**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 July 31, 2007




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 o No 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
                filero
            Accelerated
                filero
            Non-accelerated
                filerx




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


Yes o No x




The
      number of shares outstanding of issuer's common stock, $0.001 par value as
      of
      October 11, 2007: 48,279,768










**INDEX**





Page**PART
                I - Financial Information****Item
                1: Financial Statements**
            
            
            1**Nine
                Months Ended July 31, 2007 and 2006**Condensed
                Consolidated Balance Sheet As of July 31, 2007 (Unaudited)
            
            
            1Condensed
                Consolidated Statements of Operations and Comprehensive Loss For
                The Nine
                and Three Months Ended July 31, 2007 and 2006 (Unaudited)
            
            
            2Condensed
                Consolidated Statement of Stockholders’ Equity For The Nine Months
                Ended July 31, 2007 (Unaudited)
            
            
            3Condensed
                Consolidated Statements of Cash Flows For the Nine Months Ended July
                31,
                2007 (Unaudited)
            
            
            4Notes
                to Condensed Consolidated Financial Statements June 30, 2007 and
                2006
                (Unaudited)
            
            
            5**Item
                2: Management's Discussion and Analysis or Plan of
                Operation**
            
            
            17**Item
                3:****Controls
                and Procedures**
            
            
            24**PART
                II - Other Information****Item
                1: Legal Proceedings**
            
            
            25**Item
                2: Unregistered Sales of Equity Securities and Use of
                Proceeds**
            
            
            25**Item
                3: Defaults Upon Senior Securities**
            
            
            25**Item
                4: Submission of Matters to a Vote of Security
                Holders**
            
            
            25**Item
                5: Other Information**
            
            
            25**Item
                6: Exhibits**
            
            
            25**Signatures**
            
            
            26











**PART
      I. FINANCIAL INFORMATION**





**Item
      1. Financial Statements**




**CODA
      OCTOPUS GROUP, INC.**


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


**JULY
      31, 2007**


**(UNAUDITED)**


2007ASSETSCurrent
                  assets:Cash
                  and cash equivalents
              
              $
              2,894,907Accounts
                  receivable, net of allowance for doubtful accounts
              
              
              3,520,942Inventory
              
              
              2,343,257Due
                  from related parties
              
              
              339,882Other
                  current assets
              
              
              1,312,018Prepaid
                  expenses
              
              
              495,890Total
                  current assets
              
              
              10,906,896Property
                  and equipment, net
              
              
              289,646Rental
                  equipment, net
              
              
              57,568Goodwill
                  and other intangible assets, net
              
              
              4,080,438Total
                  assets
              
              $
              15,334,548LIABILITIES
                  AND STOCKHOLDERS' EQUITYCurrent
                  liabilities:Accounts
                  payable, trade
              
              $
              1,184,562Accrued
                  expenses and other current liabilities
              
              
              1,740,545Deferred
                  payment related to acquisitions
              
              
              763,936Accrued
                  dividends on Series A & B Preferred Stock
              
              
              44,426Due
                  to related parties
              
              
              258,458Loans
                  payable
              
              
              20,393Total
                  current liabilities
              
              
              4,012,320Loans
                  and notes payable, long term
              
              
              40,104Total
                  liabilities
              
              
              4,052,424Stockholders'
                  equity:Preferred
                  stock, $.001 par value; 5,000,000 shares authorized,6,407
                      Series A issued and outstanding, as of July 31,
                      2007
              
              
              6Nil
                      Series B issued and outstanding as of July 31,
                      2007
              
              
              -Common
                  stock, $.001 par value; 100,000,000 sharesauthorized,
                  48,143,656 shares issued and outstandingas
                  of July 31, 2007
              
              
              48,144Common
                  Stock subscribed
              
              
              80,100Additional
                  paid-in capital
              
              
              48,950,733Foreign
                  currency translation adjustment
              
              
              (142,363
              )Accumulated
                  deficit
              
              
              (37,654,496
              )Total
                  stockholders' equity
              
              
              11,282,124Total
                  liabilities and stockholders' equity
              
              $
              15,334,548




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**  **NINE
      AND THREE MONTHS ENDED JULY 31, 2007 AND 2006**


**(UNAUDITED)**


For
                  the nine
              
              For
                  the nine
              
              For
                  the three
              
              For
                  the threemonths
                  ended
              
              months
                  ended
              
              months
                  ended
              
              months
                  endedJuly
                  31, 2007
              
              July
                  31, 2006
              
              July
                  31, 2007
              
              July
                  31, 2006Net
                  revenue
              
              $
              10,794,621
              
              $
              5,134,847
              
              $
              5,859,907
              
              $
              2,682,539Cost
                  of revenue
              
              
              4,513,101
              
              
              2,111,696
              
              
              2,300,728
              
              
              949,930Gross
                  profit
              
              
              6,281,520
              
              
              3,023,151
              
              
              3,559,179
              
              
              1,732,609Research
                  and development
              
              
              1,736,437
              
              
              1,658,788
              
              
              634,679
              
              
              561,718Selling,
                  general and administrative expenses
              
              
              8,883,099
              
              
              5,630,112
              
              
              3,594,560
              
              
              2,382,659Other
                  operating expenses
              
              
              435,000
              
              
              -
              
              
              -
              
              
              -Operating
                  loss
              
              
              (4,773,016
              )
              
              (4,265,749
              )
              
              (670,060
              )
              
              (1,211,768
              )Other
                  income (expense)Other
                  income (expense)
              
              
              73,540
              
              
              2,708
              
              
              35,745
              
              
              2,204Interest
                  expense
              
              
              (6,349,946
              )
              
              (830,970
              )
              
              (561,350
              )
              
              (684,337
              )Total
                  other expense
              
              
              (6,276,406
              )
              
              (828,262
              )
              
              (525,605
              )
              
              (682,133
              )Loss
                  before income taxes
              
              
              (11,049,422
              )
              
              (5,094,011
              )
              
              (1,195,665
              )
              
              (1,893,901
              )Provision
                  for income taxes
              
              
              -
              
              
              -
              
              
              -
              
              
              -Net
                  loss
              
              
              (11,049,422
              )
              
              (5,094,011
              )
              
              (1,195,665
              )
              
              (1,893,901
              )Preferred
                  Stock Dividends:Series
                  A
              
              
              (238,950
              )
              
              (193,552
              )
              
              (31,851
              )
              
              (113,902
              )Series
                  B
              
              
              (107,680
              )
              
