UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION





WASHINGTON,
D.C. 20549





FORM
10-K





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


For the
fiscal year ended October 31, 2009





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


Commission file number:
000-52815




CODA
OCTOPUS GROUP, INC.


(Exact
name of registrant as specified in its charter)





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





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


New
York 10001


(Address,
Including Zip Code of Principal Executive Offices)





(212)
924-3442


(Issuer's
telephone number)





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


NONE


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


COMMON
STOCK, $0.001 PAR VALUE PER SHARE





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


s
            Indicate by check mark if the
      registrant is not required to file reports pursuant to Section 13 or
      Section 15(d) of the Act. Yes oNo x


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


s
            Indicate by check mark if
      disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
      (229.405 of this chapter) is not contained herein, and will not be
      contained, to the best of registrant’s knowledge, in definitive proxy or
      information statements incorporated by reference in Part III of this Form
      10-K or any amendment to this Form 10-K. o


s
            Indicate by check mark whether
      the registrant is a large accelerated filer, an accelerated filer, or a
      non-accelerated filer or a smaller reporting
    company.


Large
      accelerated filer o
              Accelerated
      filer oNon-accelerated
      filer o
              Smaller
      reporting company x


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


s
            State issuer's revenues for its
      most recent fiscal year:
$13,224,435.


s
            State the aggregate market value
      of the voting and non-voting common equity held by non-affiliates computed
      by reference to the price at which the common equity was last sold, or the
      average bid and asked price of such common equity, as of the April 30,
      2009, representing the last business day of the registrant’s most recently
      completed second fiscal quarter: approximately $320,000. For purposes of
      this computation, all directors and executive officers of the registrant
      are considered to be affiliates of the registrant. This assumption is not
      to be deemed an admission by the persons that they are affiliates of the
      registrant.


s
            State the number of shares
      outstanding of each of the issuer's classes of common equity, as of the
      latest practicable date: 49,050,244 as of January 21,
      2010.





TABLE OF
CONTENTS





PART IITEM
      1.
                                                            
                                                            BUSINESS
                                                            
                                                            3ITEM
      2.
                                                            
                                                            PROPERTIES
                                                            
                                                            16ITEM
      3.
                                                            
                                                            LEGAL
      PROCEEDINGS
                                                            
                                                            17ITEM
      4.
                                                            
                                                            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
                                                            
                                                            17PART IIITEM
      5.
                                                            
                                                            MARKET
      FOR REGIST RANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES
                                                            
                                                            18ITEM
      6.
                                                            
                                                            SELECTED
      FINANCIAL DATA
                                                            
                                                            18ITEM
      7.
                                                            
                                                            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
                                                            
                                                            19ITEM
      8.
                                                            
                                                            FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA
                                                            
                                                            30ITEM
      9.
                                                            
                                                            CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
                                                            
                                                            30ITEM
      9A(T)
                                                            
                                                            CONTROLS
      AND PROCEDURES
                                                            
                                                            30PART IIIITEM
      10.
                                                            
                                                            DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
                                                            
                                                            32ITEM
      11.
                                                            
                                                            EXECUTIVE
      COMPENSATION
                                                            
                                                            34ITEM
      12.
                                                            
                                                            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS
                                                            
                                                            40ITEM
      13.
                                                            
                                                            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
                                                            
                                                            41ITEM
      14.
                                                            
                                                            PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
                                                            
                                                            43ITEM
      15.
                                                            
                                                            EXHIBITS,
      FINANCIAL STATEMENT SCHEDULES
                                                            
                                                            44SIGNATURES
                                                            
                                                            46


2


FORWARD-LOOKING
STATEMENTS





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





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





PART
I





ITEM
1. BUSINESS





Overview





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





s
            Marine
      geophysical survey (commercial), which focuses on oil and gas,
      construction and oceanographic research and exploration. Our current
      products encompass geophysical data collection and analysis, through to
      printers to output geophysical data collected by sonar that are marketed
      to survey companies, research institutions and salvage companies. This was
      our original focus, from founding in 1994.
  .





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




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




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


3





w
            First mover advantage in 3D sonar
      markets based on our patented technology, research and development efforts
      and extensive and successful tests that date back almost two decades as
      well as the resulting broad customer acceptance, as evidenced by orders
      for our product and its derivatives from government agencies, research
      institutes and oil and gas companies, that conduct their own testing prior
      to placing orders, as well as repeat orders from significant customers for
      this product and its derivatives. There is usually a significant time
      period between introduction of the product to a prospective customer and
      the purchase order.  Prospective customers need to test the product
      in the environment in which they intend to use it to ensure that it is
      suitable for its intended purpose.  We hold the patent for a“Method for
      Producing a 3D image” of, for example, a submerged object and/or underwater environment. 
      This patent, first applied for in Norway in 1998, is recorded in the
      European Patents Register, Australia, Norway and the USA.  This
      method is the culmination of approximately 20 years of research and
      testing led by the three inventors/scientists, who worked for OmniTech AS.
      These individuals continue to work for us and are actively involved in
      producing and advancing the Echoscope®, which incorporates this patent. We
      have also recently been granted two (2) additional patents which
      complements our existing patent for a “Method for
      Producing a 3D Image”.





s
            Early recognition of need for 3D
      real-time sonar in defense/security applications. We believe that we are
      the first to bring to market a product with the capability of producing a
      3D image of submerged or underwater objects or environment. Prior to the
      deployment of this method in producing an image of a submerged or
      underwater object or environment was accomplished strictly by
      two-dimensional (2D) sonar.





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





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





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





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




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





Corporate
History





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




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




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


4


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





Following
the reverse merger and in continuance of our program to capture more of the
market in the United States and our focus on port security and defense, we
established our headquarters in New York City.





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





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





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





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





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




Strategy





We have a
basis in both underwater geophysical products (Coda Octopus Products Limited and
Inc.) sold in large part to the oil and gas market, and defence oriented
engineering (Coda Octopus Colmek and Coda Octopus Martech). In adding the unique
3D sonar, Echoscope®, sourced through our own R&D, to our portfolio we have
a product that appeals to both the commercial markets serviced by Coda Octopus
Products and the defence community. We have successfully sold this product to
customers in oil and gas, dredging, underwater construction, and port security
businesses, as well as to the US Coastguard.




Our short
and medium term strategy is to establish a reliable level of profitability in
part through our recently started cost reduction program which we expect will
put an end to our historical losses.  We intend to use some of the
anticipated cost savings in increased global sales and marketing with a
concentration on the USA.  We also intend to maximise the returns for
the Echoscope® product range whilst at the same time achieving double digit
growth from our historic businesses.  We will continue to concentrate
on the markets described above in the next fiscal year.




Operations





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


5


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





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




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





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





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





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





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





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





On
December 15, 2008, Martech acquired Dragon Design Ltd. Dragon is an electronics
manufacturing and design business employing thirteen staff in leased premises in
Weymouth, Dorset, UK. Examples of the type of work that Dragon does are its two
long term contracts with DEK International, the leading manufacturer of printing
machines for the electronics industry, where the Company supplies both
components for new machines and spares for older models, and its relationship
with Vector Developments, purveyors of marine night vision equipment for the
leisure market.




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





Co-located
with our corporate headquarters at our 25 th Street
offices in Manhattan, Innalogic, a Delaware corporation, provides wireless
encrypted  data products currently focused on video surveillance for
commercial organizations (domestic and international) and local and US Federal
government agencies.





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





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




Port
Security Group, Inc.





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


6


Coda
Octopus Tactical Intelligence, Inc.





Since the
end of 2008 we have formed this subsidiary to facilitate our entry into the
counter-terrorism and anti-piracy training markets, which we believe are
integral to our efforts to help major customers deploy real time 3D sonar
systems in hot spots around the world.  We have recruited two
specialists in the field of real world security training for domestic and
international military units and government agencies to spearhead this drive;
these individuals have designed or led more than 50 such training programs
throughout the world since September 11, 2001, using up to 100 freelance
specialists on a contract basis. The expertise of this part of the Group will be
used to leverage our Echoscope® and UIS capabilities in terms of sales and
training.





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





Our
Products





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





CodaTM Brand
Products





Coda
GeoSurvey Data Acquisition





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





Coda
GeoSurvey Productivity Suite





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




Coda
Echoscope®





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


7


The
Echoscope® has a very wide range of applications including:




s
            inspection of harbor
      walls;


s
            inspection of ship
      hulls;


s
            inspection of bridge
      pilings;


s
            ROV navigation (obstacle
      avoidance);


s
            AUV navigation and target
      recognition (obstacle
avoidance);


s
            construction - pipeline touchdown
      placement and inspection;


s
            obstacle avoidance
      navigation;


s
            bathymetry (measurement of water
      depth to create 3D terrain
models);


s
            monitoring underwater
      construction;


s
            underwater intruder
      detection;


s
            dredging and rock
      dumping;


s
            contraband
      detection;


s
            locating and identifying objects
      undersea, including mines.





Considerable
interest in the Echoscope® has been shown by the United States Coast Guard,
NAVSEA, the US Office for Naval Research (ONR), the US Office for Naval
Intelligence (ONI), the US Department of Homeland Security and various other
defense agencies. The Echoscope®, in its simplest form as a stand alone product,
is priced at $250,000. We have sold and delivered 29 of these to customers since
its introduction. In addition, a number of these devices are on long term rental
in places like the Gulf of Mexico. Among the first purchasers have been United
States naval agencies, the United States Coast Guard, research institutions, a
construction company in Japan and two construction companies, Van Oordand and
Baggermaatschapij Boskalis BV, both based in the Netherlands.





Coda
Underwater Inspection System (UISTM)





The Coda
Underwater Inspection System or UISTM is the world’s first, and we believe only,
fully integrated high resolution real-time 3D inspection system. It delivers
precise and intuitive 3D images in real-time, and is designed to inspect large
areas with 100% coverage . At the
heart of every UISTM is the unique Echoscope® real-time 3D sonar incorporating
our cutting edge phased array technology to simultaneously generate over 16,000
beams. This results in an instant three dimensional sonar image where the
position of every data point is accurately known, producing detailed images from
a single sonar ping.




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




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





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





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




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


8


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




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





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




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





Option
                                                                                                                        
                                                                                                                        Description
                                                                                                                        
                                                                                                                        Estimated Purchase Price
                                                                                                                        
                                                                                                                        Time Period for DeliveryOption 1
                                                                                                                          RANGE
      RESOLUTION ENHANCEMENT
                                                                                                                        
                                                                                                                        Development
      of core beam forming hardware and related technology to improve the
      current 3 or 4cm range resolution to 1 or 2cm, and increase target
      detection of objects on harbor walls and other close range
      applications.
                                                                                                                        
                                                                                                                        $
                                                                                                                        634,065
                                                                                                                        
                                                                                                                        CompletedOption 2
                                                                                                                          INCREASE
      ECHOSCOPE FREQUENCY
                                                                                                                        
                                                                                                                        Development
      of new transducer and channel board hardware to allow operation at higher
      frequencies (up to 500KHz) which will increase the resolution of the
      data
                                                                                                                        
                                                                                                                        $
                                                                                                                        378,084
                                                                                                                        
                                                                                                                        CompletedOption 3
                                                                                                                          AUTOMATED
      CHANGE DETECTION
                                                                                                                        
                                                                                                                        Development
      of software compatible with the UIS platform and designed for on-line
      detection and post-processing analysis of captured Echoscope® data. In
      essence, the software will have the capability of registering any changes
      of new data collected against a baseline survey and automatically alert
      end-user to the changes (i.e the presence of something that was not there
      on the last inspection - example of a harbor wall).
                                                                                                                        
                                                                                                                        $
                                                                                                                        1,152,948
                                                                                                                        
                                                                                                                        Expected
      to be completed April 2010Option 4
                                                                                                                          ADVANCED
      PROTOTYPE UIS SYSTEM
                                                                                                                        
                                                                                                                        Building
      of up to seven (7) additional UIS Systems to agreed USCG
      specifications.
                                                                                                                        
                                                                                                                        $
                                                                                                                        3,291,750
                                                                                                                        
                                                                                                                        CompletedOption 5
                                                                                                                          DEVELOPMENT
      OF ONE PIECE F190
                                                                                                                        
                                                                                                                        Development
      of a F190 Positioning System to replace the standard two piece system
      currently used in the UIS.
                                                                                                                        
                                                                                                                        $
                                                                                                                        247,434
                                                                                                                        
                                                                                                                        Completed


9


Octopus®
 Brand
Products




Octopus
F180TM Precision Attitude & Positioning System





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




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




Octopus
760 Series Geophysical Acquisition System





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





Octopus
361/461 Analysis Software





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





Octopus®
Thermal Printers





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





Colmek
Products





StingerTM family of Rugged
Small-Form-Factor PCs





CodaOctopus
Colmek takes a unique "Total Systems Solutions" approach to meeting customers’
requirements for rugged small-form-factor PCs. Typically our competitors try to
fit standard products into complicated applications, while we look at all the
requirements and adapt the product accordingly. By taking a modular design
approach, we can formulate the best total solution for our customer/partner and
do so economically. Coda Octopus has successfully deployed Stinger products on
Unmanned Aerial Systems (UAS), and shipboard for satellite-based tracking
systems.





RhinoTuffTM
family of Rugged Touch Screen Computers





The
robust RhinoTuffTM rugged touch screen computer is built exclusively for reliable
operation in the world's harshest environments. It is modular and user-definable
affording maximum flexibility. This all-weather, all terrain, all-in-one PC
thrives in field where the average "tough" computer is simply not tough enough,
including, mining & construction sites, oil fields, marine environments, and
military battlefields.


10


Rugged
Chassis/Enclosures:





The
chassis and enclosures offered by Coda Octopus Colmek are fully customizable to
military/industrial needs. We are a key supplier on high profile programs
including Raytheon's Phalanx Close-In Defense System (CIDS) Northrop Grumman's
airborne mine hunting sonar AN/AQS-24. Enclosures technologies offered by Coda
Octopus Colmek include: VME, Micro-TCA, cPCI, VPX and ATR.





Other
products offered by Coda Octopus Colmek include: subsea telemetry & data
acquisition systems, rugged workstations, analog-to-digital converters,
EnduranceTM rugged routers, MarathonTM rugged switches, rugged LCD displays, and
rugged printers.





Our
Services





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




Martech





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





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





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




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


11


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





Martech
provides Coda Octopus with the skills, practices and knowledge to expand its
foothold in the UK defense sector and ensures that it can substantiate its
credibility as a defense and homeland security supplier.  Martech’s
revenues for the full year ended October 31, 2009 were $2,558,808.





Colmek





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





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





In the
past, the Company has also been engaged on projects such as the design and
production of a pipeline inspection vehicle and helicopter-based mine hunting
system incorporating sonar, laser, and acoustic payload configurations.
Contracts ranged in amounts from very low values to around $2,000,000. For the
future Colmek will seek the larger engagements in addition to continuing to seek
smaller contracts. Colmek’s revenues for the full year ended October 31, 2009
were $3,368,323.




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





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





Research
and Development





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




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





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





We have
recently been investing over $3 million annually in our research and development
activities and expect to continue this investment at a level of between $2m and
$3m during the current year in order to continue the current pace of research
and development, as well as product and intellectual property rights
development. Our products are developed in-house by our team of software design,
hardware design and engineering, and support staff. In the year ended October
31, 2009, we spent $ 2,652,713 on research and development which was charged to
operations.


12


Production
and Manufacturing





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




Assembly
of our products has been rationalised from four places down to three at present,
with plans to reduce this to two places shortly. Our data acquisition products
and motion sensors and printers are currently produced in Weymouth, where
Martech also undertake any production required as part of their engineering
design services. Similarly, Colmek undertakes any production required as part of
its engineering projects in Salt Lake City, Utah. Finally, the production of our
Echoscope® product is currently located in Norway, but is moving shortly to our
facilities in Utah, and Weymouth.




Marketing





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





s
            Coda Octopus Products - four
      persons distributed in the UK and one part time staff member in New
      York.




s
            Coda Octopus Martech - three full
      time staff based in Weymouth,
UK




s
            Coda Octopus Colmek – three full
      time and one part time staff




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




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




s
            Product: The extension of our
      product line (particularly Echoscope®) through adding value to produce
      both higher added functionality products (eg. UISTM, the Company’s
      Underwater Inspection System), and higher volume products exploiting that
      same techgnology base.




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




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




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




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


13


Suppliers





Most of
the materials and components used in our products are readily available in the
marketplace and are delivered pursuant to simple purchase orders. We do not have
long term supply contracts with our suppliers with the exception of Oxford
Technical Solutions (OTS) with whom we are currently negotiating the renewal of
the supply agreement which expired in 2009 according to its terms and under
which OTS delivers licensed technology for use in our F180 product line. Other
than this specific technology we are not dependent on any materials that could
not be obtained from alternative sources if our current suppliers cease to make
deliveries to us for any reason.





Government
Regulation





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





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





Intellectual
Property





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




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


14


Patents





We have
been granted four (4) patents:





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





s
                      Patent
      No. 6,532,192 concerns “Subsea Positioning System and Apparatus”, recorded
      in the US Patent Office. This patent relates to subsea positioning system
      and apparatus.s
                      Patent
      No. 7,466,628 concerns a ’Method of constructing mathematical
      representations of objects from reflected sonar signalss
                      Patent
      No. 7,489, 592 concerns a ‘method of automatically performing a patch test
      for a sonar system is disclosed, where data from a plurality of
      overlapping 3D sonar scans of a surface as the platform is moved are used
      to compensate for biases in mounting the sonar system on the
      platform’.




In
addition, we have applied for the following patents:





s
            Application number US11760417
      concerns “Combined pressure compensator and cooling
      unit”;


s
            Application number US12061298
      concerns “Acoustic coating”;


s
            Application number US12103839
      concerns “Fast averaged volumetric rendering of large sets polar/range
      data using minimal intermediate storage”;
  and


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





Trademarks





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





Coda
®


Octopus®


Octopus
& Design®


F180
®


Echoscope
®


UISTM




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




Competition





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





Products





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





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


15


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





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





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





Services





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




Employees





As of the
date hereof, we have 88 employees:




s
            5  are employed in
      research and development in our Bergen
  facility


s
            9 are employed in research and
      development in Edinburgh


s
            17 are employed in sales,
      marketing, production and administration in
    Edinburgh


s
            4 are employed in management,
      administration and sales at our New York City
  office


s
            3 are employed in sales and
      support in Florida


s
            30 are employed in
      Weymouth


s
            20 are employed in Colmek in Salt
      Lake City, the main categories of employees being engineers and
      technician.




