for the
      2007
      period. This reflects the higher mix of engineering business, which is
      traditionally lower margin than our products sales. When combined with the
      lack
      of order flow at Innalogic, and the delay in the Coast Guard contract, this
      accounts for the shrinking margins. Our products achieved gross margins of
      61.3%, in line with expectations.





Research
      and Development (R&D) .
      R&D
      increased 32.9% to $689,193 in the 2008 period from $518,393 in 2007. This
      reflects further development of the EchoscopeTM and UISTM (Underwater Inspection
      System) tied, in part, to the TSWG contract, the initial stage of which finished
      in January, with the next stage starting in February. The company will continue
      to work on enhancements to all its products.





Selling
      and General and Administrative Expenses (SG&A) .
      SG&A expenses for the 2008 period decreased slightly to $3,056,927
      from $3,224,659 in 2007, a decrease of 5.2%. The addition of Colmek since the
      2007 period, responsible for SG&A of $430,753, means that the actual
      reduction in like-for-like SG&A was $598,485,
      or 18.6%.





Key
      areas
      of expenditures include wages and salaries, where we spent $1,556,305 or 50.5%
      of our SG&A costs (2007 period was $1,583,210 or 49.1%); legal and
      professional fees, including accounting, audit and investment banking services,
      increased to $445,556 or 14.5% in 2008 from $256,629 or 8.0% of SG&A in
      2007; travel increased to $154,604 or 5.0% of SG&A from $129,994 or 4.0% in
      2007; rent increased to $126,449, or 4.1%, in 2008, from $105,151, or 3.3%
      in
      2007; and marketing increased to $214,894 or 7.0% of SG&A from $50,295 or
      1.6% of SG&A in 2007.





Operating
      Loss .
      The
      company produced an operating loss for the period of $2,261,665against a loss of $2,417,806 in 2007. Removing and non-recurring expenses
      totaling $435,000 in 2007, the comparison shows an increase in operating losses
      of $278,859.
      This again reflects the timing shift in the Coast Guard contract.





Interest
      Expense Interest
      expense was static for the period with $113,971 incurred in 2008 and $115,211
      in
      2007.





Preferred
      Dividends and Beneficial Conversion Feature .
      During
      the 2007 period there was an $800,000 beneficial conversion feature with no
      comparable conversion feature in 2008. Dividends paid on series A preferred
      stock in 2008 totaled $46,093, versus $119,815 in 2007.





**Liquidity
      and Capital Resources**





As
      of
      January 31, 2008 the Company had positive working capital of
      $1,439,415.





In
      spite
      of the net loss generated of $2,370,779,
      the cash flow deficit for the period was $384,789 in the 2008 Period, compared
      to $1,355,169 in 2007. Of this, $109,110
      was the cash used by our operating activities in 2008, versus $1,712,767 in
      2007, with the remainder being mainly exchange rate effect. The 2007 period
      also
      saw financing introducing net cash of $482,757, with no comparable addition
      of
      finance in 2008.





In
      February 2008, the company issued an 8.5% secured convertible debenture with
      a
      conversion price of $1.05 per share callable after 2 years at $2.50, after
      3
      years at $2.90, and after 4 years at $3.50. The instrument is redeemable after
      7
      years at 130%. The company feels that this funding will enable the company
      to
      execute its plan over the next 12 months.




26





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. We also have
      had
      a measure of success in the off shore construction area. We believe that we
      can
      continue to sell into that market with success.





In
      the
      short term, our plan involves, specifically:





·
            Continue
                to sell our current range of products into a mixture of commercial,
                defense and security 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 refining our
                product and completing sales this year that are currently in our
                pipeline,
                with delivery expected to start from the second
                quarter.




·
            Continue
                to deliver to the Coast Guard on the contract we were awarded last
                July.
                Work on stage 2 will begin in the second
                quarter.




·
            Deliver
                on our first port security solution contract through the provision
                of our
                unique 3-D technology and other products and services, enabling us
                to
                provide complete solutions.





·
            Leverage
                our subsidiaries to take advantage of our lead in underwater sonar
                technology by cross marketing all group products and services from
                each
                company.





·
            Continue
                to review and refocus our cost base where necessary to achieve a
                cost
                level commensurate with our current level of activity.





Through
      these measures, we aim to move from cash negative for last year and the first
      quarter of this year to cash positive. We also aim to move from heavily
      loss-making for the past 2 years to profitable for the current year, prior
      to
      any non-cash charges made to our income statement. Although we intend to pursue
      our plans aggressively 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 in the near future, or ever.