              (23,565
              )
              
              -
              
              
              (23,565
              )Beneficial
                  conversion feature
              
              
              (800,000
              )
              
              (2,332,800
              )
              
              -
              
              
              (2,332,800
              )Net
                  loss applicable to common shares
              
              $
              (12,196,051
              )
              $
              (7,643,928
              )
              $
              (1,227,516
              )
              $
              (4,364,168
              )Loss
                  per share, basic and diluted
              
              
              (0.34
              )
              
              (0.32
              )
              
              (0.03
              )
              
              (0.18
              )Weighted
                  average shares outstanding
              
              
              35,490,398
              
              
              23,938,910
              
              
              47,986,242
              
              
              24,220,947Comprehensive
                  loss:Net
                  loss
              
              $
              (11,049,422
              )
              $
              (5,094,011
              )
              $
              (1,195,665
              )
              $
              (1,893,901
              )Foreign
                  currency translation adjustment
              
              
              150,458
              
              
              (150,118
              )
              
              55,209
              
              
              234,505Comprehensive
                  loss
              
              $
              (10,898,964
              )
              $
              (5,244,129
              )
              $
              (1,140,456
              )
              $
              (1,659,396
              )





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 NINE MONTHS ENDED JULY 31, 2007**


**(UNAUDITED)**


ForeignPreferred
                  Stock
                Series
                  A
              
              Preferred
                  Stock
                Series
                  B
              
              Common
                  Stock
              
              Stock
              
              Additional
                          Paid-in
              
              Currency
                Translation
              
              AccumulatedNine
                  Months Ended July 31, 2007
              
              Shares
              
              Amount
              
              Shares
              
              Amount
              
              Shares
              
              Amount
              
              Subscribed
              
              Capital
              
              Adjustment
              
              Deficit
              
              TotalBalance,
                  October 31, 2006
              
              
              23,641
              
              $
              24
              
              
              41,000
              
              $
              41
              
              
              24,301,980
              
              $
              24,302
              
              
              153,750
              
              $
              25,858,307
              
              $
              (292,821
              )
              $
              (25,458,447
              )
              $
              285,156Sale
                  of preferred stock
              
              
              
              
              
              
              
              
              8,000
              
              
              8
              
              
              
              
              
              
              
              
              
              
              
              799,992
              
              
              
              
              
              
              
              
              800,000Conversion
                  of preferred stockSeries
                  A
              
              
              (17,234
              )
              
              (17
              )
              
              
              
              
              
              
              
              2,878,418
              
              
              2,878
              
              
              
              
              
              (2,861
              )
              
              
              
              
              
              
              
              (0
              )Series
                  B
              
              
              
              
              
              
              
              
              (30,819
              )
              
              (31
              )
              
              3,081,900
              
              
              3,082
              
              
              
              
              
              (3,051
              )
              
              
              
              
              
              
              
              0Redemption
                  of preferred stock
              
              
              
              
              
              
              
              
              (18,181
              )
              
              (18
              )
              
              
              
              
              
              
              
              
              
              
              (1,818,082
              )
              
              
              
              
              
              
              
              (1,818,100
              )Sale
                  of common stock for cash
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              15,675,000
              
              
              15,675
              
              
              
              
              
              13,748,855
              
              
              
              
              
              
              
              
              13,764,530Shares
                  issued for compensation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,640,268
              
              
              1,640
              
              
              
              
              
              1,768,593
              
              
              
              
              
              
              
              
              1,770,233Stock
                  issued for acquisition
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              532,090
              
              
              532
              
              
              
              
              
              792,282
              
              
              
              
              
              
              
              
              792,814Stock
                  subscribedPreferred
                  stock
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              80,000
              
              
              
              
              
              
              
              
              
              
              
              80,000Common
                  stock
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              34,000
              
              
              34
              
              
              (153,650
              )
              
              187,716
              
              
              
              
              
              
              
              
              34,100Fair
                  value of options and warrants issued as
                  compensation and for financing
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              6,819,633
              
              
              
              
              
              
              
              
              6,819,633Preferred
                  stock dividendsSeries
                  A
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (238,949
              )
              
              (238,949
              )Series
                  B
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (107,680
              )
              
              (107,680
              )Beneficial
                  conversion feature ofpreferred
                  stock, Series Apreferred
                  stock, Series B
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              799,350
              
              
              
              
              
              (800,000
              )
              
              (650
              )Foreign
                  currency translation adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              150,458
              
              
              
              
              
              150,458Net
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (11,049,420
              )
              
              (11,049,420
              )Balance,
                  July 31, 2007
              
              
              6,407
              
              $
              6
              
              
              -
              
              $
              -
              
              
              48,143,656
              
              $
              48,144
              
              $
              80,100
              
              $
              48,950,733
              
              $
              (142,363
              )
              $
              (37,654,496
              )
              $
              11,282,124




See
      accompanying notes to these unaudited condensed consolidated financial
      statements.




3




**CODA
      OCTOPUS GROUP, INC.**


**CONDENSED
      CONSOLIDATED   STATEMENT OF CASH FLOWS**


**FOR
      THE NINE MONTHS ENDED JULY 31, 2007 and 2006**


**(UNAUDITED)**


2007
              
              2006CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  loss
              
              $
              (11,049,422
              )
              $
              (5,094,011
              )Adjustments
                  to reconcile net loss to net cashused
                  by operating activities:Depreciation
                  and amortization
              
              
              226,309
              
              
              90,771Stock
                  based compensation
              
              
              2,600,378
              
              
              1,030,743Financing
                  costs
              
              
              5,989,488
              
              
              565,363Dividends
              
              
              164,819
              
              
              217,117Bad
                  debt expense
              
              
              -
              
              
              1,429Changes
                  in operating assets and liabilities:(Increase)
                  decrease in:Accounts
                  receivable
              
              
              (2,266,830
              )
              
              224,796Inventory
              
              
              (391,865
              )
              
              (338,073
              )Prepaid
                  expenses
              
              
              (335,974
              )
              
              (69,331
              )Other
                  receivables
              
              
              (613,707
              )
              
              (192,938
              )Increase
                  (decrease) in:Accounts
                  payable and accrued expenses
              
              
              (2,309,944
              )
              
              672,968Due
                  to related parties
              
              
              (44,419
              )
              
              (414,775
              )Net
                  cash used in operating activities
              
              
              (8,031,167
              )
              