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





ITEM
      2.
            PROPERTIES





New York City, New York,
USA. Our corporate offices, and those of our wholly owned subsidiary,
Coda Octopus Innalogic, are located at 164 West 25 th Street,
6 th
Floor, New York, New York 10001. We lease premises comprising approximately 750
square feet pursuant to a renewable lease which expires on June 30, 2011. The
lease provides for a monthly rental of $3,000.





Salt Lake City, Utah,
USA .Our wholly owned subsidiary, Coda Octopus Colmek, Inc. d/b/a Colmek
Systems Engineering, leases approximately 7,170 square feet of business premises
at 1775 and 1785 South 4130 West  Suites, Salt Lake City UT 84104,
Utah comprising both office space, manufacturing and testing facilities. The
lease provides for a monthly rental of $6,504.00 excluding property tax and
utilities and during the term is subject to an  annual rental increase
of 3% every April. The lease expires in September 30, 2014.





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





We also
lease workshop and manufacturing facilities at Units 8 and 10 Corunna Place,
Edinburgh, Scotland comprising 1,797.5 square feet and used as workshop
space. The lease provides for a rental of £12,705 per annum (£1,058.75
per month).  We have served notice to surrender the lease which
expires on 31 July 2010.


16


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





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





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




ITEM
      3.
            LEGAL
      PROCEEDINGS





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




We are
currently engaged in two lawsuits.





The first
one involves the former Chief Executive Officer of our subsidiary, Coda Octopus
Colmek, Inc. (Scott DeBo v Miller & Hilton, Inc. d/b/a Colmek Systems
Engineering and Coda Octopus Group, Inc. File No. 080923661).  Mr DeBo
claims breach of his employment contract, tortuous interference with his
contract, termination in violation of public policy and failure to pay wages
when due. He filed a complaint and an amended complaint on November 10, 2008 and
December 10, 2008, respectively. We answered the amended complaint denying Mr.
DeBo’s allegations, raising affirmative defenses on December 22, 2008 and intend
to defend ourselves vigorously.  The Parties have now completed the
discovery process and we expect the hearing to be scheduled for the second
quarter of this financial year.





The
second one involves Federal Engineering & Marketing Associates Inc (FEMA) a
Colorado corporation.  FEMA is a former sales representative of Coda
Octopus Colmek, FEMA claims breach of contract and seeks various relief in the
District Court, Routt County, Colorado (Case Number 2009CV278).  We
have answered the complaint which included a counter-claim. We intend to defend
ourselves vigorously in these proceedings.





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





None.


17


PART
II





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





Our
common stock was included for quotation on the OTC Bulletin Board under the
symbol CDOC from October 3, 2007 until October 2009.  Since that time,
it has been included for quotation in the pink sheets.  We intend to
take all requisite action to have our common stock re-included on the OTC
Bulletin Board as soon as possible.





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





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





Year Ending October 31, 2009
                  
                  HIGH
                  
                  
                  LOWFirst
      Quarter
                  
                  $
                  0.20
                  
                  
                  $
                  0.11Second
      Quarter
                  
                  $
                  0.16
                  
                  
                  $
                  0.05Third
      Quarter
                  
                  $
                  0.12
                  
                  
                  $
                  0.05Fourth
      Quarter
                  
                  $
                  0.11
                  
                  
                  $
                  0.01





We have
not declared or paid any cash dividends on our common stock, and we currently
intend to retain future earnings, if any, to finance the expansion of our
business, and we do not expect to pay any cash dividends in the foreseeable
future. The decision whether to pay cash dividends on our common stock will be
made by our board of directors, in their discretion, and will depend on our
financial condition, operating results, capital requirements and other factors
that the board of directors considers significant. As of January 18, 2010, we
had approximately 398 shareholders of record.





Recent
Sales of Unregistered Securities





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





ITEM
6. SELECTED FINANCIAL DATA





Not
applicable.


18


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





Forward-Looking
Statements





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





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





General
Overview





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





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





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





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





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





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





1.
            It raised approximately $33
      million in funds, through three private placements primarily with
      institutional investors. The Company raised approximately $8 million in
      2006, approximately $13 million in April/May 2007, and approximately $12
      million in a convertible debt transaction that was completed in February
      2008.




2.
            It completed the
      commercialization of the Echoscope® and successfully deployed its
      real-time 3D technology and products on three continents with major
      corporations, governments, ports, law enforcement agencies and security
      organizations.





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





19




4.
            Beginning
      in July 2007,the US Department of Defense (DoD) Technical Support Working
      Group (TSWG) funded Coda Octopus to build and deliver next-generation
      Underwater Inspection SystemsTM (UIS) for the US Coast Guard and other
      potential users. The program has included money to build and deliver
      current systems, as well as a roadmap for their future development. During
      the year ended October 31, 2007, the Company delivered three UIS systems
      to the US Coast Guard against a purchase order totaling $2.59 million. In
      FY 2008 the Company was funded for an additional $1.53 million to develop
      certain mutually agreed technical enhancements to the system. The
      Company’s latest contract with TSWG covers the funding of an additional
      $1.4 million for additional enhancements and the delivery of additional
      systems. The Company believes it has successfully completed the key
      second-stage enhancements sought by the DoD and the Coast Guard. As a
      result, management believes that the Company is positioned to build and
      deploy fully integrated systems that meet the highest standards in the
      world.





These
will enable users to “see” objects that are smaller than a baseball from a
distance of more than 100 meters, and to do so in all kinds of ocean or water
conditions at virtually any depth. In addition, the Company through its Colmek
subsidiary, has more than 20 years of successful experience as contractor with
the Department of Defense, and as a subcontractor with various large primes,
most particularly Raytheon.




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





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





The
consolidated financial statements include the accounts of Coda Octopus and our
domestic and foreign subsidiaries that are more than 50% owned and controlled,
which includes Dragon Design Limited (now fully integrated into Coda Octopus
Martech Limited.), which was fully acquired on December 15th 2008
and is based in Weymouth, Dorset, United Kingdom.





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





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





Products
and Services





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





s
            Marine geophysical survey
      (commercial), which focuses on oil and gas, and oceanographic research and
      exploration, where we market to survey companies, research institutions
      and salvage companies. This was our original focus, with current products
      spanning geophysical data collection and analysis, through to printers to
      output geophysical data collected by
  sonar.





20




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





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




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





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





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





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





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


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


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


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


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





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





Critical
Accounting Policies





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





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





Revenue
Recognition





We record
revenue in accordance FASB ASC Topic 605 - Revenue Recognition.





21




Revenue
is derived from our products sold by our subsidiaries, Coda Octopus Products
Inc. and Ltd., from sales of underwater technologies and equipment for imaging,
mapping, defense and survey applications. Revenue is also derived through
service contracts gained by our Martech, Colmek Tactical 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 ASC 605, and recognize revenue for equipment
upon delivery and for installation and other services as performed. ASC 605 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 FASB
ASC Topic 985 - Software. 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





The
Company accounts for stock-based compensation in accordance with FASB ASC Topic
718 “Compensation - Stock Compensation” (“ASC 718”). Under the fair value
recognition provisions of this statement, share-based compensation cost is
measured at the grant date based on the value of the award. This value is
expensed ratably over the vesting period for time-based awards and when the
achievement of performance goals is probable in our opinion for
performance-based awards. Determining the fair value of share-based awards at
the grant date requires judgment; including volatility, terms, and estimating
the amount of share-based awards that are expected to be forfeited. If actual
results differ significantly from these estimates, stock based compensation
expense and the Company’s results of operations
could be materially impacted.




22




Income
Taxes





Deferred
income taxes are provided using the asset and liability method for financial
reporting purposes in accordance with the provisions of FASB ASC 740 - Income
Taxes. Under this method, deferred tax assets and liabilities are recognized for
temporary differences between the tax bases of assets and liabilities and their
carrying values for financial reporting purposes and for operating loss and tax
credit carry forwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be removed or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
the consolidated statements of operations in the period that includes the
enactment date.




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





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





We
measure the carrying value of goodwill recorded in connection with the
acquisitions for potential impairment in accordance with ASC 350 - Intangibles -
Goodwill and Other. To apply ASC 350, a company is divided into separate
“reporting units”, each representing groups of products that are separately
managed. For this purpose, we have one reporting unit. To determine whether or
not goodwill may be impaired, a test is required at least annually, and more
often when there is a change in circumstances that could result in an impairment
of goodwill. If the market capitalization of our common stock is below
book carrying value for a sustained period, or if other negative trends occur in
our results of operations, a goodwill impairment test will be performed by
comparing book value to estimated market value. To the extent goodwill is
determined to be impaired an impairment charge is recorded in accordance with
ASC 350.




Results
of Operations
 
 Introduction
 
 Results
for the year ending October 31, 2009 (the “2009 Period”), include two new
operations, Coda Octopus Tactical Intelligence, Inc and Dragon Design Ltd, both
of which were acquired during the period. This should be taken into account when
comparing the 2009 Period with the year ending October 31, 2008 (the “2008
Period”).
 
 Recent
Developments
 
 Cash
Framework Agreement
 
 On March
16, 2009 the Company entered a “Cash Control Framework Agreement” with the Royal
Bank of Scotland (the debt holder pursuant to which it is assumed that, subject
to the Company being compliant with the terms of the transaction documents
entered into on February 21, 2008, no adverse actions will be taken by the debt
holder). This agreement has been extended until March 16, 2011 and it creates
debtor book financing package to allow the Company to obtain up to $2.15M in
working capital in exchange for receivables or project financing. As part of the
terms of that agreement, the Company committed to a cost reduction program
(including management pay cuts) to reduce significantly our SG&A, R&D
and Capital Expenditure costs by an annualized $3.35 million.








23




Cost
Cutting Program





In
February 2009, we embarked on a cost reduction program.  This resulted
in annualized savings of at least $3.35 million for the 2009
Period.  Actual savings for the 2009 Period amounted to $2.1 million
against budget. These cost savings against budget were achieved in the following
areas:





Description
                      
                      AmountReduction
      in Research and Development:
                      
                      $
                      321,837Reductions
      in other SG&A costs
                      
                      $
                      3,061,991Total
      SG& A Cost Savings
                      
                      $
                      3,383,828Reductions
      in Capital Expenditure
                      
                      $
                      179,725





The
following table shows actual quarterly savings against budget for the 2009
Period





Period
                      
                      AmountQuarter
      Ended January 31, 2009
                      
                      $
                      237,000Quarter
      Ended April 30, 2009
                      
                      $
                      419,000Quarter
      Ended July 31, 2009
                      
                      $
                      750,000Quarter
      Ended October 31, 2009
                      
                      $
                      707,000Total
      cost saving against budget for the 2009 Period
                      
                      $
                      2,113,000





Since
September 2009 we have accelerated our program of reducing the levels of
management in the Group. We have eliminated the “Senior Vice President” level of
management and now have a total of three full time staff members (reduced from
twelve) who are not employed in any of our subsidiaries. We have also eliminated
a large number of arrangements with consultants and Government
lobbyists.





The
Group’s management now consists of a Group CEO (with overall responsibility for
Group performance), Group Financial Officer, CTO (who also manages the Group’s
R&D), and the CEOs of the various Group Companies





We
believe that the cost cutting program has achieved its objectives and we expect
to maintain our SG&A at around $8.5 million during the current fiscal year
(down from approximately $11.238 million for the 2009 Period).  We
intend to reinvest some of the savings in additional sales and marketing staff
to ensure that we are gaining the maximum advantage from our leading technology
and skills.  We also anticipate hiring one more senior executive to
operate at Group level.





Reorganization





The
Company commenced a reorganization program which has separated the operations
into two geographic segments (Europe and the Americas). The goal of the
reorganization is to centralize functions into the engineering companies located
in Weymouth, UK (currently Coda Octopus Martech) and Salt Lake City, US
(currently Coda Octopus Colmek). The R&D unit will become a more horizontal
unit working to make advances in our core technology (3D sonar) while helping to
spread these advances across the Group, as well as promoting technology advances
from other parts of the Group.





Within
our products company in Edinburgh, we have formed a dedicated unit which is
focused entirely on the Echoscope® rollout plan for the various markets the
Company has identified. The function of this unit is to oversee production,
development, documenting and delivering the core product to the defined markets.
Manufacturing of the Echoscope® will move to Salt Lake City (Colmek), to comply
with the Defense Department’s preference to have technology products
manufactured domestically, and to Weymouth, UK, (Martech).





Although
the economic environment has been challenging, the markets that the Company
addresses – engineering, defense, oil and gas, and security – are less affected
than many others. We intend to continue to exploit our lead in 3D real-time
sonar, while tactically streamlining the business to be profitable at a much
lower revenue rate.





On or
around September 2009, we also reorganized our executive and management
structure by eliminating the Senior Vice President (SVP) tier which comprised
eight SVPs and replacing the Group CEO who had been the founder and Group CEO
since inception.  Our management structure now consists of a Group CEO
(with overall responsibility for Group performance), Group Financial Officer,
CTO (who also manages the Group’s R&D), and the CEOs of the various Group
Companies.




24




Comparison
of fiscal year ended October 31, 2009, compared to fiscal year ended October 31,
2008.
  Introduction
 
 Coda
Octopus Martech acquired Dragon Design in December 2008. Therefore, financial
information for Martech for the 2009 Period includes activity in Dragon . This
should be taken into account when comparing the 2009 Period with the 2008
Period.
  Revenue:Total revenues for the 2009 Period and the 2008
Period were $13,224,435 and $16,968,992 respectively, representing a decrease of
22.1%. Contributing factors to the decrease were the global economic downturn, a
particular slowdown in the oil and gas market globally, and the hiatus in
Government business brought about by the Presidential elections, and the
particular focus on Government procurement, and where we saw only one of our
planned minimum of four sales of our
Echoscope®.
  Gross
Margins:  Margins were weaker
in the 2009 Period at 52.2% (gross profit of $6,908,474) compared to 59.1%
($10,027,635) in the 2008 Period, reflecting a different mix of sales in our
businesses (products versus project work). In particular the slowdown in the oil
and gas and Government procurement markets had a direct impact on the sales of
our Echoscope® and we realised only one of our budgeted minimum of four sales
for 2009.  These factors caused a drop in product
income.
 Whilst  our
skills businesses also to, a lesser degree, suffered from the
slowdown  because the profile of these businesses is of project work
running over a period of months and years the effect of any change of growth
rate is spread over time rather than the small number of weeks between order and
delivery typical of products businesses.
 Research and Development
(R&D). R&D spending decreased from $3,525,023 in the 2008 Period
to $2,652,713 in 2009 in line with our commitment to the holder of our secured
convertible notes. However, this level of spending still allows us to devote
considerable R&D resources to bring forward product variants of our core
technology that we plan to introduce to the market over the next
months.
 
 Selling, General and Administrative
Expenses (SG&A). SG&A expenses for the 2009 Period decreased to
$11,238,961 from $13,204,254 in 2008, a reduction of 14.9% which reflects
activity under the cost reduction plan that has been executed during 2009 and
hitherto in 2010. Of this 2009 total (of $11,238,961), $1,039,892 is due to
one-time charges associated with termination payments to directors and
management. Excluding this amount would reduce SG&A to $10,199,069 or
22.7%.
  A
breakdown of corporate (HQ) SG&A is in the table below:
 
 2009
                      
                      
                      2008Rent
      & Utlilities
                      
                      
                      211,550
                      
                      
                      
                      156,560Office
      Exps
                      
                      
                      176,816
                      
                      
                      
                      332,096Payroll
                      
                      
                      1,773,265
                      
                      
                      
                      2,055,700Insurance
                      
                      
                      241,872
                      
                      
                      
                      106,226Professional
                      
                      
                      3,106,217
                      
                      
                      
                      1,578,088Forex
                      
                      
                      41,511
                      
                      
                      
                      643,382Marketing
                      
                      
                      320,330
                      
                      
                      
                      824,593Travel
                      
                      
                      203,834
                      
                      
                      
                      362,673Sale
      of Asset
                      
                      
                      1,096
                      
                      
                      
                      -Total
      Corp SG&A
                      
                      
                      6,076,491
                      
                      
                      
                      6,059,319Depreciation
      and Amortization
                      
                      
                      279,821
                      
                      
                      
                      198,185Stock
      Compensation
                      
                      
                      226,710
                      
                      
                      
                      939,286
  Key areas
of 2009 Period expenditure include wages and salaries, where we spent $6,835,266
or 49.2% during the 2009 Period against $8,202,854 or 49.0% of our SG&A cost
during the 2008 Period; legal and professional fees, including accounting, audit
and investment banking services, where we spent $3,293,878 or 23.71% in 2009
against $1,357,114 or 8.1% of our SG&A costs in 2008 - this increase is due
to legal fees, and provisions associated with defending the two legal cases
described in Item 4 above and accounting; travel costs reduced to $476,677 or
3.3% in 2009 from $782,615 or 5.63% of SG&A in the 2008 Period, rent for our
various locations increased in 2009 to $715,910 or 5% against $701,528 or 4.2%
of SG&A in 2008; marketing reduced in the 2009 Period to $522,576 or 3.6% of
SG&A against $1,240,508 or 7.4% of SG&A in 2008, as we reduced the
number of consultants engaged in the Business.
  Operating Loss. We incurred a
loss from operations of $6,983,200  in the 2009 Period against
$6,701,642 in the 2008 Period.  This increased loss is attributable to
falling revenues, particularly in sales of products during the downturn in the
oil and gas industry and the hiatus in Government sales brought about by the
2009 Presidential election.
  Interest Expense . Interest
expense increased in the 2009 Period to $1,846,883 from the 2008 Period interest
costs which were $1,538,724. In both years we have included amortization of the
30% redemption premium for our convertible note, at a cost of $514,285 for 2009
against $348,493 for 2008.  We have accrued interest on the
convertible bond of $195,150, ahead of payment of this latter amount in
February 2010.
 