**Inflation
      and Foreign Currency**





The
      Company maintains its books in local currency: US Dollars for the parent holding
      Company in the United States of America, Pounds Sterling for its UK operations
      and Norwegian Kroner for its Norwegian operations.





The
      Company’s operations are primarily inside of the United States through its
      wholly-owned subsidiaries, though a significant proportion of revenues and
      costs
      are incurred outside of the US. 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.





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




27





**Financing
      Activities**





Since
      February 2005, we have raised approximately $36,724,289 in cash through the
      issuance in private offerings at various times of shares of our common stock,
      and units consisting of shares of preferred stock and warrants to purchase
      common stock.





In
      February 2005, we issued a total of 1,000,000 shares of our common stock for
      a
      total cash consideration of $800,534.





In
      October 2005, we issued a total of 15,000 Series A Preferred Stock (Sterling
      Denominated), since converted into 2,655,000 shares of common stock, for a
      total
      cash consideration of £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.





On
      April
      30, 2006, we issued to one investor a total of 7,320.88 shares of our Series
      A
      Preferred Stock to a group of individual investors for total cash consideration
      of £684,618.83 UK Pounds equivalent to $1,211,755 based upon a conversion ratio
      of $1.77 for each UK Pound at the time of the investment.





From
      June
      2006 through January 2007, we issued to one institutional investor units
      consisting 46,000 shares of our Series B Preferred Stock and four five year
      warrants to purchase 9.2 million shares of our common stock at a price ranging
      from $1.30 to $2.00 per share and 650,000 shares of our Common Stock for a
      total
      cash consideration of $4,600,000. Of these 46,000 shares of Series B Preferred
      Stock, 18,181 were redeemed in April 2007 and the remaining shares were
      converted into 2,781,900 shares of our common stock.





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 820,000 shares of our common stock.





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





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





During
      April and May 2007, we issued to a group of investors a total of 15,000,000
      shares of our common stock plus five-year warrants to purchase the same amount
      of shares of common stock (of which 7,500,000 may be purchased at $1.30 and
      the
      balance at $1.70 per share) for a total of $15,000,000.





In
      February 2008, we issued $12 million of 8.50% secured convertible debentures.
      This instrument is convertible into common stock at $1.05 per share. It is
      callable by the company at $2.50 after two years, $2.90 after three years and
      at
      $3.50 after four years. It matures at 130% after seven years.





28


**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.





29


**Item
      3. Control and Procedures**





(a)
      Evaluation of Disclosure Controls and Procedures





As
      of
      January 31, 2008, we carried out an evaluation, under the supervision and with
      the participation of our Chief Executive Officer and Chief Financial Officer,
      of
      the effectiveness of the design and operation of our disclosure controls and
      procedures. 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
      Chief
      Executive Officer and Chief Financial Officer have identified the following
      material weaknesses as of January 31, 2008:





·
            Insufficient
                disclosure controls in that we have experienced insufficient communication
                between the various subsidiaries and departments and a lack of timely
                financial reporting.


·
            Insufficient
                accounting procedures relating to areas including: revenue booking,
                inventory control, expense sign off procedures and shipping documentation.





We
      are in
      the process of putting improved procedures in place to remedy the various
      shortcomings in these areas.





(b)
      Changes in Internal Controls.





There
      was
      no change in our internal controls over financial reporting that has materially
      affected, or is reasonable likely to materially affect, our internal
      control  over financial reporting during the quarter covered by this
      Report.





30





**PART
      II - OTHER INFORMATION**





**Item
      1. Legal Proceedings**





There
      were no material pending legal proceedings at January 31, 2008 to which the
      Company or its subsidiaries is a party other that ordinary routine litigation
      incidental to their respective businesses.





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





Not
      Applicable





**Item
      3. Defaults Upon Senior Securities**





None





**Item
      4. Submission of Matters to a Vote of Security Holders**





None





**Item
      5. Other Information**





None





**Item
      6. Exhibits**





31
            Certifications
                of the Chief Executive Officer and Chief Financial Officer pursuant
                to
                Rule 13a-14(a)





32
            Certifications
                of Chief Executive Officer and Chief Financial Officer pursuant to
                18
                U.S.C. Section 1350, as adopted pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002





**SIGNATURES**





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




**Coda
                Octopus Group, Inc.**
              (Registrant)Date:
                March 19, 2008
            
            /s/ Jason
                ReidJason
                ReidPresident
                and Chief Executive Officer




Date:
                March 19, 2008
            
            /s/ Jody
                  E. FrankJody
                FrankChief
                  Financial Officer  31