              (3,305,941
              )CASH
                  FLOWS FROM INVESTING ACTIVITIES:Purchases
                  of property and equipment
              
              
              (206,662
              )
              
              (101,726
              )Purchases
                  of intangible assets
              
              
              (136,854
              )
              
              (7,121
              )Acquisitions
              
              
              (1,358,470
              )
              
              (1,162,570
              )Cash
                  acquired in acquisitions
              
              
              35,515
              
              
              195,684Net
                  cash used by investing activities
              
              
              (1,666,471
              )
              
              (1,075,733
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:Repayment
                  of loans
              
              
              (1,124,447
              )
              
              (2,206,804
              )Proceeds
                  from sale of stock
              
              
              14,677,980
              
              
              6,178,725Redemption
                  of preferred stock
              
              
              (1,818,100
              )
              
              -Preferred
                  stock dividend
              
              
              (606,597
              )
              
              (79,650
              )Net
                  cash provided by financing activities
              
              
              11,128,836
              
              
              3,892,271Effect
                  of exchange rate changes on cash
              
              
              85,737
              
              
              538,214Net
                  (decrease) increase in cash
              
              
              1,516,935
              
              
              48,811Cash
                  and cash equivalents, beginning of period
              
              
              1,377,972
              
              
              142,936Cash
                  and cash equivalents, end of period
              
              $
              2,894,907
              
              $
              191,747Cash
                  paid for:Interest
              
              $
              359,907
              
              $
              265,607Income
                  taxes
              
              
              -
              
              
              -


Supplemental
        Disclosures:
  During
        the nine months ended July 31, 2007, 1,640,268 shares of common
        stock
 were
        issued as payment of $1,770,233 of compensation that was earned.
  The
        acquisitions figure consists of:
  Acquisition
        of Colmek:
 Current
                    assets acquired
                
                $
                195,528Cash
                    acquired
                
                
                35,515Equipment
                    acquired
                
                
                80,007Goodwill
                    and intangible assets
                
                
                2,773,613Liabilities
                    assumed
                
                
                (727,913
                )Deferred
                    note payable
                
                
                (763,936
                )Amount
                    paid in common stock
                
                
                (792,814
                )Associated
                    costs of acquisition
                
                
                158,470Cash
                    Paid for Acquisition
                
                $
                958,470Acquisition
                    of Martech - deferred payment
                
                $
                400,000




See
      accompanying notes to these unaudited condensed consolidated financial
      statements.





4




**CODA
      OCTOPUS GROUP, INC.**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**Nine
      Months ended July 31, 2007 and 2006**


**(UNAUDITED)**




**NOTE
      1 - SUMMARY OF ACCOUNTING POLICIES**




A
      summary
      of the significant accounting policies applied in the preparation of the
      accompanying unaudited 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 Item 310 of Regulation S-B. 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 nine month period ended July 31, 2007,
      are
      not necessarily indicative of the results that may be expected for the year
      ended October 31, 2007. The unaudited condensed financial statements should
      be
      read in conjunction with the consolidated October 31, 2006 financial statements
      and footnotes thereto included in the Company’s SB-2 filed on September 10, 2007
      with the Securities Exchange Commission (SEC).




**Business
      and Basis of Presentation**




Coda
      Octopus Group, Inc. ( *”we* ” *,
      “us”,* “ *our
      company* ”
or *“Coda”* )
      was
      formed under the laws of the State of Florida in 1992 as The Panda Project,
      Inc.
      (“Panda”). We changed our name in August, 2004, subsequent to the reverse
      acquisition described below. We are a developer of underwater technologies
      and
      equipment for imaging, mapping, defense and survey applications. We are based
      in
      New York, with research and development, sales and manufacturing facilities
      located in the United Kingdom and Norway, and additional sales locations in
      Florida and Washington, D.C.




Effective
      July 12, 2004, Panda acquired all of the issued and outstanding common stock
      of
      Coda Octopus Ltd, now known as Coda Octopus Products Ltd (“COPL”) a U.K.
      operating company, which also owned United States and Norwegian subsidiaries.
      As
      a result of this transaction, COL’s former shareholders obtained control of
      Panda, a shell corporation with no operations. In accordance with Statement
      of
      Financial Accounting Standards (SFAS) No. 141, Coda was the acquiring entity,
      while the transaction was accounted for using the purchase method of accounting,
      in substance the acquisition was a recapitalization of Coda’s capital structure.
      For accounting purposes, this acquisition has been treated as a reverse
      acquisition of Panda. The Company did not recognize any goodwill or any
      intangible assets in connection with the transaction.


Following
        the reverse acquisition, Panda reincorporated in Delaware and changed its
        name
        to Coda Octopus Group, Inc.




The
      unaudited 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
      sufficient evidence of an arrangement exists, delivery has occurred or services
      have been rendered, the contract price is fixed or determinable, and
      collectibility is reasonably assured. No right of return privileges are granted
      to customers after shipment.




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




5


**CODA
      OCTOPUS GROUP, INC.**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**Nine
      Months ended July 31, 2007 and 2006**


**(UNAUDITED)**




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 current exchange rates, and related revenue
      and expenses are translated at average exchange rates in effect during the
      period. Resulting translation adjustments are recorded as a separate component
      in stockholders' equity. Foreign currency transaction gains and losses are
      included in the statement of income.




**Income
      Taxes**




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




**Cash
      and Cash Equivalents**




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




**Concentrations
      of Credit Risk**




Financial
      instruments and related items, which potentially subject us to concentrations
      of
      credit risk, consist primarily of cash and cash equivalents and accounts
      receivable. We place our cash and temporary cash investments with credit quality
      institutions. At times, such investments may be in excess of applicable
      government mandated insurance limits. We periodically review our trade
      receivables in determining our allowance for doubtful accounts.  Allowance
      for doubtful accounts was nil and $721 for the periods ended July 31, 2007
      and
      2006, respectively.




**Fair
      Value of Financial Instruments**




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




6




**CODA
      OCTOPUS GROUP, INC.**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**Nine
      Months ended July 31, 2007 and 2006**


**(UNAUDITED)**


**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 July 31, 2007:




Raw
              materials
            $
            1,482,841Work
              in process
            
            67,461Finished
              goods
            
            792,955Total
              inventory
            $
            2,343,257




**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 periods ended July 31, 2007 and
      2006.




**Research
      and Development**




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




**Marketing**




We
      charge
      the costs of marketing to expense as incurred. For the periods ended July 31,
      2007 and 2006, marketing costs were $200,459 and $236,322,
      respectively.