 Dividends and Other
Stock Charges. In the 2009
Period, dividends were due only on outstanding Series A Preferred stock, and
totalled$47,382for the year, versus $129,568 in
2008.


25





Financial Instruments Measured at
Fair Value




FASB ASC
Topic 820 - Fair Value Measurements and Disclosures (“ASC820”) defines
fair value as the price that would be received from selling an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date. When determining the fair value measurements for assets
and liabilities required or permitted to be recorded at fair value, we
considered the principal or most advantageous market in which we would transact
and considered assumptions that market participants would use when pricing the
asset or liability, such as inherent risk, transfer restrictions, and risk of
non- performance. ASC 820 establishes a fair value hierarchy that
requires an entity to maximize the use of observable inputs and minimize the use
of unobservable inputs when measuring fair value. ASC 820 establishes three
levels of inputs that may be used to measure fair value:




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




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




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




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




Items
recorded or measured at fair value on a recurring basis in our accompanying
financial statements consisted of the following items as of October 31,
2009:




Quoted Prices
                in Active
                Markets for
                Identical
                Instruments
              
              
              Significant
                Other
                Observable
                Inputs
              
              
              Significant
                Unobservable
                InputsTotal
              
              
              Level 1
              
              
              Level 2
              
              
              Level 3Assets:Restricted
      Cash
              
              $
              994,081
              
              
              $
              994,081Short
      term Investment
              
              $
              51,000
              
              
              $
              51,000Total
              
              $
              1,045,081
              
              
              $
              1,045,081
              
              
              
              -
              
              
              
              -Liabilities:Notes
      Payable
              
              $
              13,233,523
              
              
              $
              -
              
              
              $
              13,233,523
              
              
              
              -Total
              
              $
              13,233,523
              
              
              $
              -
              
              
              $
              13,233,523
              
              
              
              -


With the
exception of assets and liabilities included within the scope of FASB ASC Topic
820-10-15, we adopted the provisions of ASC 820 prospectively
effective as of the beginning of the 2008 Period.  For financial
assets and liabilities included within the scope of ASC 820-10-15, we will be
required to adopt the provisions of ASC 820 prospectively as of the beginning of
Fiscal 2009.  The adoption of ASC 820 did not have a
material impact on our financial position or results of operations, and we do
not believe that the adoption of ASC 820-10-15 will have a material
impact on our financial position or results of operations.




The fair
value of the assets, short term investments, at October 31, 2008 was grouped as
Level 1 valuation as the market price was readily available, and there has been
no change to the fair value of the securities at October 31, 2009.









Liquidity
and Capital Resources




The
Company’s financial statements have been prepared assuming it will continue as a
going concern. For the fiscal year ended October 31, 2009, the Company has an
accumulated deficit of $59,130,336, negative working capital of $442,520, a
capital deficit of $7,915,102 and generated a deficit in cash flow from
operations of $1,665,070 in 2009 Period against $5,261,562 in the 2008 Period.
The Company has been dependant upon the ability to generate revenue from the
sale of its products and services and the discretion of the note holder to
release cash to cover operations. Management believes that based upon its
current cost reduction program to reduce expenses by $3.35 million annually;
based upon our reorganization of our business, customer prospects have been
enhanced and is evident in receipt of approximately $3.9 million dollars of
additional contracts and purchase orders during the first quarter of fiscal year
end 2010; based upon the Company’s cash flow projections for it business
operations through January 2011; collectability of its receivables in the
ordinary course of business; based on the Noteholder’s 12 month extension of the
cash control framework agreement as discussed in Note 12 and the Noteholder’s
agreement to waive its right to demand repayment of the loan until March 16,
2011, the Company will be able to continue its operations through October 31,
2010. The Company’s ability to continue as a going concern is ultimately
dependent upon achieving profitable operations and generating sufficient cash
flows from operations to meet future obligations.


26




Inflation
and Foreign Currency





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





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




The translation of the
Company’s UK operations’ pound sterling denominated balance sheets into US
dollars has been affected by the rapid strengthening of the average value of the
US dollar against the British pound sterling from $1.94 in 2008, to $1.54 in
2009, an approximate 20.6% appreciation in value. These are the values that have
been used in the calculations below.





The
translation of the Company’s Norwegian operation’s Kroner denominated balance
sheets into US dollars, as of October 31, 2009, has also been affected by the
currency fluctuations of the US dollar against the Kroner from and average rate
of $0.186 during 2008, to $0.154 during 2009, an approximate 18% change in
value. These are the values that have been used in the calculations
below.





The
impact of these currency fluctuations on the 2009 Period is shown
below:




Pound
      Sterling
                      
                      
                      Norwegian
      KronerActual
                        Results
                      
                      
                      Constant
                        Rates
                      
                      
                      Actual
                        Results
                      
                      
                      Constant
                        Rates
                      
                      
                      Total
      EffectRevenues
                      
                      $
                      7,319,662
                      
                      
                      $
                      9,211,649
                      
                      
                      $
                      98,366
                      
                      
                      $
                      118,593
                      
                      
                      $
                      1,912,215Costs
                      
                      
                      7,395,197
                      
                      
                      
                      9,306,708
                      
                      
                      
                      41,290
                      
                      
                      
                      49,781
                      
                      
                      
                      1,920,002Net
      Income/(Losses)
                      
                      
                      (75,535)
                      
                      
                      
                      (95,059)
                      
                      
                      
                      57,075
                      
                      
                      
                      68,812
                      
                      
                      
                      (7,787)Assets
                      
                      
                      16,604,650
                      
                      
                      
                      16,374,676
                      
                      
                      
                      894,178
                      
                      
                      
                      762,033
                      
                      
                      
                      (362,120)Liabilities
                      
                      
                      13,335, 020
                      
                      
                      
                      11,296,309
                      
                      
                      
                      630,886
                      
                      
                      
                      534,433
                      
                      
                      
                      (2, 135,164)Net
      Assets
                      
                      
                      3,269,630
                      
                      
                      
                      5,078,367
                      
                      
                      
                      263,293
                      
                      
                      
                      227,600
                      
                      
                      
                      1,773,044
 
 This
table shows that the effect of constant exchange rates, versus the actual
exchange rate fluctuations, reduced profits for the year by $7,787 and increased
net assets by $1,773,044. In addition, the Company booked transactional exchange
rate gains of $34,478 during 2009. All of these amounts are material to our
overall financial results.


27




Financing
Activities





Equity
Offerings




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





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





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





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





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




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




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





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





Secured
Convertible Debentures





On
February 21, 2008 we entered into and completed the transactions contemplated
under a series of agreements providing for the issuance to a London based
institutional investor, The Royal Bank of Scotland plc of senior secured
convertible notes in the principal amount of $12,000,000 (the “Notes”). The
Notes are secured by all of the assets of the Company and its subsidiaries and
mature 84 months after the date of issuance at which time they are redeemable at
130% of the face amount of the Notes. The Notes accrue interest at the annual
rate of 8.5% which is payable in semi-annually in arrears. The Notes also
stipulate additional interest payments of 2% per annum above the base rate
quoted by The Royal Bank of Scotland plc from time to time, in the event that
the semi-annual interest payments are not paid by us on the due dates. All of
these amounts are payable by us in cash. Of the proceeds, $6,000,000 constituted
a specific purpose loan and in the event that we failed to use the proceeds as
agreed within 12 months from the closing, then, unless alternative investments
were approved by the holders of the Notes, this $6,000,000 was repayable in
February 2009. In such case there will be a partial redemption of 60 of the
notes (having an aggregate nominal value of $6 million). During the term, the
Notes are convertible into our common stock at the option of the Noteholders at
a conversion price of $1.05. We may also force the conversion of these Notes
into our common stock after two years in the event that we obtain a listing on a
national exchange and our stock price  closes on 40 consecutive
trading days at or above $2.50 between the second and third anniversaries of
this agreement; $2.90 between the third and fourth anniversaries of this
agreement; and $3.50 after the fourth anniversary of this agreement or where the
daily volume weighted average price of our stock as quoted on OTCBB or any other
US National Exchange on which our securities are then listed has, for at least
40 consecutive trading days closed at the agreed price.





28




In August
2008, we notified the Noteholder that we believed that we would be unable to use
the $6,000,000 in the manner agreed to under the terms of the Notes. In
response, the Noteholder orally consented to the use of an additional $2 million
of the $6,000,000 for general working capital purposes.  It
should be noted that the transaction documents provides that all amendment shall
be in writing signed by the parties and this was not obtained by the Company and
therefore not valid.





In
January 2009, we notified the Noteholder that the balance of the $6,000,000
had fallen below $4 million.





On March
16, 2009, the Company and the Noteholder entered into a Cash Control Framework
Agreement, pursuant to which it is assumed that, subject to the Company being
fully compliant with the terms of this agreement and those set out in the
Transaction Documents entered into between the Company and the Noteholder on
February 21, 2008, no adverse actions will be taken by the Noteholder. The
agreement provides, among other things, for the placement of approximately $2.15
million into a segregated cash account.  Under the terms of the
agreement, we may request the release of funds from the account from time to
time for working capital purposes, subject to the Noteholder’s consent and
agreed upon terms and conditions. Under the terms of the agreement, we have had
to adhere to a strict cost cutting program which has involved reducing our
SG&A, R&D and capital expenditure by an annualized $3.35 million and in
this financial year, whilst we have achieved the required costs cut, we expect
to maintain our SG&A at around $8.5 million level. The cash framework
agreement was extended for a further period of 12 months and now expires on
March 16, 2011.





On
January 18, 2010, the Noteholder notified us in writing that it had waived its
right to demand repayment of the loan as a result of our failure to observe
certain specified loan covenants.  The waiver will expire on the first
anniversary of the waiver letter.





Our
ability to survive current financial difficulties resulting from our cash flow
deficit is dependent on our capacity to generate revenues from the sale of our
products and services.  In addition, we are highly dependent on the
discretion of the Noteholder to release cash to us to cover our operating
expenses.





Nevertheless,
by adjusting our operations and development to the level of capitalization, we
believe we will have sufficient capital resources to meet projected cash flow
deficits. However, if during fiscal 2010 we are not successful in generating
sufficient liquidity from operations or in raising sufficient capital resources,
on terms acceptable to us, this could have a material adverse effect on our
business, results of operations liquidity and financial condition  In
order to fund our operations in the financial year 2009/2010, we estimate that
we need to generate $2 million in cash in addition to the funds potentially
available to us under the Cash Control Framework Agreement to be able to
continue our operations at their current levels.  We will also need to
increase our sales significantly in the fiscal year 2009 to 2010. We are
currently negotiating with several large prospective US-based customers.
Successful sales to these entities are expected to provide us increased
liquidity. However, there can be no assurance that we will be successful in
gaining these additional customer contracts or that we will gain them in good
time.





Other
than disclosed herein, we presently do not have any available credit, bank
financing or other external sources of liquidity. Due to our brief history and
historical operating losses, our operations have not been a source of liquidity.
We will need to obtain additional capital in order to expand operations and
become profitable. In order to obtain capital, we may need to sell additional
shares of our common stock or borrow funds from private lenders. There can be no
assurance that we will be successful in obtaining additional
funding.





Our
current financing options are limited due to onerous anti-dilution provisions
contained in the Purchase Agreements entered into in April and May
2007.  Under the terms of the Purchase Agreements, the investors who
purchased stock in the Company thereunder are entitled to receive shares of
common stock without additional consideration any time we sell equity securities
at a price per share of less than $1.00.  Therefore, we will likely
have to renegotiate the terms of the Purchase Agreements before we are able to
raise additional equity financing. Financing transactions may include the
issuance of equity or debt securities, obtaining credit facilities, or other
financing mechanisms. However, the trading price of our common stock and the
downturn in the U.S. stock and debt markets could make it more difficult to
obtain financing through the issuance of equity or debt securities. In addition,
our stock was recently stricken from the OTC Bulletin Board for failure to make
our periodic filings on a timely basis. This will further impact on the
liquidity of our stock putting further downward pressure on its price and making
it less likely that we will be able to raise equity financing.




We will
seek to enter into negotiations with our existing investors with the objective
of revising the terms of the existing investment documents.   We
have also entered into preliminary discussions with the holder of the
convertible note to prevent it from taking actions adverse to us and to have the
debt be reclassified on our books from a short term obligation to a long term
obligation.  On January 18, 2010 the note holder notified us in writing
that it had waived its right to demand repayment of the loan as a result of the
failure to observe certain specified loan covenants.  The waiver will
expire on the first anniversary of the waiver letter.  We can give no
assurance that we will be successful in any of these efforts.  If we
are unable to raise additional capital in the near future, it may have to
curtail its business operations significantly.




Even if
we are able to raise the funds required, it is possible that we could incur
unexpected costs and expenses, fail to collect significant amounts owed to us,
or experience unexpected cash requirements that would force us to seek
alternative financing. Further, if we issue additional equity or debt
securities, stockholders may experience additional dilution or the new equity
securities may have rights, preferences or privileges senior to those of
existing holders of our common stock. If additional financing is not available
or is not available on acceptable terms, we will have to curtail our
operations.




29




Off-Balance
Sheet Arrangements





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





ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





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





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





None.





ITEM 9A(T). CONTROLS AND
PROCEDURES





Evaluation of Disclosure
Controls and Procedures




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




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




Management's Report on
Internal Control over Financial Reporting




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





30




Management
is responsible for establishing and maintaining adequate internal control over
financial reporting. Our management, with the participation of our Chief
Executive Officer and Group Financial Officer, has assessed the effectiveness of
our internal control over financial reporting as of October 31, 2009. In making
this assessment, our management used the criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).




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




Based on
our assessment and the criteria discussed above, the Company has concluded that,
as of October 31, 2009, the Company’s internal control over financial reporting
was not effective as a result of the aforementioned material
weakness.




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




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




Plan
for Remediation of Material Weaknesses




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




Limitations
on Effectiveness of Controls and Procedures




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





Changes
in Internal Control over Financial Reporting




There
were no changes in our internal control over financial reporting identified in
connection with the evaluation required by paragraph (d) of Rule 13a-15 or
15d-15 under the Exchange Act that occurred during the quarter ended October 31,
2009 that have materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.





31




PART
III





ITEM
10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE





Directors
and Executive Officers





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





Name
                    
                    Age
                    
                    Position(s)Geoff
      Turner
                    
                    57
                    
                    Chief
      Executive Officer, Interim Chief Financial Officer and
      DirectorBlair
      Cunningham
                    
                    40
                    
                    Chief
      Technology Officer and Head of R&D OperationsFrank
      B. Moore
                    
                    73
                    
                    Director




Geoff
Turner has been with the Company since May 2006 and during this time has
had a number of roles including Senior Vice President, Mergers and Acquisitions
of Coda Octopus Group, Inc. and  President European Operations. In
September 2009 he was appointed as Chief Executive Officer. He was appointed
interim Chief Financial Officer in January 2010. Previously, he served
as a consultant from November 2005 to April 2006 through his consultancy company
Taktos Limited. Mr. Turner is also a Director of the Company’s subsidiaries,
Coda Octopus Martech Limited and Coda Octopus Products Limited. He has been
involved in the IT industry for over 30 years, in both technical and commercial
roles. He spent the 13 years up to 1999 with GE Information Services (&
International Network Services), the then global market leader in Electronic
Commerce, where he was Director of Business Development for Europe, Middle East
and Africa. During this time, in addition to his business development roles he
held posts as Software Products Director, and in global channel sales
management. Since leaving GE in 1999, Mr. Turner has been involved as a
shareholder and a consultant through Taktos Limited in a number of businesses
ranging from financial services businesses to a provider of supply chain
management software.





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





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




32




Election
and Removal of Directors





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





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





We do not
currently have any Board committees and all functions typically performed by
Board committees are performed by the Board of Directors as a
whole.  We are in the process of identifying new members for our Board
and intend to establish one or more Board committees as soon as
practicable.





33




ITEM
11. EXECUTIVE COMPENSATION





The
Summary Compensation Table shows certain compensation information for services
rendered for the fiscal years ended October 31, 2008 and 2009 by our executive
officers. The following information includes the dollar value of base salaries,
bonus awards, stock options grants and certain other compensation, if any,
whether paid or deferred. Conversion rates were used for 2009 and 2008 of $1.94143 and $1.9840 to £1,respectively.





Name and Principal
                                    Position
                                  
                                  Year
                                  
                                  Salary
                                  
                                  
                                  Bonus
                                  
                                  
                                  Restricted
                                    Stock
                                    Awards
                                  
                                  
                                  Option
                                    Awards
                                  
                                  
                                  All Other
                                    Compensation
                                  
                                  
                                  Total($)
                                  
                                  
                                  ($)
                                  
                                  
                                  ($)
                                  
                                  
                                  ($)(5)
                                  
                                  
                                  ($)(6)
                                  
                                  
                                  ($)Jason
      Reid (1)
                                  
                                  2009
                                  
                                  
                                  289,904
                                  
                                  
                                  
                                  -0-
                                  
                                  
                                  
                                  -0-
                                  
                                  
                                  
                                  -0-
                                  
                                  
                                  
                                  10,200
                                  
                                  
                                  
                                  500,385President
      & CEO
                                  
                                  2008
                                  
                                  
                                  375,000
                                  
                                  
                                  
                                  -0-
                                  
                                  
                                  
                                  -0-
                                  
                                  
                                  
                                  15,635
                                  
                                  
                                  
                                  10,200
                                  
                                  
                                  
                                  400,835Blair
      Cunningham (2 )(3)
                                  
                                  2009
                                  
                                  
                                  161,875
                                  
                                  
                                  
                                  -0-
                                  
                                  
                                  
                                  -0-
                                  
                                  
                                  
                                  -0-
                                  
                                  
                                  
                                  18,866
                                  
                                  
                                  
                                  239,333Chief
      Technology Officer
                                  
                                  2008
                                  
                                  
                                  178,815
                                  
                                  
                                  
                                  -0-
                                  
                                  
                                  
                                  50,000
                                  (7)
                                  
                                  
                                  10,423
                                  
                                  
                                  
                                  50,095
                                  
                                  
                                  
                                  243,866Anthony
      Davis (2)
                                  
                                  2009
                                  
                                  
                                  161,875
                                  
                                  
                                  
                                  -0-
                                  
                                  
                                  
                                  50,000
                                  (7)
                                  
                                  
                                  -0-
                                  
                                  
                                  
                                  72,825
                                  
                                  
                                  
                                  262,063President
      US Operations
                                  
                                  2008
                                  
                                  
                                  178,815
                                  
                                  
                                  
                                  -0-
                                  
                                  
                                  
                                  -0-
                                  
                                  
                                  
                                  10,423
                                  
                                  
                                  
                                  11,962
                                  
                                  
                                  
                                  236,962Geoff
      Turner (2)(4)
                                  
                                  2009
                                  
                                  
                                  161,875
                                  
                                  
                                  
                                  -0-
                                  
                                  
                                  
                                  50,000
                                  (7)
                                  
                                  
                                  -0-
                                  
                                  
                                  
                                  15,328
                                  
                                  
                                  
                                  204,566President
      European Ops
                                  
                                  2008
                                  
                                  
                                  178,815
                                  (7)
                                  
                                  
                                  -0-
                                  
                                  
                                  
                                  -0-
                                  
                                  
                                  
                                  10,423
                                  
                                  
                                  
                                  15,833
                                  
                                  
                                  
                                  240,833








(1)
            Reid
      resigned his position as the Company’s President and Chief Executive
      Officer effective September 23, 2009 and as Director on January 27,
      2010.


