Summary of CODA OCTOPUS GROUP, INC.

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

Forward-Looking Statements

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

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

General Overview

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

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

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

Background

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

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

· 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 ™, a unique, patented instrument which permits accurate three-dimensional visualization, measurement, data recording and mapping of underwater objects. We have recently completed developing and commenced marketing this first real time, high resolution, three-dimensional underwater sonar imaging device which we believe has particularly important applications in the fields of port security, defense and undersea oil and gas development.

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

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

· First mover advantage in 3-D sonar markets based on our patented technology, our research and development efforts and extensive and successful testing in this area that date back almost two decades as well as broad customer acceptance.

· Early recognition of need for 3-D real-time sonar in defense/security applications.

· Expansion into new geographies like North America and the Western hemisphere.

· Expansion into new commercial markets like commercial marine survey with innovative products.

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

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

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

To this established base of business, we now plan to add other sub-sections:

· we are now starting to bid (sometimes in partnership, where areas of focus other than underwater sonar and wireless video surveillance capability are demanded) for complete port security and other solutions. We have bid on a small number of these in the last six months and hope for our first successes shortly.

· we are currently reviewing the possibility of launching next year, in partnership with others, a services business based on our product set. This business will be port based and will, for example, provide ship hull inspections by way of rental of equipment and provision of a team to operate the equipment for any ship entering that particular port.

Critical Accounting Policies

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

Below is a discussion of accounting policies that we consider critical to an understanding of our financial condition and operating results and that may require complex judgment in their application or require estimates about matters which are inherently uncertain. A discussion of our significant accounting policies, including further discussion of the accounting policies described below, can be found in Note 3, "Summary of Significant Accounting Policies" of our Consolidated Financial Statements.

Revenue Recognition

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

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

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

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

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

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

Recoverability of Deferred Costs

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

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

Stock-Based Compensation Expense

Stock Based Compensation - SFAS No. 123, "Accounting for Stock-Based Compensation", establishes and encourages the use of the fair value based method of accounting for stock-based compensation arrangements under which compensation cost is determined using the fair value of stock-based compensation determined as of the date of the grant or the date at which the performance of the services is completed and is recognized over the periods in which the related services are rendered. The statement also permits companies to elect to continue using the current intrinsic value accounting method specified in Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", to account for stock-based compensation to employees. We use the fair value method for equity instruments granted to employees and non-employees and use the Black Scholes model for measuring the fair value. The stock based fair value compensation is determined as of the date of the grant or the date at which the performance of the services is completed (measurement date) and is recognized over the periods in which the related services are rendered.

Income Taxes

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

Results of Operations

Introduction

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

Comparison of Three Months Ended January 31, 2008 ("2008 Period") compared to Three Months Ended January 31, 2007 ("2007 Period")

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

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

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

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

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

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

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

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

Liquidity and Capital Resources

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

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

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

Our plan to move from loss to profit is based upon intensifying our focus on port security. We believe that in the post 9/11 era there are significant growth opportunities available in the market segment in which we operate because of increased government expenditures aimed at enhancing security. We also have had a measure of success in the off shore construction area. We believe that we can continue to sell into that market with success.

In the short term, our plan involves, specifically:

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

· Start to sell complete turnkey systems based around our leading Echoscope™ 3-D technology, to open markets in law enforcement and inspection - a great deal of our R&D expenditure has been directed towards refining our product and completing sales this year that are currently in our pipeline, with delivery expected to start from the second quarter.

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

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

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

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

Through these measures, we aim to move from cash negative for last year and the first quarter of this year to cash positive. We also aim to move from heavily loss-making for the past 2 years to profitable for the current year, prior to any non-cash charges made to our income statement. Although we intend to pursue our plans aggressively as set forth in the previous paragraph, there can be no assurance that we will be successful in our attempt to make the company profitable in the near future, or ever.

Inflation and Foreign Currency

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

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

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

Financing Activities

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

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

In October 2005, we issued a total of 15,000 Series A Preferred Stock (Sterling Denominated), since converted into 2,655,000 shares of common stock, for a total cash consideration of £1,500,000 equivalent to approximately $2,655,000, based upon a conversion ratio of $1.77 for each UK Pound at the time of the investment.

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

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

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

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

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

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

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

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

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.