**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.




7


**CODA
      OCTOPUS GROUP, INC.**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**Nine
      Months ended July 31, 2007 and 2006**


**(UNAUDITED)**




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.




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.




8


**CODA
      OCTOPUS GROUP, INC.**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**Nine
      Months ended July 31, 2007 and 2006**


**(UNAUDITED)**




Per
      share
      basic and diluted net loss amounted to $0.34 and $0.32 for the periods
      ended July 31, 2007 and 2006, respectively. For the periods ended July
      31, 2007 and 2006, 34,577,728 and 15,743,728 potential shares,
      respectively, were excluded from the shares used to calculate diluted earnings
      per share as their inclusion would reduce net loss per share.




**Liquidity**




As
      of
      July 31, 2007 we have cash and cash equivalents of $2,894,907 and positive
      working capital of $6,894,576. For the nine month period ended July 31, 2007
      we
      had a net loss of $11,049,422 and negative cash flow from operations of
      $7,981,740. We also have an accumulated deficit of $37,654,496 at July 31,
      2007.




**NOTE
      2 - FIXED ASSETS**




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




Machinery
                and equipment
            $
            851,384Accumulated
                depreciation
            
            (561,738
            )Net
                property and equipment
            $
            289,646




Depreciation
      expense recorded in the statement of operations for the periods ended July
      31,
      2007 and 2006 is $103,332 and $26,588, respectively.




Rental
      equipment at July 31, 2007 is summarized as follows:




Rental
                equipment
            $
            240,876Accumulated
                depreciation
            
            (183,308
            )Net
                rental equipment
            $
            57,568




Depreciation
      expense recorded in the statement of operations for the periods ended July
      31,
      2007 and 2006 is $63,283 and $59,749, respectively.




**NOTE
      3 - INTANGIBLE ASSETS AND GOODWILL**




The
      Company has adopted SFAS No. 142, Goodwill and Other Intangible Assets, whereby
      the Company periodically test 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.




9


**CODA
      OCTOPUS GROUP, INC.**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**Nine
      Months ended July 31, 2007 and 2006**


**(UNAUDITED)**





The
        identifiable intangible assets acquired and their carrying value at July
        31,
        2007 is:
 
 Customer
                  relationships (weighted average life of 10 years)
              
              $
              694,503Non-compete
                  agreements (weighted average life of 3 years)
              
              
              198,911Patents
              
              
              66,410Licenses
              
              
              100,000Total
                  amortized identifiable intangible assets - gross carrying
                  value
              
              
              1,059,824Less
                  accumulated amortization
              
              
              (78,962
              )Net
              
              
              980,863Residual
                  value
              
              
              980,863




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.




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


Beginning
                  goodwill balance at November 1, 2006
              
              $
              1,060,906Goodwill
                  recorded upon acquisition of Colmek
              
              
              2,038,669Balance
                  at July 31, 2007
              
              $
              3,099,575




Considerable
      management judgment is necessary to estimate fair value. We enlisted 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.




Amortization
      of patents, customer relationships, non-compete agreements and licenses included
      as a charge to income amounted to $59,701 and $4,434 for the periods ended
      July
      31, 2007 and 2006, respectively. Goodwill is not being amortized.




**NOTE
      4 - 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 July 31, 2007, the Company has issued and
      outstanding 48,143,656 shares of common stock. The Company is also authorized
      to
      issue 5,000,000 shares of preferred stock with a par value of $.001 per share.
      We have designated 50,000 preferred shares as Series A preferred stock and
      have
      designated 50,000 preferred shares as Series B preferred stock. The remaining
      4,900,000 shares of preferred stock is undesignated. There were 6,407 preferred
      shares outstanding at July 31, 2007, all of which were Series A.




Series
      A Preferred Stock




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




10





**CODA
      OCTOPUS GROUP, INC.**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**Nine
      Months ended July 31, 2007 and 2006**


**(UNAUDITED)**




During
      the period ended July 31, 2007 we did not issue any further Series A Preferred
      Stock. We converted 17,234 shares of Series A Preferred Stock into 2,878,418
      shares of common stock, along with 2,878,418 warrants
      at prices ranging from $1.30 to $1.70. At July 31, 2007, the total of Series
      A
      Preferred Stock outstanding is 6,407 shares, convertible into 1,050,310 shares
      of common stock. During the period ended July 31, 2006 we sold 820 shares,
      taking the total outstanding at the end of that period to 23,161.




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 July 31, 2007, we have no shares of Series B Preferred Stock outstanding,
      compared to 23,000 outstanding as of July 31, 2006.




During
      the period ended July 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 proceeds from the sale of the units were
      $800,000.




Also
      during the period, 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 $100 per share.




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.




Common
      Stock




During
      the period ending July 31, 2007 we issued 1,640,268 shares of common stock,
      valued at $1,770,233, to employees, directors and consultants for
      services.




During
      the period ending July 31, 2007 we sold 15,025,000 shares of common stock which
      were issued alongside 7,512,500 Series A warrants and 7,512,500 Series B
      warrants. 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.
      Each
      warrant has a life of 5 years. A further 650,000 shares of common stock were
      sold as part of a unit with Series B Preferred Stock.




During
      the period ending July 31, 2007 we issued 532,090 shares of common stock 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 period ending July 31, 2007 a total of 34,000 shares of common stock were
      issued on the exercise of 34,000 stock options.




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




These
      transactions results in outstanding common stock of 48,143,656 at July 31,
      2007,
      compared to 24,301,980 at July 31, 2006.




11




**CODA
      OCTOPUS GROUP, INC.**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**Nine
      Months ended July 31, 2007 and 2006**


**(UNAUDITED)**




Other
      Equity Transactions




During
      the period ended July 31, 2007, we issued in the aggregate 1,195,000 common
      share purchase options to employees and consultants, with exercise prices of
      $1.30 to $1.70. The initial fair value of the options was $1,304,621 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%; (2) dividend yield of 0%;
      (3)
      volatility factor of the expected market price of our common stock of 263%
      -
      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,
      445,000 options were cancelled, all of which had exercise prices of $1.00 to
      $1.50. Also during the period, a total of 34,000 options were exercised at
      $1.00. During the period ended July 31, 2007, $637,917 was charged to
      expense.