(2)
            All
      cash amounts were paid in UK Pounds (the conversion rate used in this
      table for these amounts is stated
above).


(3)
            Mr.
      Davis resigned his position effective January 16,
  2010.


(4)
            Mr.
      Turner became Chief Executive Officer effective September 23,
      2009.


(5)
            Amount
      represents the aggregate grant date fair value computed in accordance with
      ASC 718. Information regarding the assumptions made in the valuation
      reported and material terms of each grant are incorporated herein by
      reference from “Note 4 Capital Stock” to our Consolidated Financial
      Statements for the Year Ended October 31,
2009.


(6)
            All
      other compensation consisted of car allowances, re-location expenses,
      disability payments, pension benefits and/or pay for vacation not taken.
      Some of these amounts were paid in UK Pounds at the conversion rates shown
      above.


(7)
            Comprised
      of 40,159 shares valued at $50,000.




34





OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END 2009*


Option Awards




Name
                                    (a)
                                  
                                  Number of
                                    Securities Underlying
                                    Unexercised
                                    Options
                                    (#)
                                    Exercisable
                                    (b)
                                  
                                  
                                  Number of
                                    Securities Underlying
                                    Unexercised
                                    Options
                                    (#)
                                    Unexercisable
                                    (c)
                                  
                                  
                                  Option
                                    Exercise
                                    Price
                                    ($)
                                    (e)
                                  
                                  Option
                                    Expiration Date
                                    (f)Jason Reid(1)
                                  
                                  
                                  400,000
                                  
                                  
                                  
                                  
                                  
                                  
                                  $
                                  1.00
                                  
                                  May
      2010President
      and Chief Executive Officer
                                  
                                  
                                  25,500
                                  
                                  
                                  
                                  49,500
                                  
                                  
                                  
                                  1.30
                                  
                                  August
      2013Anthony
      Davis (2)
                                  
                                  
                                  200,000
                                  
                                  
                                  
                                  
                                  
                                  
                                  $
                                  1.00
                                  
                                  May
      2010President US Operations
                                  
                                  
                                  17,000
                                  
                                  
                                  
                                  33,000
                                  
                                  
                                  
                                  1.30
                                  
                                  August
      2013Geoff
      Turner(3)
                                  
                                  
                                  150,000
                                  
                                  
                                  
                                  
                                  
                                  
                                  $
                                  1.00
                                  
                                  May
      2010President European
      Operations
                                  
                                  
                                  17,000
                                  
                                  
                                  
                                  33,000
                                  
                                  
                                  
                                  1.30
                                  
                                  August
      2013Blair
      Cunningham
                                  
                                  
                                  237,500
                                  
                                  
                                  
                                  
                                  
                                  
                                  $
                                  1.30
                                  
                                  May
      2012Chief
      Technology Officer
                                  
                                  
                                  17,000
                                  
                                  
                                  
                                  33,000
                                  
                                  
                                  
                                  1.30
                                  
                                  August
      2013





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





(1)
            Reid
      resigned his position as the Company’s President and Chief Executive
      Officer effective September 23, 2009 and as Director on January 27,
      2010.


(2)
            Mr.
      Davis has resigned his position effective January 2010.  All
      options granted to him will expire within 90 days after that date, unless
      exercised.


(3)
            Geoff
      Turner was appointed the Company’s Chief Executive Officer effective
      September 23, 2009





DIRECTOR
COMPENSATION*


(During
Last Completed Fiscal Year)




Name**
                          (a)
                        
                        Fees Earned or Paid
                          in Cash (1)
                          ($)
                          (b)
                        
                        
                        Stock
                          Awards ($)
                          (c)
                        
                        
                        Option
                          Awards ($)
                          (d) (6)
                        
                        
                        Total
                          ($)
                          (j)Paul
      Nussbaum
                        
                        $
                        7,500
                        (2)
                        
                        $
                        -0-
                        
                        
                        $
                        57,675
                        (6a)
                        
                        $
                        87,675Rodney
      Peacock
                        
                        $
                        5,000
                        (3)
                        
                        $
                        -0-
                        
                        
                        $
                        38,450
                        (6b)
                        
                        $
                        58,450Frank
      Moore
                        
                        $
                        6,042
                        (4)
                        
                        $
                        60,000
                        
                        
                        $
                        -0-
                        
                        
                        $
                        66,667Faith
      Griffin
                        
                        $
                        4,167
                        (5)
                        
                        $
                        60,000
                        
                        
                        $
                        52,016
                        (6c)
                        
                        $
                        121,349Nicholas
      Franks
                        
                        $
                        6,042
                        (6)
                        
                        $
                        -0-
                        
                        
                        $
                        -0-
                        
                        
                        $
                        6,042





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


** Does
not include individuals who were both executive officers and directors but who
did not receive extra compensation as a result of their
directorship.




(1)
            All
      cash fees shown in the table above were earned by the directors and
      accrued by the Company.  However, none have been paid to the
      directors to date.  Figures do not include expenses incurred by
      the directors in the course of their duties and which have accrued but not
      been paid.


(2)
            Consists
      of an annual retainer in the amount of $22,500 and $1,875 per board
      meeting attended.


(3)
            Consists
      of an annual retainer in the amount of $12,500 and $1,875 per board
      meeting attended.


(4)
            Consists
      of an annual retainer of $12,500 and $1,875 per board meeting
      attended.  Pro-rated in accordance with appointment as a
      director with effect from July 1,
2008.


(5)
            Consists
      of an annual retainer of $12,500 and $1,875 per board meeting attended,
      $4,000 per annum as Chair of the Audit Committee, and $4,000 per annum as
      member of the advisory board.  Pro-rated in accordance with
      appointment as a director with effect from July 1,
  2008.


(6a)
            Comprising
      75,000 options valued based on date of issue using Black Scholes method
      and booked into our accounts as an
expense.


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


(6c)
              Comprising
      250,000 options valued based on date of issue using Black Scholes method
      and booked into our accounts as an expense.(6d)
              On
      or around September 23, 2009 all retainers with Directors were terminated
      (with the exception of retainer with Mr. Frank
    Moore).





Compensation
of Directors





Effective
on the date of his election on July 10, 2008, Frank Moore (in his capacity as a
director) is paid $20,000 per annum (consisting of a $12,500 basic fee plus
$1,875 per meeting, for up to four meetings per year with additional meetings to
be paid for at a rate of $500 per meeting). He also received a grant of 200,000
shares of common stock, to be issued over a period of 24 months. In addition,
Mr. Moore was granted a five year option to purchase 200,000 shares of common
stock and 50,000 shares of common stock at $1.30 per share,
respectively.  Further, he will receive an annual grant of 50,000
options (with a strike price to be determined at the time of grant).  No
such options were issued by the Company in the fiscal year
2008/2009.





35




Employment
Agreements





Blair
Cunningham





On July
1, 2005, the Company entered into an Employment Agreement with Blair Cunningham.
The Agreement has an indefinite term until terminated pursuant to said
Agreement. Mr. Cunningham agreed to serve as Senior Vice President, Products
Division (now Chief Technology Officer). Pursuant to said Agreement, Mr.
Cunningham was paid a base annual salary of approximately $150,000 Mr.
Cunningham shall be entitled to receive an annual cash and stock incentive bonus
for each fiscal year based upon a level of accomplishment of management and
performance objectives as established by the Compensation Committee. At its
meeting held in October 2006 and in accordance with its remit our then existing
Compensation Committee approved an increase in the base annual salary to
$175,000, effective November 1, 2006. During the fiscal year 2008/2009 Mr.
Cunningham agreed to a 10% salary reduction.





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





With
effect from November 1, 2007, the annual grant of common stock is replaced by an
equivalent amount in number of options in the Company.  For the year
ended October 31, 2008, Mr Cunningham therefore received 50,000 options in the
Company.   No such options were issued by the Company in
2009.





Geoff
Turner





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




(a)
            assist the Company’s Management
      with the analysis and effective and optimal implementation of its business
      plan;


(b)
            oversee the Company’s European
      operations and performance of the
Group;


(c)
            explore acquisitions, strategic
      alliances, partnering opportunities and other cooperative ventures within
      and without its industry
focus;


(d)
            evaluate possible acquisitions
      and strategic strategies and partnering candidates, including the
      evaluation of targets and the structuring of related transactions;
      and


(e)
            advise and consult with executive
      officers with respect to any of the above described
      matters.





The
Company is paying approximately $178,000 per annum to the consultant for
providing the services of Mr. Turner. Consultant is also entitled to
reimbursement of travel and other expenses. During the financial year 2008/2009
Mr. Turner agreed to a 10% salary reduction.  Pursuant to a separate
option agreement with Mr. Turner who serves as an executive officer, the Company
granted him five year options to purchase 150,000 shares of common stock with
34% having vested on November 1, 2005 and with 33% having vested on each of
November 1, 2006 and 2007. He is also entitled to directors’ and officers’
liability insurance during his tenure as an executive officer with the Company
and for a period of three years after termination. Our then existing
Compensation Committee approved in October 2006 the renewal of this contract and
approved an increase in the compensation package paid for the services of Mr.
Turner effective November 1, 2006 we are paying Taktos Limited $178,000
for Mr. Turner's services.





36




Effective
November 1, 2007, the annual grant of common stock is replaced by an equivalent
amount in number of options in the Company.  For the year ended
October 31, 2008, Mr Turner therefore received 50,000 options in the
Company.No such options
were issued by the Company in fiscal year 2008/2009





The
Company is in the process of negotiating a new agreement with Mr.
Turner.





Stock Option Plans





2004
Plan





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





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





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





The
Compensation Committee of the Board of Directors (or, if there is no such
committee, the Board of Directors) administers the 2004 Plan. Subject to the
provisions of the plan, the Compensation Committee will determine the type of
awards, when and to which executives awards will be granted, the number of
shares covered by each award and the terms, provisions and kind of consideration
payable (if any), with respect to awards. The Compensation Committee may
interpret the plan and may at any time adopt such rules and regulations for the
plan as it deems advisable, including the delegation of certain of its
authority. In determining the persons to whom awards shall be granted and the
number of shares covered by each award, the Compensation Committee takes into
account the duties of the respective persons, their present and potential
contributions to the success of the Company and such other factors as the
Compensation Committee deems relevant.





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





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





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





2006
Plan





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





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


37




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





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




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





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





2008
Plan





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





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




As of
October 31, 2009,[ we had granted non-qualified options to purchase an aggregate
of 5,545,900 shares of the Company’s common stock at exercise prices
ranging from $1.00 per share to $1.80 per share, of which 5,197,649 have
vested].




2008
Stock Purchase Plan





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





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





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





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





Limitation
on Stock Option Plans





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


38




Section
16(a) Beneficial Ownership Reporting Compliance




Under the
Exchange Act, our directors, our executive officers, and any persons holding
more than 10% of our common stock are required to report their ownership of the
common stock and any changes in that ownership to the Securities and Exchange
Commission. To our knowledge, based solely on our review of the copies of such
reports received or written representations from certain reporting persons that
no other reports were required, we believe that during our fiscal year ended
October 31, 2009, no reports relating to our securities required to be filed by
current reporting persons were filed late.


39




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





The
following table sets forth information as of January 28, 2010 regarding
the beneficial ownership of our Common Stock, based on information provided by
(i) each of our executive officers and directors; (ii) all executive officers
and directors as a group; and (iii) each person who is known by us to
beneficially own more than 5% of the outstanding shares of our Common Stock. The
percentage ownership in this table is based on 49,050,244shares
issued and outstanding as of January 21,2010.




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





Name and Address of Beneficial Owner (1)
                        
                        Amount and Nature of Beneficial
                          Ownership of Common Stock (2)
                        
                        
                        Percent of
                          Common StockGeoff
      Turner (3)
                        
                        
                        223,659
                        
                        
                        
                        
                        *Blair
      Cunningham (4)
                        
                        
                        523,659
                        
                        
                        
                        1.1
                        %Frank
      B. Moore (5)
                        
                        
                        298,659
                        
                        
                        
                        
                        *Greenhouse
      Investments Limited (6)
                          12-14
      David Place
                          St.
      Helier
                          Jersey
      JE24TD
                        
                        
                        23,299,839
                        
                        
                        
                        44.9
                        %The
      Royal Bank of Scotland plc (7)
                          135
      Bishopsgate, London EC2M 3UR, England
                        
                        
                        11,428,571
                        
                        
                        
                        18.9
                        %Vision
      Opportunity Master Fund Limited (8)
                          317
      Madison Avenue, Suite 1220.New York, NY 10017
                        
                        
                        4,943,276
                        
                        
                        
                        9.9
                        %All
      Directors and Executive Officers as a Group
                          (three
      persons):
                        
                        
                        1,045,977
                        
                        
                        
                        2.1
                        %







* Less
than 1%.




(1)
Unless otherwise indicated, the address of all individual and entities listed
below is c/o Coda Octopus Group, Inc. 164 West 25th Street, 6th Floor, New York
NY10001.


(2) The
number of shares indicated includes (i) shares issuable upon the exercise of
outstanding stock options or warrants held by each individual or group to the
extent such options and warrants are exercisable within sixty days of February
27, 2009.


(3)
Includes 183,500 shares issuable upon exercise of currently exercisable
options.


(4)
Includes 283,500 shares issuable upon exercise of options.


(5)
Includes 233,500 shares issuable upon exercise of options.


(6)
Includes 2,796,418 shares usable upon exercise of warrants. Christiaan de
Bruyn, principal director of Greenhouse, has voting and dispositive power over
the securities held by Greenhouse.
 (7)
Consists of shares issuable upon conversion of convertible
notes.


(8)
Consist of 4,314,700 shares of Common Stock and 628,576 shares of Common Stock
issuable upon currently exercisable warrants. The warrants contain a provision
that limits their exercise to the extent that Vision’s ownership
percentage would exceed 9.9% of our issued and outstanding common stock of the
Company. Adam Benowitz, portfolio manager, has investment and dispositive power
of the shares held by this entity.


40




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





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





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


41




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





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


From
November 2007 until April 2009 we provided web development, design and IT
support services to Weight Management (aka Scottish Slimmers), a UK company in
which Mr. Reid, our then President and Chief Executive Officer, was an Affiliate
and also a director.
  In the
year ended 31 October 2008, we recognised $204,685 as income for these
services.
 
 Further
services totalling $48,676 were provided to Weight Management between November
2008 and April 2009.
 
 In July
2009 this entity went into bankruptcy and its assets were acquired by a new
management. This debtor is therefore considered doubtful and, consequently, we
recognised within our doubtful accounts for 2009, $226,839 for these
services.


Prior to
Mr. Reid stepping down as President and Chief Executive Officer we maintained
key man insurance for him. Since stepping down we have paid premiums of £660.18
and we have now re-charged these to Mr. Reid who is now assuming the obligations
under this insurance policy.





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


42




ITEM
14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES




Audit
Fees. The aggregate fees billed by RBSM LLP, our principal accountants, for
professional services rendered for the audit of the Company's annual financial
statements for the last two fiscal years and for the reviews of the financial
statements included in the Company's Quarterly reports on Form 10-QSB during the
last two fiscal years 2009 and 2008 were $240,086
and $261,114, respectively.




Audit-Related
Fees. The aggregate fees billed by RBSM LLP, our principal accountants, for
professional services rendered in connection with the audits of acquired
businesses, the review of and consent to the filing of registration statements,
and assistance in responding to comment letters issued by the Securities &
Exchange Commission during the last two fiscal years 2009 and 2008
were $3,100 and nil,
respectively.




Tax Fees.
The aggregate fees billed by the Company's principal accountants for tax
compliance, tax advice and tax planning services rendered to the Company during
the last two fiscal years 2009 and 2008  were $3,100 and nil,
respectively.




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





Prior to
the Company's engagement of its independent auditor, such engagement is approved
by the Company's audit committee. The services provided under this engagement
may include audit services, audit-related services, tax services and other
services. Pre-approval is generally provided for up to one year and any
pre-approval is detailed as to the particular service or category of services
and is generally subject to a specific budget. Pursuant to the Company's Audit
Committee Charter, the independent auditors and management are required to
report to the Company's audit committee at least quarterly regarding the extent
of services provided by the independent auditors in accordance with this
pre-approval, and the fees for the services performed to date. The audit
committee may also pre-approve particular services on a case-by-case basis. All
audit-related fees, tax fees and other fees incurred by the Company for the year
ended October 31, 2009, were approved by the Company's audit
committee.





43





ITEM 15. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES





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










44





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










*
            Incorporated
      by reference to the Company’s Registration Statement on Form SB-2 (SEC
      File No.143144)**
            Incorporated
      by reference to the Company’s Anuual Report on Form 10-KSB for the year
      ended October 31, 2007***
            Incorporated
      by reference to the Company’s Proxy Statement filed with the Securities
      and Exchange Commission June 13, 2008****
            Incorporated
      by reference to the Company’s Registration Statement on Form S-8 (SEC File
      No. 153254)





45




SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.