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, 616,000 vested
      immediately and the balance vests over various periods through August, 2008.
      The
      initial fair value of the options was $835,438 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 period
      ended July 31, 2007, $7,407 was 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 $1,221,497 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 periods ending July 31, 2007 and 2006,
      $184,821 and $373,650, respectively, were charged to expense.




**NOTE
      5 - WARRANTS AND STOCK OPTIONS**




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




2007
            
            2006Number
            
            Weighted
                Average Exercise Price
            
            Number
            
            Weighted
                Average Exercise PriceOutstanding
                at beginning of the period
            
            
            13,410,000
            
            $
            1.29
            
            
            2,350,000
            
            $
            1.00Granted
                during the period
            
            
            23,098,418
            
            
            1.44
            
            
            7,215,000
            
            
            1.27Exercised
                during the period
            
            
            (34,000
            )
            
            1.00
            
            
            -
            
            
            -Terminated
                during the period
            
            
            (295,000
            )
            
            1.25
            
            
            -
            
            
            -Outstanding
                at the end of the period
            
            
            36,179,418
            
            $
            1.39
            
            
            9,565,000
            
            $
            1.20Exercisable
                at the end of the period
            
            
            35,323,318
            
            $
            1.39
            
            
            8,322,500
            
            $
            1.23




12


**CODA
      OCTOPUS GROUP, INC.**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**Nine
      Months ended July 31, 2007 and 2006**


**(UNAUDITED)**




The
      number and weighted average exercise prices of stock purchase options and
      warrants outstanding as of July 31, 2007 are as follows:




Range
                of
              Exercise
                Prices
            
            Number
                Outstanding
            
            Weighted
                Average Contractual Life (Yrs)
            
            Weighted
                Average
              Exercise
                Price0.50
            
            
            750,000
            
            
            3.75
            
            $
            0.500.58
            
            
            400,000
            
            
            3.67
            
            
            0.581.00
            
            
            5,881,000
            
            
            3.50
            
            
            1.001.30
            
            
            14,536,709
            
            
            4.47
            
            
            1.301.50
            
            
            310,000
            
            
            4.04
            
            
            1.501.70
            
            
            14,301,709
            
            
            4.45
            
            
            1.70




**NOTE
      6 - 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 $16,310,000 which expire through 2027, subject to limitations
      of Section 382 of the Internal Revenue Code, as amended. The deferred tax asset
      related to the carry forward is approximately $5,546,000. 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 $9,758,000, with no expiration. The deferred tax asset
      related to the carryforward is approximately $2,933,000. 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.




Components
      of deferred tax assets as of July 31, 2007 are as follows:




**Non-Current**
            
            **July
                31, 2007**
            
            **July
                31, 2006****Net
                Operating Loss Carry Forward**
            
            **$**
            **5,546,000**
            
            **$**
            **4,316,000****Valuation
                Allowance**
            
            
            **(5,546,000**
            **)**
            
            **(4,316,000**
            **)****Net
                Deferred Tax Asset**
            
            **$**
            **-**
            
            **$**
            **-**




**NOTE
      7 - 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.




13




**CODA
      OCTOPUS GROUP, INC.**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**Nine
      Months ended July 31, 2007 and 2006**


**(UNAUDITED)**




**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.




This
      factoring agreement was entered into on August 17, 2005 with Faunus Group
      International, Inc. (“FGI”) for a maximum borrowing of up to $1 million. Over
      the course of the period, we factored invoices totaling $3,906,587 in
      receivables and we received $3,016,033 in proceeds from FGI. This compares
      with
      the 2006 period, where, we factored invoices totaling $3,805,782 in receivables
      and we received $3,812,735 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
      $1,684,607.




**Concentrations**




We
      had no
      concentrations of purchases of over 5% during either of the periods ended 2007
      and 2006. We had a sales concentration of over 5% for the period ended 2007
      due
      to a sale to a customer for $1,521,675.




**NOTE
      8 - NOTES AND LOANS PAYABLE**




At
      July
      31, 2007 we had no outstanding balance under our UK bank revolving credit
      facility, which was repaid in full during the period. Advances under this credit
      facility bear interest at 2.0% over UK Bank Base Rate and are due on demand.
      Any
      advances are secured by a bond and a security interest in the assets of our
      subsidiary, Coda Octopus Products Ltd, exclusive of accounts
      receivable.




**NOTE
      9 - DUE TO RELATED PARTIES**




We
      are
      indebted to various related parties for advances for payments of operating
      expenses and dividends. These related parties include our parent and other
      entities controlled by our parent. Advances are non interest bearing and are
      due
      on demand. At the end of the period ending July 31, 2007, $258,458 was due
      to
      related parties, compared with $162,206 for the period ending July 31, 2006.




**NOTE
      10 - ACQUISITIONS**




*Acquisition
      of Martech Systems (Weymouth) Limited*




On
      June
      26, 2006, we acquired all of the issued and outstanding capital stock of Martech
      Systems (Weymouth) Limited, a UK company (“Martech”). Martech specializes in
      engineering projects and sales to the UK Ministry of Defense. The acquisition
      was made to expand our engineering and related services, along with the sale
      of
      products, to the U K government. The purchase price was approximately
      $1,536,000, payable as follows: approximately $1,180,000 in cash at closing;
      approximately $364,000 in cash one year after closing, which is accrued as
      $382,000 as at October 31, 2006, due to exchange rate movements. Approximately
      $286,000 in common stock could become due on October 31, 2007, though this
      dependent upon the performance of Martech, and is in no way guaranteed. The
      shares of common stock issued in conjunction with the merger were not registered
      under the Securities Act of 1933. The acquisition of Martech was accounted
      for
      using the purchase method in accordance with SFAS 141, “Business Combinations.”
The results of operations for Martech have been included in the Consolidated
      Statements of Operations since the date of acquisition.




14




**CODA
      OCTOPUS GROUP, INC.**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**Nine
      Months ended July 31, 2007 and 2006**


**(UNAUDITED)**




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




Current
                assets acquired
            
            $
            993,817Equipment,
                net
            
            
            37,126Goodwill
            
            
            998,591Current
                liabilities assumed
            
            $
            (493,262
            )Purchase
                price
            
            $
            1,536,271




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




*Acquisition
      of Colmek Systems Engineering*




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




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




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





15




**CODA
      OCTOPUS GROUP, INC.**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**Nine
      Months ended July 31, 2007 and 2006**


**(UNAUDITED)**




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 nine months ended
        July 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.
  July
                  31, 2007Revenue
              
              $
              11,699,184Net
                  loss
              
              
              (11,258,905
              )Loss
                  per common share
              
              
              (0.32
              )
  **NOTE
        11 - SEGMENT INFORMATION**
  Due
        to
        the nature of our businesses, we are operating in two reportable segments.
        Martech, Colmek, and Innalogic operate as contractors, and the balance of
        our
        operations are comprised of product sales. Segment information is as
        follows:
  **Contracting**
              
              **Product
                  Sales**
              
              **Corporate**
              
              **Total**Revenue
              
              $
              5,396,355
              
              $
              5,398,266
              
              
              -
              
              $
              10,794,621Segment
                  operating profit/(loss)
              
              
              1,454,978
              
              
              559,107
              
              
              (6,787,101
              )
              
              (4,773,016
              )Identifiable
                  assets
              
              
              3,806,328
              
              
              5,901,170
              
              
              5,627,050
              
              
              15,334,548Capital
                  expenditure
              
              
              207,061
              
              
              73,962
              
              
              62,493
              
              
              343,516Selling,
                  general & administrative
              
              
              1,426,722
              
              
              1,858,575
              
              
              5,597,802
              
              
              8,883,099Depreciation
                  and amortization
              
              
              87,655
              
              
              59,806
              
              
              78,848
              
              
              226,309Interest
                  expense
              
              
              60,975
              
              
              256,833
              
              
              6,032,139
              
              
              6,349,947


**NOTE
      12 - SUBSEQUENT EVENTS**




On
      September 10, 2007 the Company’s SB-2 registration statement became effective
      with the SEC, meaning that the Company is, from that date, subject to the
      standard reporting requirements of a publicly listed company in the United
      States.




16


**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**




On
      July
      12, 2004, pursuant to the terms of a share exchange agreement between The Panda
      Project, Inc., a Florida corporation, and Fairwater Technologies Ltd.
      (“Fairwater”), Panda acquired the shares of Coda Octopus Limited, a UK
      corporation and Fairwater’s wholly-owned subsidiary, in consideration for the
      issuance of a total of 20,050,000 shares of common stock to Fairwater and other
      shareholders of Coda Octopus Limited. The shares issued represented
      approximately 90.9% of the issued and outstanding shares of Panda. The share
      exchange was accounted for as a reverse acquisition of Panda by Coda.
      Subsequently, Panda was reincorporated in Delaware and changed its name to
      Coda
      Octopus Group, Inc.




We
      are a
      developer of underwater technologies and equipment for imaging, mapping, defense
      and survey applications. We are based in New York, with research and
      development, sales and manufacturing facilities located in the United Kingdom,
      United States and Norway.




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.·
            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.





17




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
      91% of our 2006 revenues of $7,291,291 were attributable to pure products
      business. On a pro forma basis, adding the acquired businesses last year would
      have given us revenues of $11,587,523 and around 43% of our revenues would
      have
      been generated from engineering services. For the six months to April 30, 2007,
      our revenues were $4,934,714, with 49.5% of this attributable to our products
      business, and the remainder to our acquired engineering services businesses.
      On
      a pro forma basis, adding Colmek for the period from November 1, 2006 to April
      6, 2007 would have given us revenues of $5,814,500, with 41.8% of this
      attributable to our products business, and the remainder from 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.·
            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.




18




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 collectibility is reasonably assured. No right of return
      privileges are granted to customers after shipment.




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




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




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




*Recoverability
      of Deferred Costs*




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




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




*Stock-Based
      Compensation 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.




19




*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




Due
      to
      the acquisition of Martech Systems (Weymouth) Limited (“Martech”), a UK
      engineering services company, on June 26, 2006, the financial information
      presented for Coda Octopus for the three and nine months ended July 31, 2006
      (“the 2006 period”) only includes activity in Martech for the period from June
      26 to July 31. The three and nine month period ending July 31, 2007 includes
      the
      revenues and expenses of Martech for the entire period.




Activities
      pursuant to the acquisition of Miller and Hilton Inc. d/b/a Colmek System
      Engineering (“Colmek”) on April 6, 2007 are included in the three and nine
      months ending July 31, 2006 from the date of acquisition only. The three and
      nine month periods ending July 31, 2007 includes revenues and expenses of Colmek
      for the entire period.




The
      start
      up of Innalogic, Inc. earlier this year contributed to costs and revenues in
      the
      period in 2007 but not in 2006. As a result, the sharply increased revenues
      and
      expenses in the accompanying unaudited consolidated statements of operations
      in
      2007 compared to those in 2006 mean that comparisons between the two periods
      may
      not be meaningful.




On
      July
      24 the company announced that it had received an award of $2.6 million from
      the
      DOD Technical Support Workgroup (TSWG) to build and deliver next generation
      UIS
      systems for use by the Coast Guard and, potentially, other customers.
      Approximately 55% of this contract was billed in the  third
      quarter. The remainder is expected to be fulfilled over the next two quarters.
      The system is designed as a security enhancing device which gives a state of
      the
      art view of subsurface structures and which could determine the level of threat
      that may be encountered. The system we are sending to the Coast Guard could
      be
      used by regional enforcement teams for roving security purposes or to monitor
      changes in the landscape of a seawall. We believe that the system takes the
      next
      step in the development and implementation of underwater security plans
      targeting specific threat types including detection and monitoring for swimmers,
      underwater vehicles, improvised explosive devices (IEDs), limpet mines (attached
      to ships, seawalls, etc.) and related underwater threats.




***Comparison
      of Three Months Ended July 31, 2007 compared to Three Months Ended July 31,
      2006***




Revenue .
      Total
      revenue for the 2007 period and the 2006 period was $5,859,907 and $2,682,539.
      Compared with the 2006 period, contributions from Martech were $972,648 in
      2007
      compared to $82,905 in 2006. Colmek revenues were $1,588,560 (acquired in April
      of 2007) and Innalogic was $343,700 in the 2007 period. Therefore, there was
      a
      13.7% increase in our original businesses. This was due to strong demand for
      our
      traditional products in the geophysical and hydrographic survey markets and
      the
      TSWG contract.




Margins .
      Gross
      margins were slightly weaker in the 2007 period at 60.7% compared with 64.5%
      for
      the 2006 period. This reflects the addition of Colmek and Martech (for the
      full
      period) engineering businesses, which have a slightly lower margin than the
      products division of our company. Our original businesses had a gross margin
      of
      68.1% for the period.