DATE: January
      29, 2010
                    CODA
      OCTOPUS GROUP, INC./s/
      Geoff TurnerChief
      Executive Officer





POWER
OF ATTORNEY





KNOW ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Geoff Turner, his attorney-in-fact, each with the power
of substitution, for him in any and all capacities, to sign any amendments in
this Annual Report on Form 10-K, and to file the same, with exhibits thereto and
other documents in connections therewith, with the Securities and Exchange
Commission, hereby ratifying and conforming all that each of said
attorneys-in-fact, or his or her substitutes, may do or cause to be done by
virtue of hereof.





Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.





Signature
                                      
                                      Title
                                      
                                      Date/s/
                                      Geoff Turner
                                      
                                      Chief Executive Officer, Interim
      Chief Financial
                                        Officer and Director
                                      
                                      January 29, 2010(Principal Executive and Financial Officer)/s/
                                      Frank Moore
                                      
                                      Director
                                      
                                      January 29, 2010





46




CODA
OCTOPUS GROUP, INC.





INDEX TO
FINANCIAL STATEMENTS




PAGEREPORT
      OF INDEPENDENT REGISTERED CERTIFIED
                        
                        F-1PUBLIC
      ACCOUNTING FIRMCONSOLIDATED
      BALANCE SHEETSOCTOBER
      31, 2009 and 2008
                        
                        
                        F-2CONSOLIDATED
      STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSSFOR
      THE YEARS ENDED OCTOBER 31, 2009 and 2008
                        
                        
                        F-3CONSOLIDATED
      STATEMENT OF STOCKHOLDERS' (DEFICIT) EQUITYFOR
      THE TWO YEARS ENDED OCTOBER 31, 2009
                        
                        
                        F-4CONSOLIDATED
      STATEMENT OF CASH FLOWSFOR
      YEARS ENDED OCTOBER 31, 2009 and 2008
                        
                        
                        F-5NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
                        
                        
                        F-6 - F-25





47




REPORT OF
INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM





Board of
Directors


Coda
Octopus Group, Inc.


New York,
New York





We have
audited the accompanying consolidated balance sheets of Coda Octopus Group, Inc.
and its wholly owned subsidiaries (the “Company”), as of October 31, 2009 and
2008, and the related consolidated statements of operations and comprehensive
loss, stockholders’ deficit and cash flows for each of the two years in the
period ended October 31, 2009. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.




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




As
discussed in Note 12 to the financial statements, the Company has failed to
comply with certain covenants in connection with the securedconvertibledebt.
The Company and the noteholder entered into an agreement, whereby the noteholder
agreed not to undertake any adverse actions against the Company, subject to the
Company complying with the terms of the agreement and the noteholder has waived
its right to demand repayment as a result of the Company's failure to observe
certain specified loan covenants.





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Coda Octopus Group, Inc. and its
wholly owned subsidiaries as of October 31, 2009 and 2008, and the results of
its operations and its cash flows for each of the two years in the period ended
October 31, 2009, in conformity with accounting principles generally accepted in
the United States of America.





/S/RBSM LLPNew
      York, New York
            RBSM
      LLPJanuary
      29, 2010





F-1




CODA
OCTOPUS GROUP, INC.
 CONSOLIDATED
BALANCE SHEETS
 OCTOBER
31, 2009 and 2008
 
 October
      31,
              
              
              October
      31,ASSETS
              
              2009
              
              
              2008Current
      assets:Cash
      and cash equivalents
              
              $
              275,885
              
              
              $
              3,896,149Restricted
      cash, Note 2
              
              
              994,081
              
              
              
              1,017,007Short-Term
      Investments, Note 4
              
              
              51,000
              
              
              
              153,000Accounts
      receivable, net of allowance for doubtful accounts
              
              
              2,033,879
              
              
              
              2,589,174Inventory
              
              
              2,798,425
              
              
              
              2,317,322Due
      from related parties, Note 13
              
              
              -
              
              
              
              54,166Unbilled
      receivables, Note 3
              
              
              690,344
              
              
              
              518,326Other
      current assets, Note 5
              
              
              285,691
              
              
              
              407,080Prepaid
      expenses
              
              
              247,134
              
              
              
              385,831Total
      current assets
              
              
              7,376,439
              
              
              
              11,338,055Property
      and equipment, net, Note 6
              
              
              267,964
              
              
              
              355,909Deferred
      financing costs, net of accumulated amortizationof
      $242,128 in 2009 and $181,596 in 2008, Note 12
              
              
              1,271,170
              
              
              
              1,513,297Goodwill
      and other intangible assets, net, Note 7
              
              
              4,221,807
              
              
              
              3,832,023Total
      assets
              
              $
              13,137,380
              
              
              $
              17,039,284LIABILITIES
      AND STOCKHOLDERS' (DEFICIT) EQUITYCurrent
      liabilities:Accounts
      payable, trade
              
              $
              2,390,039
              
              
              $
              1,159,849Accrued
      expenses and other current liabilities
              
              
              4,626,164
              
              
              
              2,347,522Deferred
      revenues, Note 3
              
              
              398,482
              
              
              
              268,650Deferred
      payment related to acquisitions, Note 14
              
              
              404,274
              
              
              
              -Accrued
      dividends on Series A & B Preferred Stock
              
              
              -
              
              
              
              53,874Due
      to related parties, Note 13
              
              
              -
              
              
              
              41,904Loans
      and notes payable, short term, Note 12
              
              
              
              
              
              
              12,358,597Total
      current liabilities
              
              
              7,818,959
              
              
              
              16,230,396Loans
      and notes payable, long term, Note 12
              
              
              13,233,523
              
              
              
              162,700Total
      liabilities
              
              
              21,052,482
              
              
              
              16,393,096Stockholders'
      (deficit) equity:Preferred
      stock, $.001 par value; 5,000,000 shares authorized,6,287
      and 6,407 shares Series A issued and outstanding, as ofOctober
      31, 2009 and 2008 respectively
              
              
              6
              
              
              
              6Nil
      and Nil shares Series B issued and outstanding as ofOctober
      31, 2009 and 2008 respectively
              
              
              -
              
              
              
              -Common
      stock, $.001 par value; 100,000,000 sharesauthorized,
      49,000,244 and 48,853,664 shares issued and outstandingas
      of October 31, 2009 and 2008 respectively
              
              
              49,000
              
              
              
              48,854Common
      Stock subscribed
              
              
              96,350
              
              
              
              131,790Additional
      paid-in capital
              
              
              51,766,495
              
              
              
              51,433,049Accumulated
      other comprehensive loss
              
              
              (696,617
              )
              
              
              (1,317,696
              )Accumulated
      deficit
              
              
              (59,130,336
              )
              
              
              (49,649,815
              )Total
      stockholders' (deficit) equity
              
              
              (7,915,102
              )
              
              
              646,188Total
      liabilities and stockholders' (deficit) equity
              
              $
              13,137,380
              
              
              $
              17,039,284
  The
accompanying notes are an integral part of these consolidated financial
statements.
  F-2
 CODA
OCTOPUS GROUP, INC.
 CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
 FOR
THE YEARS ENDED OCTOBER 31, 2009 AND 2008
 2009
                          
                          
                          2008Net
      revenue
                          
                          $
                          13,224,435
                          
                          
                          $
                          16,968,922Cost
      of revenue
                          
                          
                          6,315,961
                          
                          
                          
                          6,941,287Gross
      profit
                          
                          
                          6,908,474
                          
                          
                          
                          10,027,635Research
      and development
                          
                          
                          2,652,713
                          
                          
                          
                          3,525,023Selling,
      general and administrative expenses
                          
                          
                          11,238,961
                          
                          
                          
                          13,204,254Total
      operating expenses
                          
                          
                          13,891,674
                          
                          
                          
                          16,729,277Operating
      loss
                          
                          
                          (6,983,200
                          )
                          
                          
                          (6,701,642
                          )Other
      income
                          
                          
                          201,748
                          
                          
                          
                          323,866Interest
      expense
                          
                          
                          (1,846,883
                          )
                          
                          
                          (1,538,724
                          )Impairment
      of investment in marketable securities
                          
                          
                          (782,595
                          )
                          
                          
                          -Total
      other expense
                          
                          
                          (2,427,730
                          )
                          
                          
                          (1,214,858
                          )Loss
      before income taxes
                          
                          
                          (9,410,930
                          )
                          
                          
                          (7,916,500
                          )Provision
      for income taxes
                          
                          
                          22,208
                          
                          
                          
                          4,017Net
      loss
                          
                          
                          (9,433,139
                          )
                          
                          
                          (7,920,517
                          )Preferred
      Stock Dividends:Series
      A
                          
                          
                          (47,382
                          )
                          
                          
                          (129,568
                          )Series
      B
                          
                          
                          -
                          
                          
                          
                          -Beneficial
      Conversion Feature
                          
                          
                          -
                          
                          
                          
                          -Net
      Loss Applicable to Common Shares
                          
                          $
                          (9,480,520
                          )
                          
                          $
                          (8,050,085
                          )Loss
      per share, basic and diluted
                          
                          
                          (0.19
                          )
                          
                          
                          (0.17
                          )Weighted
      average shares outstanding
                          
                          
                          48,707,615
                          
                          
                          
                          48,486,291Comprehensive
      loss:Net
      loss
                          
                          $
                          (9,433,138
                          )
                          
                          $
                          (7,920,517
                          )Foreign
      currency translation adjustment
                          
                          
                          (143,921
                          )
                          
                          
                          (297,599
                          )Unrealized
      gain (loss) on investment
                          
                          
                          (17,000
                          )
                          
                          
                          (782,000
                          )Comprehensive
      loss
                          
                          $
                          (9,594,059
                          )
                          
                          $
                          (9,000,116
                          )
  The
accompanying notes are an integral part of these consolidated financial
statements.
  F-3
  CODA
OCTOPUS GROUP, INC.
 CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
 FOR THE
TWO YEARS ENDED OCTOBER 31, 2009 AND 2008
  Additional
                                                              
                                                              
                                                              AccumulatedPreferred Stock Series A
                                                              
                                                              
                                                              Preferred Stock Series B
                                                              
                                                              
                                                              Common Stock
                                                              
                                                              
                                                              Stock
                                                              
                                                              
                                                              Paid-in
                                                              
                                                              
                                                              Other
                                                              
                                                              
                                                              AccumulatedShares
                                                              
                                                              
                                                              Amount
                                                              
                                                              
                                                              Shares
                                                              
                                                              
                                                              Amount
                                                              
                                                              
                                                              Shares
                                                              
                                                              
                                                              Amount
                                                              
                                                              
                                                              Subscribed
                                                              
                                                              
                                                              Capital
                                                              
                                                              
                                                              Comprehensiveloss
                                                              
                                                              
                                                              Deficit
                                                              
                                                              
                                                              TotalBalance,
      October 31, 2007
                                                              
                                                              
                                                              6,407
                                                              
                                                              
                                                              $
                                                              6
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              $
                                                              -
                                                              
                                                              
                                                              
                                                              48,245,768
                                                              
                                                              
                                                              $
                                                              48,246
                                                              
                                                              
                                                              $
                                                              80,000
                                                              
                                                              
                                                              $
                                                              49,785,244
                                                              
                                                              
                                                              $
                                                              (238,097
                                                              )
                                                              
                                                              $
                                                              (41,599,730
                                                              )
                                                              
                                                              $
                                                              8,075,669Stock
      issued for compensation
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              448,737
                                                              
                                                              
                                                              
                                                              449
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              258,827
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              259,276Stock
      issued for financing
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              4200
                                                              
                                                              
                                                              
                                                              4
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              4,196
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              4,200Stock
      subscribedPreferred
      stock
                                                              
                                                              
                                                              (120
                                                              )
                                                              
                                                              
                                                              (0
                                                              )
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              116,640
                                                              
                                                              
                                                              
                                                              117
                                                              
                                                              
                                                              
                                                              (80,000
                                                              )
                                                              
                                                              
                                                              79,883
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              (0
                                                              )Common
      stock
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              131,790
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              131,790Fair
      value of options and warrants issued as compensation
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              872,170
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              872,170Fair
      value of options and warrants issued for financing
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              391,230
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              391,230Preferred
      stock dividends Series A
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              38,319
                                                              
                                                              
                                                              
                                                              38
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              41,498
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              (129,568
                                                              )
                                                              
                                                              
                                                              (88,032
                                                              )Foreign
      currency translation adjustment
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              (297,599
                                                              )
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              (297,599
                                                              )Unrealized
      (loss) from marketable securities
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              (782,000
                                                              )
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              (782,000
                                                              )Net
      loss
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              (7,920,517
                                                              )
                                                              
                                                              
                                                              (7,920,517
                                                              )Balance,
      October 31, 2008
                                                              
                                                              
                                                              6,287
                                                              
                                                              
                                                              $
                                                              6
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              $
                                                              -
                                                              
                                                              
                                                              
                                                              48,853,664
                                                              
                                                              
                                                              $
                                                              48,854
                                                              
                                                              
                                                              $
                                                              131,790
                                                              
                                                              
                                                              $
                                                              51,433,049
                                                              
                                                              
                                                              $
                                                              (1,317,696
                                                              )
                                                              
                                                              $
                                                              (49,649,815
                                                              )
                                                              
                                                              $
                                                              646,188Shares
      issued for compensation
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              146,580
                                                              
                                                              
                                                              
                                                              146
                                                              
                                                              
                                                              
                                                              (35,440
                                                              )
                                                              
                                                              
                                                              30,163
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              (5,131
                                                              )Fair
      value of options issued as compensation
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              295,853
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              295,853Fair
      value of options issued for acquisition
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              7,430
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              7,430Preferred
      stock dividends series A
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              (47,382
                                                              )
                                                              
                                                              
                                                              (47,382
                                                              )Foreign
      currency translation adjustment
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              (143,921
                                                              )
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              (143,921
                                                              )Realized
      loss on marketable securities reclassified to earnings
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              782,000
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              782,000Unrealized
      (loss) on marketable securities
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              (17,000
                                                              )
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              (17,000
                                                              )Net
      loss
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              (9,433,139
                                                              )
                                                              
                                                              
                                                              (9,433,139
                                                              )Balance,
      October 31, 2009
                                                              
                                                              
                                                              6,287
                                                              
                                                              
                                                              $
                                                              6
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              $
                                                              -
                                                              
                                                              
                                                              
                                                              49,000,244
                                                              
                                                              
                                                              $
                                                              49,000
                                                              
                                                              
                                                              $
                                                              96,350
                                                              
                                                              
                                                              $
                                                              51,766,495
                                                              
                                                              
                                                              $
                                                              (696,617
                                                              )
                                                              
                                                              $
                                                              (59,130,336
                                                              )
                                                              
                                                              $
                                                              (7,915,102
                                                              )
  The accompanying notes are an integral part of these
consolidated financial statements.
 F-4
  CODA
OCTOPUS GROUP, INC.
 CONSOLIDATED
STATEMENT OF CASH FLOWS
 FOR THE
YEARS ENDED OCTOBER 31, 2009 AND 2008
  2009
                
                
                2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                
                $
                (9,433,137
                )
                
                $
                (7,920,517
                )Adjustments
      to reconcile net loss to net cashused
      by operating activities:Depreciation
      and amortization
                
                
                689,744
                
                
                
                547,369Stock
      based compensation
                
                
                290,722
                
                
                
                1,067,221Financing
      costs
                
                
                1,534,295
                
                
                
                1,057,843Impairment
      of investment in marketable securities
                
                
                782,000
                
                
                
                -Bad
      debt expense
                
                
                238,458
                
                
                
                74,897Interest
      earned on restricted cash
                
                
                -
                
                
                
                (17,017
                )Loss
      on sale of assets
                
                
                11,636
                
                
                
                -Changes
      in operating assets and liabilities:(Increase)
      decrease in:Accounts
      receivable
                
                
                593,621
                
                
                
                56,080Inventory
                
                
                (445,850
                )
                
                
                609,195Prepaid
      expenses
                
                
                138,696
                
                
                
                90,452Other
      receivables
                
                
                (161,462
                )
                
                
                37,581Increase
      (decrease) in:Accounts
      payable and accrued expenses
                
                
                4,055,979
                
                
                
                (800,885
                )Due
      to related parties
                
                
                40,228
                
                
                
                (63,781
                )Net
      cash used in operating activities
                
                
                (1,665,070
                )
                
                
                (5,261,562
                )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of property and equipment
                
                
                (47,758
                )
                
                
                (131,502
                )Purchases
      of intangible assets
                
                
                (18,524
                )
                
                
                (11,466
                )Acquisition
      Payments
                
                
                (181,317
                )
                
                
                (763,936
                )Change
      in restricted cash
                
                
                22,926
                
                
                
                (1,000,000
                )Cash
      acquired in acquisitions
                
                
                877
                
                
                
                -Net
      cash used in investing activities
                
                
                (223,796
                )
                
                
                (1,906,904
                )CASH
      FLOWS FROM FINANCING ACTIVITIES:(Repyament
      of) Proceeds from loans
                
                
                (1,530,086
                )
                
                
                10,605,377Preferred
      stock dividend
                
                
                (101,256
                )
                
                
                (127,541
                )Net
      cash (used in) provided by financing activities
                
                
                (1,631,342
                )
                
                
                10,477,836Effect
      of exchange rate changes on cash
                
                
                (100,056
                )
                
                
                (329,477
                )Net
      (decrease) increase in cash
                
                
                (3,620,264
                )
                
                
                2,979,893Cash
      and cash equivalents, beginning of period
                
                
                3,896,149
                
                
                
                916,257Cash
      and cash equivalents, end of period
                
                $
                275,885
                
                
                $
                3,896,149Cash
      paid for:Interest
                
                $
                172,842
                
                
                $
                480,881Income
      taxes
                
                
                -
                
                
                
                -Supplemental
      Disclosures:During
      the twelve months ended October 31, 2009,146,580 shares of common
      stockwere
      issued, 43,694 of which were subscribed for in the year ended October 31,
      2008,and
      the other 102,886 shares were issued as $18,520 in
      compensation.During
      the twelve months ended October 31, 2008, 452,937 shares of common
      stockwere
      issued as payment of $263,476 of compensation that was
    earned.Acquisition of
      Dragon:Current
      assets acquired
                
                $
                147,039
                
                
                $
                -Cash
      acquired
                
                
                877
                
                
                
                -Equipment
      acquired
                
                
                51,336
                
                
                