Research
      and Development (R&D) .
      R&D
      increased 12.9% to $634,679 in the 2007 period from $561,718 in 2006. This
      reflects further development of the EchoscopeTM and UISTM system (Underwater
      Inspection System) tied, in part, to the TSWG contract. 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 2007 period increased to $3,594,560 from $2,382,659 in
      2006. However, the non-cash element of these costs (charges for stock and option
      grants) was $776,634 compared to $690,138 in the corresponding period of 2006.
      The 2007 period also contained $161,894 of costs related to filing of the SB-2
      (a non-recurring cost). When adjusted for these two amounts, SG&A totals
      $2,656,032 for 2007 and $1,692,521 in 2006, an increase of $963,511, or 56.9%.
      Of this increase, the additions of Martech (responsible for $303,608), Colmek
      (responsible for $394,805) and Innalogic (responsible for $265,293) contributed
      a total of $963,706, meaning that core SG&A decreased slightly by $195 year
      on year.




20




Key
      areas
      of expenditures include wages and salaries, where we spent $1,534,028 or 42.7%
      of our SG&A costs (2006 period was $1,028,729 or 43.2%). Legal and
      professional fees, including accounting, audit and investment banking services,
      decreased to $480,892 or 13.4% in 2007 from $528,475 or 22.2% of SG&A in
      2006. Travel decreased to $127,283 or 3.5% of SG&A from $155,553 or 6.5% in
      2006. Rents for various locations increased to $148,376 or 4.1% of SG&A from
      $71,613 or 3.0% of SG&A in 2006. Marketing increased slightly to $74,031 or
      2.1% of SG&A from $65,299 or 2.7% of SG&A in 2006.




Operating
      Loss .
      As a
      result of the foregoing, the company incurred a loss from operations of $670,060
      for the quarter ending July 31, 2007 compared to a loss of $1,211,768 for the
      same period in 2006. Removing non-cash expenses and non-recurring expenses
      totaling $1,061,833, the comparison shows a gain from operations of $268,468
      against a loss of $521,630 in the third quarter of 2006. The total of adjusted
      SG&A (ie. removing non-cash and non-recurring items) and R&D is
      $3,167,406. Applying to the fourth quarter and assuming no further increases
      in
      SG&A for the period nor any unusual non-recurring expenses, would mean $5.3
      million is our break-even revenue goal, assuming a continuation of the 60%
      gross
      margin achieved in the July quarter.




Interest
      Expense .
      Interest expense for the 2007 period decreased to $561,350 compared to $684,337
      in the same period of 2006. Of these numbers, $445,043 and $565,363 respectively
      were attributable to warrants issued in conjunction with a financing. When
      adjusted, these numbers were $116,307 for 2007 and $118,974 for
      2006.




Preferred
      Dividends and Beneficial Conversion Feature .
      During
      the 2007 period, dividends of $31,851 were declared on the Series A Preferred
      shares which remain outstanding. In the corresponding period in 2006 dividends
      were declared ($113,902 for series A and $23,565 for series B) on outstanding
      preferred stock. At July 31, 2007 there remain 6,407 series A preferred shares
      outstanding, which convert into 1,050,310 shares of common. The bulk of the
      series A and all of the series B were converted in the April financing. There
      was no charge for the beneficial conversion feature in 2007 while during the
      2006 period a charge of $2,332,800 was incurred and shown in our statement
      of
      operations.




***Comparison
      of Nine Months Ended July 31, 2007 (“2007 Period”) compared to Nine Months Ended
      July 31, 2006 (“2006 Period”)***




Revenue .
      Total
      revenue for the 2007 period and the 2006 period was $10,794,621 versus
      $5,134,847, an increase of 110.2% year on year. In the 2007 period contributions
      from Martech were $2,103,840 for the nine months Colmek were $1,709,014 and
      Innalogic were $1,583,502. The 2006 contributions from the new businesses were
      $82,905 from Martech which was the only new business to contribute in the 2006
      period. Therefore, the original businesses showed a gain of $84,814 virtually
      flat for the nine month period.




Margins .
      Gross
      margins were 58.1% similar to the 58.8% percent in the 2006 period.




Research
      and Development (R&D) .
      R&D
      spending increased slightly to $1,736,437 in the 2007 period from $1,658,788
      for
      the 2006 period. We continue to focus considerable effort into enhancing the
      EchoscopeTM and releasing other products in our suite of marine geophysical
      offerings. In particular, work focused on delivering our Underwater Inspection
      System (UIS), a turnkey system built around the EchoscopeTM
platform.




Selling,
      General and Administrative Expenses (SG&A). SG&A
      expenses for the 2007 period increased to $8,883,099 from $5,630,112 during
      the
      2006 period. During the 2007 period $2,565,175 was attributable to non-cash
      charges relating to stock and options issued compared to $1,030,743 in the
      2006
      period. Excluding non-cash charges and non-recurring charges of $161,894 related
      to the filing of our SB-2, the SG&A for the period would have been
      $6,156,030 compared to $4,599,369 in 2006, representing an increase over the
      prior year of $1,556,661 or 33.8%. Of this increase $678,964 (net of the $39,471
      SG&A cost in 2006) was due to the acquisition of Martech, $441,929 was due
      to the acquisition of Colmek, with Innalogic contributing $690,346. This meant
      core expenses (without new businesses) decreased by $254,578 for the
      period.




Key
      areas
      of expenditure included wages and salaries, where we spent $3,736,218 or 42.1%
      of our SG&A costs (2006 period was $2,239,539 or 39.8%); legal and
      professional fees, including accounting, audit and investment banking services,
      where we spent $1,169,935 or 13.2% of our SG&A costs (2006 period was
      $1,179,084 or 20.9%); travel costs, which increased to $389,987 or 4.4%
      ($286,414 or 5.1% in 2006); rent for various locations, which increased to
      $390,526 or 4.4% ($157,943 or 2.8% in 2006); marketing costs, which decreased
      to
      $200,459 or 2.3% (2006 period was $236,322 or 4.2%).




21




Other
      Operating Expenses .
      We
      incurred costs of $435,000 as non-recurring fees in connection with our
      financings, which are also included in our loss from operations, and shown
      separately under Other Operating Expenses. These fees covered equity fund
      raising during the 2007 period. There we no comparable fees incurred during
      2006.




Operating
      Loss. As a result of the foregoing, the company incurred a loss from operations
      of $4,773,016 in 2007 and $4,265,749 in 2006. Removing non-cash and
      non-recurring expenses, the comparison shows losses of $2,045,947 and $3,235,006
      respectively.