                -Goodwill
      and other intangible assets
                
                
                342,013
                
                
                
                -Liabilities
      assumed
                
                
                (201,166
                )
                
                
                -Deferred
      payments
                
                
                (250,782
                )
                
                
                -Cash
      Paid for Acquisition
                
                $
                89,317
                
                
                $
                -Acquisition of
      Tactical:Equipment
      acquired
                
                $
                5,000
                
                
                $
                -Goodwill
      and other intangible assets
                
                
                252,430
                
                
                
                -Options
      issued
                
                
                (7,430
                )
                
                
                -Deferred
      note payable
                
                
                (125,000
                )
                
                
                -Cash
      Paid for Acquisition
                
                $
                125,000
                
                
                $
                -


F-5




CODA
OCTOPUS GROUP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 October
31, 2009 and 2008
 
 NOTE
1 - SUMMARY OF ACCOUNTING POLICIES
  A summary
of the significant accounting policies applied in the preparation of the
accompanying consolidated financial statements follows.
  Business
and Basis of Presentation
  Coda
Octopus Group, Inc. (”we ”, “us”, “our company” or “Coda”) was formed under the
laws of the State of Florida in 1992. We are a developer of underwater
technologies and equipment for imaging, mapping, defense and survey
applications. We are based in New York, with research and development, sales and
manufacturing facilities located in the United Kingdom and Norway, and
additional sales locations in Florida, Utah and Washington, D.C.
  The
consolidated financial statements include the accounts of Coda and our domestic
and foreign subsidiaries that are more than 50% owned and controlled. All
significant intercompany transactions and balances have been eliminated in the
consolidated financial statement.
  Use
of Estimates
  The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and
accompanying disclosures. Although these estimates are based on management's
best knowledge of current events and actions that we may undertake in the
future, actual results may differ from those estimates.
  Revenue
Recognition
  We record
revenue in accordance with ASC Topic 605 - Revenue Recognition. Our revenue
is derived from sales of underwater technologies and equipment for imaging,
mapping, defense and survey applications. Revenue is recognized when persuasive
evidence of an arrangement exists, delivery has occurred or services have been
rendered, the contract price is fixed or determinable, and collectibility is
reasonably assured. No right of return privileges are granted to customers after
shipment.
  For
arrangements with multiple deliverables, we recognize product revenue by
allocating the revenue to each deliverable based on the fair value of each
deliverable in accordance with ASC 605-25-05 and ASC 605-10-599, and recognize
revenue for equipment upon delivery and for installation and other services as
performed. ASC 605-25-05 was effective for revenue arrangements entered into in
fiscal periods beginning after June 15, 2003.
  Our
contracts sometimes require customer payments in advance of revenue recognition.
These deposit amounts are reflected as liabilities and recognized as revenue
when the Company has fulfilled its obligations under the respective
contracts.
  Revenues
derived from our software license sales are recognized in accordance
with FASB ASC Topic 985 - Software. For software license sales for
which any services rendered are not considered essential to the functionality of
the software, we recognize revenue upon delivery of the software, provided (1)
there is evidence of an arrangement, (2) collection of our fee is considered
probable and (3) the fee is fixed and determinable.
  F-6
  CODA
OCTOPUS GROUP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 October
31, 2009 and 2008
  Foreign
Currency Translation
  The
Company translates the foreign currency financial statements of its foreign
subsidiaries in accordance with the requirements of ASC 830 - Foreign Currency
Matters. Assets and liabilities are translated at exchange rates existing
at the balance sheet dates, related revenue and expenses are translated at
average exchange rates in effect during the period and stockholders’ equity,
fixed assets and long-term investments are recorded at historical exchange
rates. Resulting translation adjustments are recorded as a separate component in
stockholders' equity as part of accumulated other comprehensive income (loss).
Foreign currency transaction gains and losses are included in the statement of
income.
  Income
Taxes
  Deferred
income taxes are provided using the asset and liability method for financial
reporting purposes in accordance with the provisions of ASC 740 - Income Taxes.
Under this method, deferred tax assets and liabilities are recognized for
temporary differences between the tax bases of assets and liabilities and their
carrying values for financial reporting purposes, and for operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be removed or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
the consolidated statements of operations in the period that includes the
enactment date.
  Cash
and Cash Equivalents
  Cash
equivalents are comprised of highly liquid investments with maturity of three
months or less when purchased. We maintain our cash in bank deposit accounts,
which at times, may exceed insured limits. We have not experienced any losses in
such accounts.
  Concentrations
of Credit Risk
  Financial
instruments and related items, which potentially subject us to concentrations of
credit risk, consist primarily of cash and cash equivalents and accounts
receivable. We place our cash and temporary cash investments with credit quality
institutions. At times, such investments may be in excess of applicable
government mandated insurance limits.
  Accounts
Receivable
  We
periodically review our trade receivables in determining our allowance for
doubtful accounts.   Allowance for doubtful accounts was $255,789 and
$74,897 for the years ended October 31, 2009 and 2008 respectively.
  Fair
Value of Financial Instruments
  FASB ASC
825-10-50 - Financial Investments requires disclosure of the fair value of
certain financial instruments. The carrying value of cash and cash equivalents,
accounts receivable, other receivables, accounts payable and short-term
borrowings, as reflected in the balance sheets, approximate fair value because
of the short-term maturity of these instruments. Our long term debt has interest
rates that approximate market and therefore the carrying amounts approximate
their fair values.
 
 Fair
Values
  In the
first quarter of fiscal year 2008, the Company adopted FASB ASC Topic -820,
“Fair Value Measurements and Disclosures” (ASC 820) as amended by ASC Topic
820-10-55. ASC 820 defines fair value, establishes a framework for
measuring fair value, and enhances fair value measurement disclosure. ASC Topic
820-10-55 delays, until the first quarter of fiscal year 2009, the effective
date for ASC 820 for all non-financial assets and non-financial
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually). The adoption
of ASC 820 did not have a material impact on the Company’s financial
position or operations. Refer to Note 11 for further discussion regarding fair
value.
  F-7
 
 CODA
OCTOPUS GROUP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 October
31, 2009 and 2008
  Debt
and Equity Securities
  The
Company follows the provisions of FASB ASC Topic 320, Accounting for Certain
Investments in Debt and Equity Securities (ASC 320). The Company classifies debt
and equity securities into one of three categories: held-to-maturity,
available-for-sale or trading. These security classifications may be modified
after acquisition only under certain specified conditions. Securities may be
classified as held-to-maturity only if the Company has the positive intent and
ability to hold them to maturity. Trading securities are defined as those bought
and held principally for the purpose of selling them in the near term. All other
securities must be classified as available-for-sale.
  Held-to-maturity
securities are measured at amortized cost in the consolidated balance sheets.
Unrealized holding gains and losses are not included in earnings or in a
separate component of capital. They are merely disclosed in the notes to the
consolidated financial statements.
  Available-for-sale
securities are carried at fair value on the consolidated balance sheets.
Unrealized holding gains and losses are not included in earnings but are
reported as a net amount (less expected tax) in a separate component of capital
until realized.
  Trading
securities are carried at fair value on the consolidated balance sheets.
Unrealized holding gains and losses for trading securities are included in
earnings.
  Declines
in the fair value of held-to-maturity and available-for-sale securities below
their cost that are deemed to be other than temporary are reflected in earnings
as realized losses.
 
 Inventory
  Inventory
is stated at the lower of cost or market using the first-in first-out method.
Inventory is comprised of the following components at October 31, 2009 and
2008:
  2009
              
              
              2008Raw
      materials
              
              $
              1,384,043
              
              
              $
              1,917,566Work
      in process
              
              
              48,389
              
              
              
              113,942Finished
      goods
              
              
              1,365,993
              
              
              
              285,814Total
      inventory
              
              $
              2,798,425
              
              
              $
              2,317,322
  F-8
 CODA
OCTOPUS GROUP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 October
31, 2009 and 2008
  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
FASB ASC Topic 360, "Accounting for Impairment of Disposal of Long-Lived
Assets", (ASC 360) which established a "primary asset" approach to determine the
cash flow estimation period for a group of assets and liabilities that
represents the unit of accounting for a long-lived asset to be held and used.
Long-lived assets to be held and used are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The carrying amount of a long-lived asset is not
recoverable if it exceeds the sum of the undiscounted cash flows expected to
result from the use and eventual disposition of the asset. Long-lived assets to
be disposed of are reported at the lower of carrying amount or fair value less
cost to sell. No impairment loss was recognized during the years ended October
31, 2009 and 2008.
  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.
During the year ended October 31, 2009, we recorded tax credits totalling
$358,346. We recorded no tax credits during the year ended October 31,
2008.
  Advertising
  We charge
the costs of advertising to expense as incurred. For the years ended October 31,
2009 and 2008, advertising costs were $522,576 and $1,237,175,
respectively.
  Other
Operating Expenses
  We
incurred costs of nil and nil as non-recurring fees and expenses in connection
with our financings and acquisitions for October 31, 2009 and 2008,
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. Goodwill is not amortized and is evaluated
for impairment annually or more often if circumstances indicate impairment may
exist. Customer relationships, non-compete agreements, patents and licenses are
being amortized on a straight-line basis over periods of 2 to 10 years. The
Company amortizes its amortizable 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 FASB ASC Topic 350,
“Goodwill and Other Intangible Assets” (ASC 350). 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. ASC 350 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 ASC
360.
  F-9
 
 CODA
OCTOPUS GROUP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 October
31, 2009 and 2008
 
 Stock
Based Compensation
  Effective
January 1, 2006, the Company adopted FASB ASC Topic 718 - Compensation - Stock
Compensation, (ASC 718) which requires the recognition of the expense related to
the fair value of stock-based compensation awards within the statement of
income. The Company elected the modified prospective transition method as
permitted by (ASC 718). Under this transition method, stock-based compensation
expense for the years ended October 31, 2009 and 2008 includes compensation
expense for unvested stock-based compensation awards that were outstanding as of
January 1, 2006, respectively, for which the requisite service was rendered
during the year. The stock-based compensation costs for these awards granted
prior to January 1, 2006 were based on the grant date fair value estimated in
accordance with the original provisions of ASC 718. Compensation expense for all
stock-based compensation awards granted subsequent to January 1, 2006 is based
on the grant date fair value estimated in accordance with the provisions of ASC
718 recorded over the requisite service period.
 We use
the fair value method for equity instruments granted to non-employees and use
the Black Scholes model for measuring the fair value. The stock based fair value
compensation is determined as of the date of the grant or the date at which the
performance of the services is completed (measurement date) and is recognized
over the periods in which the related services are rendered.
  Comprehensive
Income
  FASB ASC
Topic 220 - Comprehensive Income, (ASC 220) 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, ASC 220 requires that all items that are required to be
recognized under current accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. Comprehensive income includes gains
and losses on foreign currency translation adjustments and is included as a
component of stockholders' equity.
 
 Deferred
Financing Costs
  Deferred
financing costs primarily include debt issuance costs incurred by the Company in
connection with the issuance of convertible debt in February 2008 (see Note 12).
Amortization is provided on a straight-line basis over the terms of the
respective debt instruments to which the costs relate and is included in
interest expense. Deferred financing cost expense was $242,128 and $181,596 in
2009 and 2008, respectively.
  Earnings Per
Share
  We use
FASB ASC Topic 260, “Earnings per Share” (ASC 260) for calculating the basic and
diluted earnings per share. We compute basic earnings per share by
dividing the income attributable to common shareholders by the weighted average
number of common shares outstanding. Diluted earnings per share include the
dilutive effect, if any, from the potential exercise of stock options and
warrants using the treasury stock method, as well as the dilutive effect from
outstanding restricted Common Stock. Potential common shares not included in the
calculation of net income per share, since their effect would be
anti-dilutive.
  Per share
basic and diluted net loss amounted to $0.19 and $0.17 for the years ended
October 31, 2009 and 2008, respectively. For the years ended October
31, 2009 and 2008, 50,999,756 and 50,583,299 potential shares,
respectively, were excluded from the shares used to calculate diluted earnings
per share as their inclusion would reduce net loss per share.
  F-10
  CODA
OCTOPUS GROUP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 October
31, 2009 and 2008
  New
Accounting Pronouncements
  In June
2009, the Financial Accounting Standards Board (“FASB”) issued guidance now
codified under Accounting Standards Codification (“ASC”) Topic 105-10, which
establishes the FASB Accounting Standards Codification (the “Codification”) as
the source of authoritative accounting principles recognized by the FASB to be
applied in the preparation of financial statements in conformity with GAAP. ASC
Topic 105-10 explicitly recognizes rules and interpretive releases of the
Securities and Exchange Commission (“SEC”) under federal securities laws as
authoritative GAAP for SEC registrants.  Upon adoption of this
guidance under ASC Topic 105-10, the Codification superseded all then-existing
non-SEC accounting and reporting standards. All other non-grandfathered non-SEC
accounting literature not included in the Codification became
non-authoritative.  The guidance under ASC Topic 105-10 became
effective for the Company as of September 30, 2009.  References made
to authoritative FASB guidance throughout this document have been updated to the
applicable Codification section.
  In
February 2007, the FASB issued FASB ASC Topic 825, “The Fair Value Option for
Financial Assets and Financial Liabilities – Including an Amendment of ASC 320”
(ASC 825)  which permits entities to choose to measure many financial
instruments and certain other items at fair value.  Most of the
provisions of (ASC 825) apply only to entities that elect the fair value option.
However, the amendment to ASC 320 “Accounting for Certain Investments
in Debt and Equity Securities” applies to all entities with available-for-sale
and trading securities.  ASC 825 is effective as of the beginning
of an entity’s first fiscal year that begins after November 15,
2007.  Early adoption is permitted as of the beginning of a fiscal
year that begins on or before November 15, 2007, provided the entity also elects
to apply the provision of ASC 820, “Fair Value Measurements”.  The
adoption of ASC 825 is not expected to have a material impact on the
Company’s consolidated financial position, results of operations or cash
flows.
  In
December 2007, the FASB issued FASB ASC Topic 805, “Business Combinations”
(ASC 805), which establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling interest in an
acquiree, including the recognition and measurement of goodwill acquired in a
business combination. ASC 805  is effective as of the beginning
of the first fiscal year beginning on or after December 15, 2008. Earlier
adoption is prohibited and the Company is currently evaluating the effect, if
any that the adoption will have on its consolidated financial position, results
of operations or cash flows.
  In
December 2007, the FASB FASB ASC Topic 810, “Noncontrolling Interest in
Consolidated Financial Statements, an amendment of ASC 810-12-15” (ASC
810), which will change the accounting and reporting for minority interests,
which will be recharacterized as noncontrolling interests and classified as a
component of equity within the consolidated balance sheets. ASC 810 is
effective as of the beginning of the first fiscal year beginning on or after
December 15, 2008. Earlier adoption is prohibited and the Company is
currently evaluating the effect, if any that the adoption will have on its
consolidated financial position, results of operations or cash
flows.
  In June
2007, the FASB issued FASB ASC Topic 730-20, “Accounting for Nonrefundable
Advance Payments for Goods or Services to be Used in Future Research and
Development Activities” ASC 730-20, which requires that nonrefundable advance
payments for goods or services that will be used or rendered for future research
and development (R&D) activities be deferred and amortized over the period
that the goods are delivered or the related services are performed, subject to
an assessment of recoverability. ASC 730-20 will be effective for fiscal years
beginning after December 15, 2007. The Company does not expect that the
adoption of ASC 730-20 will have a material impact on its consolidated financial
position, results of operations or cash flows.
  In
December 2007, the FASB issued FASB ASC Topic 808-10-15, “Accounting for
Collaborative Arrangements” (ASC 808-10-15)  which defines
collaborative arrangements and requires collaborators to present the result of
activities for which they act as the principal on a gross basis and report any
payments received from (made to) the other collaborators based on other
applicable authoritative accounting literature, and in the absence of other
applicable authoritative literature, on a reasonable, rational and consistent
accounting policy is to be elected. ASC 808-10-15 also provides for
disclosures regarding the nature and purpose of the arrangement, the entity’s
rights and obligations, the accounting policy for the arrangement and the income
statement classification and amounts arising from the agreement. ASC 808-10-15
will be effective for fiscal years beginning after December 15, 2008, which
will be the Company’s fiscal year 2009, and will be applied as a change in
accounting principle retrospectively for all collaborative arrangements existing
as of the effective date. The Company has not yet evaluated the potential impact
of adopting ASC 808-10-15 on its consolidated financial position, results of
operations or cash flows.
  In March
2008, the FASB” issued FASB ASC Topic 815-10-65, “Disclosures about Derivative
Instruments and Hedging Activities – an amendment to 815-10-05 (ASC 815-10-65)
which is intended to improve financial standards for derivative instruments and
hedging activities by requiring enhanced disclosures to enable investors to
better understand their effects on an entity’s financial position, financial
performance, and cash flows.  Entities are required to provide
enhanced disclosures about: (a) how and why an entity uses derivative
instruments; (b) how derivative instruments and related hedged items are
accounted for under 815-10-05 and its related interpretations; and (c) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows.  It is effective for
financial statements issued for fiscal years beginning after November 15, 2008,
with early adoption encouraged.  The Company is currently evaluating
the impact of ASC 815-10-65, if any, will have on its consolidated financial
position, results of operations or cash flows.
  F-11
  CODA
OCTOPUS GROUP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 October
31, 2009 and 2008
  In April
2008, the FASB issued FASB ASC Topic 350-30, “Determination of the Useful Life
of Intangible Assets”. (ASC 350-30) which amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS
No. 142, “Goodwill and Other Intangible Assets”.   The Company is
required to adopt ASC 350-30 on September 1, 2009, earlier adoption is
prohibited.  The guidance in ASC 350-30 for determining the
useful life of a recognized intangible asset shall be applied prospectively to
intangible assets acquired after adoption, and the disclosure requirements shall
be applied prospectively to all intangible assets recognized as of, and
subsequent to, adoption.  The Company is currently evaluating the
impact of ASC 350-30 on its consolidated financial position, results of
operations or cash flows.
  In 2008,
the FASB issued FASB ASC 815-40 (Previously known as: EITF 07-05, Determining
whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own
Stock). FASB ASC 815-40 provides guidance on determining what types of
instruments or embedded features in an instrument held by a reporting entity can
be considered indexed to its own stock for the purpose of evaluating the first
criteria of the scope exception in FASB ASC 810-10-15 (Prior authoritative
literature: paragraph 11(a) of SFAS 133). The Company is currently evaluating
the impact of FASB ASC 815-40 on the Company’s financial
statements.
 In May
2008, the FASB FASB ASC Topic 470-20-15, “Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement)” (ASC 470-20-15) which requires the issuer of certain
convertible debt instruments that may be settled in cash (or other assets) on
conversion to separately account for the liability (debt) and equity (conversion
option) components of the instrument in a manner that reflects the issuer’s
non-convertible debt borrowing rate.  ASC 470-20-15 is effective
for fiscal years beginning after December 15, 2008 on a retroactive
basis. The Company is currently evaluating the potential impact, if any, of
the adoption of ASC 470-20-15 on its consolidated financial
position, results of operations or cash flows.
  In
June 2008, the FASB issued FASB ASC Topic 260-10-45, “Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities.” FASB ASC Topic 260-10-45, unvested share-based
payment awards that contain rights to receive nonforfeitable dividends (whether
paid or unpaid) are participating securities, and should be included in the
two-class method of computing EPS. The FSP is effective for fiscal years
beginning after December 15, 2008, and interim periods within those years.
The Company does not expect the adoption of ASC 260-10-45 to have a
material effect on its consolidated financial position, results of operations or
cash flows.
  In May
2009, the FASB issued FASB ASC 855-10 (Previously known as: SFAS No. 165,
“Subsequent Events”) FASB ASC 855-10 establishes general standards for
accounting for and disclosure of events that occur after the balance sheet date
but before financial statements are available to be issued (“subsequent
events”). More specifically, FASB ASC 855-10 sets forth the period after the
balance sheet date during which management of a reporting entity should evaluate
events or transactions that may occur for potential recognition in the financial
statements, identifies the circumstances under which an entity should recognize
events or transactions occurring after the balance sheet date in its financial
statements and the disclosures that should be made about events or transactions
that occur after the balance sheet date. FASB ASC 855-10 provides largely the
same guidance on subsequent events which previously existed only in auditing
literature. The guidance under ASC Topic 855-10 became effective for the Company
as of June 30, 2009.
 Liquidity
  The
Company’s financial statements have been prepared assuming it will continue as a
going concern. For the fiscal year ended October 31, 2009, the Company has an
accumulated deficit of $59,130,336, negative working capital of $442,520, a
capital deficit of $7,915,102 and generated a deficit in cash flow from
operations of $1,665,070 in 2009 Period against $5,261,562 in the 2008 Period.
The Company has been dependant upon the ability to generate revenue from the
sale of its products and services and the discretion of the note holder to
release cash to cover operations. Management believes that based upon its
current cost reduction program to reduce expenses by $3.35 million annually;
based upon our reorganization of our business, customer prospects have been
enhanced and is evident in receipt of approximately $3.9 million dollars of
additional contracts and purchase orders during the first quarter of fiscal year
end 2010; based upon the Company’s cash flow projections for it business
operations through January 2011; collectability of its receivables in the
ordinary course of business; based on the Noteholder’s 12 month extension of the
cash control framework agreement as discussed in Note 12 and the Noteholder’s
agreement to waive its right to demand repayment of the loan until March 16,
2011, the Company will be able to continue its operations through October 31,
2010. The Company’s ability to continue as a going concern is ultimately
dependent upon achieving profitable operations and generating sufficient cash
flows from operations to meet future obligations.
  F-12
 
 CODA
OCTOPUS GROUP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 October
31, 2009 and 2008
  NOTE
2 – RESTRICTED CASH
 
 Under
terms of the Company’s secured convertible debenture dated February 26, 2008, we
maintained a $1,000,000 interest-bearing deposit in a restricted bank account
until such time as advances under an accounts receivable factoring agreement
were repaid in full and the agreement and related liens were terminated. As of
October 31, 2008, the Company had $1,017,007 in the restricted cash account,
which was released to the Company in December 2008 after the factoring agreement
was terminated and settled in full in October 2008 and the debenture holders
perfected their security in December 2008.
 
 On March
16, 2009, the Company and the holder of the secured convertible debenture (“The
Noteholder”) entered into a Cash Control Framework Agreement, pursuant to which
it is assumed that, subject to the Company being fully compliant with the terms
of this agreement and those set out in the Transaction Documents entered into
between the Company and the Noteholder on February 21, 2008, no adverse actions
will be taken by the Noteholder. The agreement provides, among other things, for
the placement of approximately $2.15 million into a segregated cash account.
Under the terms of the agreement, we may request the release of funds from the
account from time to time for working capital purposes, subject to the
Noteholder’s consent and agreed upon terms and conditions. Under the terms of
the agreement, we must also adhere to a strict cost cutting program which
involves reducing our SG&A, R&D and capital expenditure by an annualized
$3.35 million. This agreement was extended for a further period of one year,
expiring on March 16, 2009. We have also received a waiver letter from the
Noteholder dated January 18, 2010, under which it has waived its right to demand
repayment of the loan as a result of the failure to observe certain specified
loan covenants. The waiver will expire on the first anniversary of the waiver
letter. We believe that the terms of this agreement may provide us with
sufficient liquidity to operate for fiscal 2009.
 
 At
October 31, 2009 we have received net advances from this facility of
$1,155,919.
 NOTE
3 - CONTRACTS IN PROGRESS
  Costs and
estimated earnings in excess of billings on uncompleted contracts represent
accumulated project expenses and fees which have not been invoiced to customers
as of the date of the balance sheet. These amounts are stated on the balance
sheet as Unbilled Receivables of $771,698 and $518,326 as of October 31, 2009
and 2008, respectively.
  Billings
in excess of cost and estimated earnings on uncompleted contracts represent
project invoices billed to customers that have not been earned as of the date of
the balance sheet. These amounts are stated on the balance sheet as Deferred
Revenue of $111,463 and $57,513 as of October 31, 2009 and 2008,
respectively.
  Revenue
received for the sale of equipment includes a provision for warranty and is
treated as deferred revenue, along with extended warranty sales. These amounts
are amortized over the 12-month warranty term starting from the date of
sale. These amounts are stated on the balance sheet as Deferred Revenue of
$287,018 and $211,137 as of October 31, 2009 and 2008,
respectively.
  NOTE
4 - INVESTMENTS
 
 FASB ASC
Topic 820 - Fair Value Measurements and Disclosures ("ASC 820") defines fair
value as the price that would be received from selling an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date. When determining the fair value measurements for assets
and liabilities required or permitted to be recorded at fair value, the Company
considers the principal or most advantageous market in which it would transact
and considers assumptions that market participants would use when pricing the
asset or liability, such as inherent risk, transfer restrictions, and risk of
nonperformance. ASC 820 establishes a fair value hierarchy that requires an
entity to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. ASC 820 establishes three levels
of inputs that may be used to measure fair value:
  Level 1 -
Quoted prices in active markets for identical assets or
liabilities.
  Level 2 -
Observable inputs other than Level 1 prices such as quoted prices for similar
assets or liabilities; quoted prices in markets with insufficient volume or
infrequent transactions (less active markets); or model-derived valuations in
which all significant inputs are observable or can be derived principally from
or corroborated by observable market data for substantially the full term of the
assets or liabilities.
  Level 3 -
Unobservable inputs to the valuation methodology that are significant to the
measurement of fair value of assets or liabilities.
  To the
extent that valuation is based on models or inputs that are less observable or
unobservable in the market, the determination of fair value requires more
judgment. In certain cases, the inputs used to measure fair value may fall into
different levels of the fair value hierarchy. In such cases, for disclosure
purposes, the level in the fair value hierarchy within which the fair value
measurement is disclosed is determined based on the lowest level input that is
significant to the fair value measurement.
  F-13





CODA
OCTOPUS GROUP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 October
31, 2009 and 2008
  Items
recorded or measured at fair value on a recurring basis in the accompanying
financial statements consisted of the following items as of October 31,
2009:
  Quoted Prices
                              in Active
                              Markets for
                              Identical
                              Instruments
                            
                            
                            Significant
                              Other
                              Observable
                              Inputs
                            
                            
                            Significant
                              Unobservable
                              InputsTotal
                            
                            
                            Level
      1
                            
                            
                            Level
      2
                            
                            
                            Level
      3Assets:Restricted
      Cash
                            
                            $
                            994,081
                            
                            
                            $
                            994,081
                            
                            
                            $
                            -
                            
                            
                            $
                            -Short
      term Investment
                            
                            $
                            51,000
                            
                            
                            $
                            51,000
                            
                            
                            $
                            -
                            
                            
                            $
                            -Total
                            
                            $
                            1,045,081
                            
                            
                            $
                            1,045,081
                            
                            
                            $
                            -
                            
                            
                            
                            -Liabilities:Loans
      and Notes Payable
                            
                            $
                            13,233,523
                            
                            
                            $
                            -
                            
                            
                            $
                            13,233,523
                            
                            
                            $
                            -Totals
                            
                            $
                            13,233,523
                            
                            
                            $
                            -
                            
                            
                            $
                            13,233,523
                            
                            
                            $
                            -
  With the
exception of assets and liabilities included within the scope of ASC 820-10-15,
the Company adopted the provisions of ASC 820 prospectively effective as of
the beginning of the year ended October 31, 2008.  For financial
assets and liabilities included within the scope of ASC 820-10-15, the Company
will be required to adopt the provisions of ASC 820 prospectively as
of the year beginning October 31, 2009.  The adoption of ASC
820 did not have a material impact on our financial position or results of
operations, and the Company do not believe that the adoption of ASC 820-10-15
will have a material impact on our financial position or results of
operations.
  The fair
value of the assets, short term investments, at October 31, 2009 was grouped as
Level 1 valuation as the market price was readily available, compared to a fair
value of $153,000 at October 31, 2008.
  During
the year ended October 31, 2007, the Company received marketable securities in
settlement of $533,147 loan and $316,853 of accounts receivable. As of October
31, 2007, the Company had an investment of $935,000 that was considered
available-for-sale for financial reporting purposes which included an unrealized
gain of $85,000 included in the determination of comprehensive loss. As of
October 31, 2009, this investment had a value of $51,000, with an realized loss
of $782,000, and an unrealised loss of $17,000 included in the determination of
comprehensive loss.
    NOTE
5 - OTHER CURRENT ASSETS
  Other
current assets on the balance sheet total $204,337 and $407,080 at October 31,
2009 and 2008 respectively. These totals comprise the following:
 
 2009
              
              
              2008Deposits
              
              $
              96,277
              
              
              $
              110,548Value
      added tax (VAT) receivable
              
              
              113,636
              
              
              
              262,090Other
      receivables
              
              
              75,777
              
              
              
              34,442Total
              
              $
              285,690
              
              
              $
              407,080
  F-14
 
 CODA
OCTOPUS GROUP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 October 31, 2009 and
2008
  NOTE
6 - FIXED ASSETS
  Property
and equipment at October 31, 2009 and 2008 is summarized as
follows:
  2009
              
              
              2008Machinery
      and equipment
              
              $
              1,001,385
              
              
              $
              1,076,950Accumulated
      depreciation
              
              
              (733,420
              )
              
              
              (721,041
              )Net
      property and equipment assets
              
              $
              267,964
              
              
              $
              355,909
  Depreciation
expense recorded in the statements of operations for the years ended October 31,
2009 and 2008 is $238,632 and $176,147, respectively.
  NOTE
7 - INTANGIBLE ASSETS AND GOODWILL
  The Company accounts for intangible assets
and goodwill in accordance with ASC 350. Goodwill and Other Intangible Assets,
whereby the Company periodically tests its intangible assets for impairment. On
an annual basis, and when there is reason to believe that their values have been
diminished or impaired, these assets are tested for impairment, and write-downs
will be included in results from operations.
  The
identifiable intangible assets acquired and their carrying value at October 31,
2009 and 2008 is:
  2009
              
              
              2008Customer
      relationships (weighted average life of 10 years)
              
              $
              784,243
              
              
              $
              694,503Non-compete
      agreements (weighted average life of 3 years)
              
              
              278,651
              
              
              
              198,911Patents
      (weighted average life of 10 years)
              
              
              67,837
              
              
              
              63,695Licenses
      (weighted average life of 2 years)
              
              
              100,000
              
              
              
              100,000Total
      amortized identifiable intangible assets - gross carrying
      value
              
              
              1,230,731
              
              
              
              1,057,109Less
      accumulated amortization
              
              
              (533,462
              )
              
              
              (324,661
              )Net
              
              
              697,269
              
              
              
              732,448Residual
      value
              
              $
              697,269
              
              
              $
              732,448
  F-15
 CODA
OCTOPUS GROUP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 October
31, 2009 and 2008
  Our
acquisition of Dragon Design Ltd (“Dragon”) in December 2008 resulted in the
valuation of Dragon’s customer relationships and covenants not to compete as
intangible assets (see Note 14), which have an estimated useful life of 3 years
each, and as such are being amortized on a straight-line basis over that period.
In addition, we recognized goodwill of $282,533 that represents the excess of
the purchase price we paid over the fair value of Dragon’s net tangible and
intangible assets we acquired.
  Our
acquisition of the assets of Tactical Intelligence, LLC (“Tactical”) In November
2008 resulted in the valuation of Tactical’s customer relationships and
covenants not to compete as intangible assets (see Note 14), which have an
estimated useful life of 3 years each, and as such are being amortized monthly
over that period. In addition, we recognized goodwill of $135,000 that
represents the excess of the purchase price we paid over the fair value of
Tactical’s net tangible and intangible assets acquired.
 
 Estimated
annual amortization expense as of October 31, 2009 is as follows:
 
 2010
                  
                  $
                  153,0282011
                  
                  
                  131,5372012
                  
                  
                  76,6962013
      and thereafter
                  
                  
                  336,008Total
                  
                  $
                  697,269
  Amortization
of patents, customer relationships, non-compete agreements and licenses included
as a charge to income amounted to $231,321 and $189,621 for the years ended
October 31, 2009 and 2008, respectively. Goodwill is not being
amortized.
  As a
result of the acquisitions of Martech, Colmek, Dragon and Tactical, the Company
has goodwill in the amount of $3,524,538 as of October 31, 2009 and $3,099,575
as of October 31, 2008. The changes in the carrying amount of goodwill for the
period ended October 31, 2009 and year ended October 31, 2008 are recorded
below
 
 2009
              
              
              2008Beginning
      goodwill balance at November 1:CodaOctopus
      Colmek, Inc.
              
              $
              2,038,699
              
              
              $
              2,038,669CodaOctopus
      Martech Ltd
              
              
              998,591
              
              
              
              998,591CodaOctopus
      Products Ltd
              
              
              62,315
              
              
              
              62,315Goodwill
      recorded upon acquisition:CodaOctopus
      Tactical Intelligence, Inc.
              
              
              142,430
              
              
              
              -Dragon
      Design Ltd
              
              
              282,533
              
              
              
              -Balance
      at October 31, 2009 and 2008
              
              $
              3,524,538
              
              
              $
              3,099,575
  Considerable
management judgment is necessary to estimate fair value. We enlisted the
assistance of an independant valuation consultant to determine the values of our
intangible assets and goodwill, both at the dates of acquisition and at dates
thereafter. Based on various market factors and projections used by management,
actual results could vary significantly from management’s
estimates.
  The
Company’s policy is to test its goodwill balances for impairment on an annual
basis, in the fourth quarter of each year, or more frequently if events or
changes in circumstances indicate that the asset might be impaired.
 
 As
disclosed in the Company’s prior filings, the historic goodwill assets arose
chiefly from the acquisition of two wholly owned subsidiaries that comprise the
Company’s professional services reporting units- Martech and
Colmek.
 
 The
Company performed its regular impairment test according to the pronouncements in
ASC 350 “ Intangibles – goodwill and other” for FYE October 31, 2008 by an
experienced consultant.
  There has
been no change in the regulatory or legal environment the could have an negative
impact on the Martech or Colmek’ operations. Further,
in addition during Q1 2010 the Company again engaged the services of an
independent consultant to verify the conclusions that the Company had reached in
evaluating its goodwill according to the pronouncements in ASC 350 “ Intangibles
– goodwill and other” for FYE October 31, 2009 at the end of the financial year
2009. The independent consultant again reviewed the same series of measures and
tests that had been performed in prior years and verified these values as
reasonable
    NOTE
8 - CAPITAL STOCK
  The
Company is authorized to issue 150,000,000 shares of common stock with a par
value of $.001 per share. As of October 31, 2009 and 2008, the Company has
issued and outstanding 49,000,244 shares and 48,853,664 shares of common stock
respectively. The Company is also authorized to issue 5,000,000 shares of
preferred stock with a par value of $.001 per share. We have designated 50,000
preferred shares as Series A preferred stock and have designated 50,000
preferred shares as Series B preferred stock. The remaining 4,900,000 shares of
preferred stock is undesignated.  There were 6,287 Series A preferred
shares outstanding at October 31, 2009 and October 31, 2008 respectively, and
nil Series B preferred shares outstanding at the same dates.
  F-16
  CODA
OCTOPUS GROUP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 October
31, 2009 and 2008
  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 and has no liquidation preference above par. The
Series A Preferred Stock is sold as units of $100 (or £100 where stock has been
sold to investors in British Pounds) and has a dividend rate of 12% per year,
ie. $12 per $100 unit, paid every six months, in May and November each year. The
Series A Preferred Stock and accrued dividends is convertible at the option of
the holder into shares of our common stock at a conversion price of $1.00 per
share, and at the option of the Company when the stock price reaches or exceeds
$3.00.
  During
the year ended October 31, 2008, we issued 200 shares of Series A Preferred
Stock, which were subscribed for in March 2007 and converted 320 shares of
Series A Preferred Stock into 32,000 shares of common stock. The original
transaction was concluded in GBP at a price of £32,000. The fixed exchange rate
at which the Preferred Stock was issued is $1.77 to GPB 1.00. This is equivalent
to 320 Series A Preferred Stock (GBP 100 each). 320 units of Series A Preferred
Stock were issued in exchange for consultancy services provided by a consultant
to the Company. The total of Series A preferred stock outstanding is 6,287
shares at October 31, 2009, convertible into 1,013,670 shares of common
stock.
  Series B Preferred
Stock
  We
designated 50,000 shares of our preferred stock, par value $.001, as Series B
Preferred Stock. The Series B Preferred Stock ranks junior to our issued and
outstanding Series A preferred Stock and senior to all classes of common stock.
The Series B Preferred Stock has a dividend rate of 8% per year. The Series B
Preferred Stock and accrued dividends are convertible at the option of the
holder into shares of our common stock at a conversion price of $1.00 per share.
As of October 31, 2009 and October 31, 2008 respectively, we have no shares of
Series B Preferred Stock outstanding.
  F-17
 
 CODA
OCTOPUS GROUP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 October
31, 2009 and 2008
  Common
Stock
  During
the period ending October 31, 2009 we issued 146,580 shares of common stock,
valued at $30,310, to employees, directors and consultants for services, of
which $11,790 was subscribed for during the year ending October 31, 2008,
leaving a charge for compensation in the period ending October 31, 2009 of
$18,520.
 