Interest
      Expense. Interest expense for the 2007 period was $6,349,946 compared to
      $830,970 for 2006. Charges relating to warrants issued for financing were
      $5,874,827 for the 2007 period and $565,363 for the 2006 period, leaving cash
      interest charges of $475,119 for 2007 against $338,829 in 2006.




Dividends
      and Other Stock Charges .
      During
      the 2007 period dividends of $346,630 were declared preferred stock series
      A and
      B while a $217,117 dividend was declared in the corresponding period of 2006.
      At
      July 31, 2007 there remain 6,407 series A preferred shares outstanding, which
      can convert into 1,050,310 shares of common. The bulk of the series A preferred
      stock and all of the series B preferred stock were converted in the April
      financing. There was a charge of $800,000 for the beneficial conversion feature
      in 2007 while during the 2006 period a charge of $2,332,800 was incurred and
      shown in our statement of operations.




**Liquidity
      and Capital Resources**




As
      of
      July 31, 2007 the Company had positive working capital of $6,894,576. This
      was
      primarily due to the April 3, 2007 and May 6, 2007 consummation of securities
      purchase agreements with a group of accredited individual and institutional
      investors providing for the sale and issuance of 15,025,000 shares of our common
      stock and five-year warrants to purchase 7,512,500 shares of common stock at
      $1.30 per share and five-year warrants to purchase 7,512,500 shares of common
      stock at $1.70 per share. Gross proceeds from the offering amounted to
      $15,025,000. Also, in the period, we raised $800,000 from the sale of preferred
      stock, which has since been converted into common stock. We also issued
      five-year warrants to purchase 2,400,000 shares of our common stock at $1.00
      per
      share as part of placement agent fees, with the sale of securities netting
      the
      company $14,677,980 for the period.




The
      Company generated a deficit in cash flow from operations of $8,031,167 in the
      2007 Period. This deficit is primarily attributable to the Company's net loss
      from operations of $11,049,422 (removing non-cash charges reduced this loss
      to
      $2,045,947), with increases in inventory of $391,865, accounts receivable of
      $2,266,830, other receivables and prepayments of $949,681, and decreases in
      payables and accrued expenses of $2,354,363 also contributing to this
      deficit.




Cash
      from
      the sale of our securities was also used in our investing activities, with
      $343,516 spent on property, plant and equipment and intangible assets in the
      2007 period. In addition, we acquired a business, Miller & Hilton d/b/a
      Colmek Systems Engineering (“Colmek”) which used cash of $958,470 during the
      period, and completed the payments on the purchase of Martech Systems (Weymouth)
      Ltd (“Martech”), with a further $400,000 paid during the period. During the
      period, $1,124,447 of debt was also repaid, $1,818,100 of preferred stock was
      redeemed and dividends of $606,597 were paid (this includes a redemption premium
      of $181,810 paid on the preferred stock).




While
      we
      have raised capital to meet our working capital and financing needs in the
      past,
      additional financing is required in order to meet our current and projected
      cash
      flow requirements from operations and development. While we believe we have
      sufficient cash on hand as of July 31, 2007 to meet our working capital needs
      and requirements for the next twelve (12) months, we may seek additional
      financing, which may take the form of debt, convertible debt or equity, in
      order
      to provide the additional working capital and funds for expansion.  We
      currently have no commitments for financing. There is no guarantee that we
      will
      be successful in raising the funds required.




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.




In
      the
      short term, our plan involves, specifically:




·
            Continue
                to sell our current range of products into a mixture of commercial
                and
                government markets, increasing sales of these products over the course
                of
                this financial year - we are expecting previous growth trends broadly
                to
                continue over the course of the
                year;


·
            Start
                to sell complete turnkey systems based around our leading EchoscopeTM 3-D
                technology, to open markets in law enforcement and inspection - a
                great
                deal of our R&D expenditure has been directed towards the launch of
                these systems earlier this year, and we expect to sell a small number
                of
                high-value systems before the end of the current financial
                year;


·
            Complete
                our first government sales in the US, through the DoD contract awarded
                earlier this year;




22




·
            Gain
                our first port security solution contracts through the provision
                of our
                unique 3-D technology and other products and services, enabling us
                to
                provide complete solutions;




·
            Integrate
                our latest acquisition, Colmek Systems Engineering, which is already
                adding to our revenues this year;


·
            Reduce
                costs through the closure of at least one site this year in England,
                UK -
                this has been completed;


·
            Reorganize
                our subsidiary operations to increase efficiency and reduce the need
                for
                additional staff recruitment through the remainder of the
                year;


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




Through
      these measures, we aim to move from cash negative for last year and the first
      two quarters of this year to cash positive. We also aim to move from heavily
      loss-making for the past 18 months to break-even for the current year, prior
      to
      any non-cash charges made to our income statement. Based on this, we aim to
      be
      profitable over the course of the next year. Although we intend to pursue our
      plans as set forth in the previous paragraph aggressively, 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, Pound Sterling and Norwegian Kroner
      for
      its or its United Kingdom and Norwegian operations, respectively.




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




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




**Financing
      Activities**




Since
      February 2005, we have raised approximately $24,724,289 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.




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




From
      September 2006 through January 2007, we issued to one institutional investor
      units consisting 23,000 shares of our Series B Preferred Stock and four five
      year warrants to purchase 4.6 million shares of our common stock at a price
      ranging from $1.30 to $2.00 per share and 650,000 shares of our Common Stock
      for
      a total cash consideration of $2,300,000. The 23,000 shares of Series B
      Preferred Stock have since been converted into 2,300,000 shares of our common
      stock.




23




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




In
      April
      2007, we issued to an individual investor 25,000 shares of our common stock
      plus
      five-year warrants to purchase the same 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.




**Off-Balance
      Sheet Arrangements**




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




**Item
      3. Control and Procedures**




(a)
      Evaluation of Disclosure Controls and Procedures




As
      of
      July 31, 2007, 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
      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.




(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.





24




**PART
      II - OTHER INFORMATION**





**Item
      1. Legal Proceedings**




There
      were no material pending legal proceedings at July 31, 2007 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





25





**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:
                October 16, 2007
            
            /s/ Jason
              ReidJason
                Reid
              President
                and Chief Executive Officer




Date:
              October 16, 2007
            
            /s/ Jody
              E. FrankJody
                Frank
              Chief
                Financial Officer




26