 During
the year ended October 31, 2008 we issued 452,937 shares of common stock, valued
at $263,476, to employees, directors and consultants for services. We also
issued 38,319 shares as dividends on Series A Preferred Stock, which had accrued
over the period August 2006 to April 2008, valued at $41,537. A further 60,000
shares of common stock were issued to an investor, which were subscribed for
during the year to October 31, 2007, plus 4,200 shares for financing, and 56,640
shares to an investor on conversion of 320 shares of Series A Preferred
stock.
 
 Other Equity
Transactions
  During
the year ended October 31, 2009, we issued 50,000 common share
purchase options in relation to the Tactical acquisition. However, options
issued in earlier periods vested, resulting in a charge of $295,853 in this
period. There were also 210,000 options cancelled connected with staff
departures, of which 95,000 were exercisable.
 
 During
the year ended October 31, 2008, we issued in the aggregate 1,870,000 common
share purchase options to employees and consultants, with exercise prices of
$1.30 to $1.50. The initial fair value of the options was $872,170 using the
Black Scholes method at the date of grant of the options based on the following
assumptions: (1) risk free interest rate of 3.43%-5.25%; (2) dividend yield of
0%; (3) volatility factor of the expected market price of our common stock of
222% - 246%; and (4) an expected life of the options of 2 years. The fair value
of the options has been expensed in this period. In accordance with EITF 96-18,
the fair value of consultant vesting options will be recomputed at each
reporting period and any increase will be charged to expense. Due to staff
departures, 50,000 options were cancelled, all of which had exercise prices of
$1.70. During the year ended October 31, 2008, $257,547 was charged to
expense.
  F-18
 
 CODA
OCTOPUS GROUP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 October
31, 2009 and 2008
  NOTE 9 - WARRANTS AND STOCK OPTIONS
  Transactions
involving stock options and warrants issued are summarized as
follows:
 
 Warrants
              
              Year ended
                October
      31, 2009
              
              
              Year ended
                October 31, 2008Number
              
              
              Weighted
                Average Exercise
                Price
              
              
              Number
              
              
              Weighted
                Average Exercise
                PriceOutstanding
      at beginning of the period
              
              
              32,583,418
              
              
              $
              1.42
              
              
              
              31,983,418
              
              
              $
              1.42Granted
      during the period
              
              
              -
              
              
              
              -
              
              
              
              600,000
              
              
              
              1.50Terminated
      during the period
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Outstanding
      at the end of the period
              
              
              32,583,418
              
              
              $
              1.42
              
              
              
              32,583,418
              
              
              $
              1.42Exercisable
      at the end of the period
              
              
              32,583,418
              
              
              $
              1.42
              
              
              
              32,583,418
              
              
              $
              1.42
 
 The
number and weighted average exercise prices of warrants outstanding as of
October 31, 2009 are as follows:
 
 Range of
                Exercise Prices
              
              
              Number
                Outstanding
              
              
              Weighted Average
                Contractual Life
                (Yrs)
              
              
              Total Exercisable0.50
              
              
              
              750,000
              
              
              
              1.50
              
              
              
              750,0000.58
              
              
              
              400,000
              
              
              
              1.41
              
              
              
              400,0001.00
              
              
              
              2,750,000
              
              
              
              2.35
              
              
              
              2,750,0001.30
              
              
              
              14,341,709
              
              
              
              2.17
              
              
              
              14,341,7091.50
              
              
              
              -
              
              
              
              -
              
              
              
              -1.70
              
              
              
              14,341,709
              
              
              
              2.17
              
              
              
              14,341,7091.80
              
              
              
              -
              
              
              
              -
              
              
              
              -Totals
              
              
              
              32,583,418
              
              
              
              2.22
              
              
              
              32,583,418
 
 
 Stock
      Options
              
              Year ended
                October
      31, 2009
              
              
              Year ended
                October 31, 2008Number
              
              
              Weighted
                Average Exercise
                Price
              
              
              Number
              
              
              Weighted
                Average Exercise
                PriceOutstanding
      at beginning of the period
              
              
              5,755,900
              
              
              $
              1.18
              
              
              
              4,535,900
              
              
              $
              1.16Granted
      during the period
              
              
              50,000
              
              
              
              1.30
              
              
              
              1,270,000
              
              
              
              1.30Terminated
      during the period
              
              
              (210,000
              )
              
              
              1.32
              
              
              
              (50,000
              )
              
              
              1.70Outstanding
      at the end of the period
              
              
              5,595,900
              
              
              $
              1.18
              
              
              
              5,755,900
              
              
              $
              1.18Exercisable
      at the end of the period
              
              
              5,214,149
              
              
              $
              1.17
              
              
              
              4,578,000
              
              
              $
              1.14
 
 The
number and weighted average exercise prices of stock purchase options
outstanding as of October 31, 2009 are as follows:
 
 Range of
                Exercise Prices
              
              
              Number
                Outstanding
              
              
              Weighted Average
                Contractual Life
                (Yrs)
              
              
              Total Exercisable0.50
              
              
              
              -
              
              
              
              -
              
              
              
              -0.58
              
              
              
              -
              
              
              
              -
              
              
              
              -1.00
              
              
              
              3,045,900
              
              
              
              0.87
              
              
              
              3,045,9001.30
              
              
              
              1,755,000
              
              
              
              3.32
              
              
              
              1,356,7501.50
              
              
              
              425,000
              
              
              
              2.20
              
              
              
              425,0001.70
              
              
              
              310,000
              
              
              
              2.67
              
              
              
              310,0001.80
              
              
              
              60,000
              
              
              
              2.90
              
              
              
              60,000Totals
              
              
              
              5,595,900
              
              
              
              1.85
              
              
              
              5,197,649
  F-19
  CODA
OCTOPUS GROUP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 October
31, 2009 and 2008
  NOTE
10 - INCOME TAXES
  The
Company has adopted FASB ASC Topic 740 Income Taxes 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 $45,400,000 which expire through 2029, subject to limitations
of Section 382 of the Internal Revenue Code, as amended. The deferred tax asset
related to the carry forward is approximately $15,436,000. 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 $5,505,045, with no expiration. The deferred tax asset
related to the carry-forward is approximately $2,300,000. The Company has
provided a valuation reserve against the full amount of the benefits, because in
the opinion of management based upon the earning history of the Company, it is
more likely than not that the benefits will not be realized.
  Income
tax expense for 2009 and 2008 represents income taxes on our Norwegian
subsidiary.
  Components
of deferred tax assets as of October 31, 2009 and 2008 are as
follows:
  Non-Current
              
              2009
              
              
              2008Net
      operating losses carried forward
              
              $
              17,736,000
              
              
              $
              16,485,000Valuation
      allowance
              
              
              (17,736,000
              )
              
              
              (16,485,000
              )Net
      deferred tax asset
              
              $
              -
              
              
              $
              -
  The
Company follows FASB ASC 740-10-25 (Previously known as: Financial Accounting
Standards Board interpretation No. 48 Accounting for Uncertainty in Income
Taxes).  As a result of the implementation of FASB ASC 740-10-25, the
Company recognized no adjustment for unrecognized tax provisions.
 
 The
Company recognizes interest and penalties related to uncertain tax positions in
general and administrative expense. As of October 31, 2009 and 2008, the Company
has not recorded any provisions for accrued interest and penalties related to
uncertain tax positions.
 
 By
statute, tax years 2007 through 2009 remain open to examination by the major
taxing jurisdictions to which the Company is subject.
  NOTE
11 - CONTINGENCIES AND COMMITMENTS
  Litigation
  The
Company is currently engaged in two lawsuits:
 
 The first
one involves the former Chief Executive Officer of our subsidiary, Coda Octopus
Colmek, Inc. (Scott DeBo v Miller & Hilton, Inc. d/b/a Colmek Systems
Engineering and Coda Octopus Group, Inc. File No. 080923661).  Mr DeBo
claims breach of his employment contract, tortuous interference with his
contract, termination in violation of public policy and failure to pay wages
when due. He filed a complaint and an amended complaint on November 10, 2008 and
December 10, 2008, respectively. We answered the amended complaint denying Mr.
DeBo’s allegations, raising affirmative defenses on December 22, 2008 and intend
to defend ourselves vigorously.  The Parties have now completed the
discovery process and we expect the hearing to be scheduled for the second
quarter of this financial year
 
 The
second one involves Federal Engineering & Marketing Associates Inc (FEMA) a
Colorado corporation.  FEMA is a former sales representative of Coda
Octopus Colmek, FEMA claims breach of contract and seeks various relief in the
District Court, Routt County, Colorado (Case Number 2009 CV278).  We
have answered the complaint which included a counter-claim. We intend to defend
ourselves vigorously in these proceedings.
 
 We may
become subject to other legal proceedings and claims, which arise in the
ordinary course of our business. Although occasional adverse decisions or
settlements may occur, we believe that the final disposition of any matters
should not have a material adverse effect on our financial position or results
of operations.
  F-20
  CODA
OCTOPUS GROUP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 October
31, 2009 and 2008
  Factoring
Agreement
  Until
October 31, 2008, we factored certain of our receivables pursuant to a number of
factoring agreements with Faunus Group International (“FGI”). Advances received
pursuant to the agreement are secured by our accounts receivable and other
assets of the Company.
  An
initial factoring agreement was entered into on August 17, 2005 between FGI and
Coda Octopus Group, Inc., for a maximum borrowing in the US of up to $1 million.
Subsequent agreements were added in November 2006 covering our UK businesses,
Martech Systems Ltd and Coda Octopus Products Ltd.
  Over the
course of the year ended October 31, 2008, we factored invoices totaling
$7,545,200 in receivables and we received $5,828,550 in proceeds from FGI. This
compares with 2007, where we factored invoices totaling $5,088,665 in
receivables and we received $3,961,695 in proceeds from FGI.
  Under the
arrangement, FGI typically advanced to the Company 80% of the total amount of
accounts receivable factored. FGI retained 20% of the outstanding factored
accounts receivable as a reserve, which it holds until the customer pays the
factored invoice to FGI. The cost of funds for the accounts receivable portion
of the borrowings with FGI was 1.85% for the initial 30 day credit period, up to
a maximum of 45 days; thereafter, an additional fee of 0.5% was charged for each
10 day period.
  On
February 20, 2008, FGI, RBS and us entered into an intercreditor agreement
regulating the priority of each creditor’s debts.
 
 As of
October 31, 2008 all FGI agreements were terminated and advances repaid in
full.
  Operating
Leases
  We occupy
our various office and warehouse facilities pursuant to both term and
month-to-month leases. Our term leases expire at various times through September
2015. Future minimum lease obligations are approximately $1,372,384,
with the minimum future rentals due under these leases as of October 31, 2009 as
follows:
  2009
                          
                          $
                          11,4482010
                          
                          
                          401,1362011
                          
                          
                          378,3852012
                          
                          
                          235,7992013
      and thereafter
                          
                          
                          345,618Total
                          
                          $
                          1,372,384
  Concentrations
  We had no
concentrations of purchases of over 5% during either of the years ended 2009 and
2008. We had no sales concentrations of over 5% during the year ended 2009 We
had a sales concentration of over 5% in the year ended October 31,
2008  due to a sale to a customer for $1,557,130.
  Termination Payments
  On or around September 23, 2009 pursuant to the
termination of the employment agreements of the CEO and CFO and in accordance
with the termination provisions of the said agreements we committed to pay over
eighteen (18) months approximately $875,000 as termination payments to these
executives.
  F-21
 
 CODA
OCTOPUS GROUP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 October
31, 2009 and 2008
 
 NOTE
12 - NOTES AND LOANS PAYABLE
  A summary
of notes payable at October 31, 2009 and 2008 is as follows:
  2009
                          
                          
                          2008The
      Company has a secured convertible debenture for $12M with a life of 7
      years from February 26, 2008, maturing at 130% of face value, and with
      interest payable every six months, starting in February 2009, at a rate of
      8.5%; During the term, the debentures are convertible into our common
      stock at the option of the Noteholders at a conversion price of $1.05. We
      may also force the conversion of these Notes into our common stock after
      two years in the event that we obtain a listing on a national exchange and
      our stock price closes on 40 consecutive trading days at or above $2.50
      between the second and third anniversaries of this agreement; $2.90
      between the third and fourth anniversaries of this agreement; and $3.50
      after the fourth anniversary of this agreement or where the daily volume
      weighted average price of our stock as quoted on OTCBB or any other US
      National Exchange on which our securities are then listed has, for at
      least 40 consecutive trading days closed at the agreed price. the Company
      has failed to comply with certain  covenants contained in the
      debenture agreement (see Note 16)
                          
                          $
                          13,067,929
                          
                          
                          $
                          12,348,493The
      Company, through its UK subsidiary Coda Octopus Products Ltd has a 7 year
      unsecured loan note for £100,000; interest rate of 12% annually; repayable
      at borrower’s instigation or convertible into common stock when the share
      price reaches $3.
                          
                          
                          165,594
                          
                          
                          
                          162,700The
      Company through its US subsidiary Coda Octopus Colmek, Inc., has an
      unsecured loan note payable to a director and former officer of the
      Company, which is being repaid in the short term.
                          
                          
                          -
                          
                          
                          
                          10,104Total
                          
                          $
                          13,233,523
                          
                          
                          $
                          12,521,297Less:
      current portion
                          
                          
                          -
                          
                          
                          
                          12,358,597Total
      long-term portion
                          
                          $
                          13,233,523
                          
                          
                          $
                          162,700
  F-22
 
 CODA
OCTOPUS GROUP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 October
31, 2009 and 2008
  In
connection with the secured convertible debenture noted above and the Cash
Control Framework Agreement (see below), we carry $1,271,170 deferred financing
costs as an asset on the consolidated balance sheet at October 31, 2009, which
represents $1,694,893 in financing closing costs we incurred, net of $242,128 in
amortization expense at October 31, 2009 and $181,596 in amortization expense at
October 31, 2008. We amortize deferred financing costs over the life of the
financing facility using the straight line method.
 
 On March
16, 2009, the Company and the holder of the secured convertible debenture (“the
Noteholder”) entered into a Cash Control Framework Agreement, pursuant to which
it is assumed that, subject to the Company being fully compliant with the terms
of this agreement and those set out in the Transaction Documents entered into
between the Company and the Noteholder on February 21, 2008, no adverse actions
will be taken by the Noteholder. The agreement provides, among other things, for
the placement of approximately $2.15 million into a segregated cash
account. Under the terms of the agreement, we may request the release of
funds from the account from time to time for working capital purposes, subject
to the Noteholder’s consent and agreed upon terms and conditions. Under the
terms of the agreement, we must also adhere to a strict cost cutting program
which involves reducing our SG&A, R&D and capital expenditure by an
annualized $3.35 million. We believe that the terms of this agreement may
provide us with sufficient liquidity to operate for fiscal 2010.
      NOTE
13 - RELATED PARTY TRANSACTIONS
  We have
been indebted to various related parties for advances for payments of operating
expenses and dividends. These related parties include our then biggest
shareholder and other entities controlled by this shareholder. Advances are non
interest bearing and are due on demand. At the end of the period ending October
31, 2009, nil was due to related parties, compared with $41,904 for the year
ending October 31, 2008.
  We are
also owed by related parties a sum of nil at October 31, 2009 compared to
$54,166 at October 31, 2008.
 
 NOTE
14 - ACQUISITIONS
  Acquisition of Tactical
Intelligence
 
 In
November 2008, the Company formed a new subsidiary called Coda Octopus Tactical
Intelligence, Inc. (“Tactical”) to facilitate our entry into the
counter-terrorism and anti-piracy training markets, which we believe are
integral to our efforts to help major customers deploy real time 3D sonar
systems in hot spots around the world.  On November 10, 2008, Tactical
acquired the assets of Tactical Intelligence International, LLC and Tactical
Executive Services, LLC, which consisted of some plant and machinery, valued at
$5,000, customer relationships, valued at $60,000, non-compete agreements,
valued at $50,000, and goodwill, valued at $135,000.The purchase price consisted
of an initial cash outlay of $125,000, a convertible promissory note in the
amount of $125,000 due on November 10, 2009, and 50,000 options to acquire
common shares of Coda Octopus Group, Inc., which were due to be issued in June
2009. As part of the transaction we acquired the services of two specialists in
the field of real world security training for domestic and international
military units and government agencies to spearhead this drive. These
individuals have designed or led more than 50 such training programs throughout
the world since September 11, 2001, using up to 100 freelance specialists on a
contract basis. The expertise of this part of the Group will be used to leverage
our Echoscope and UIS capabilities in sales and training.
 
 The
acquisition of Tactical was accounted for using the purchase method in
accordance with ASC 805. The results of operations for Tactical have been
included in the Consolidated Statements of Operations since the date of
acquisition. In accordance with ASC 805, 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
estimates. The total purchase price was allocated to the assets and liabilities
acquired as follows:
 
 Equipment,
      net
              
              $
              5,000Customer
      relationships acquired
              
              
              60,000Non-compete
      agreements acquired
              
              
              50,000Goodwill
              
              
              142,430Total
      purchase price
              
              $
              257,430
  The
intangible assets acquired consisted of customer relationships and non-compete
agreements, which have an estimated useful life of 3 years each and as such will
be amortized monthly over those periods. Goodwill of $135,000 represented the
excess of the purchase price over the fair value of the net tangible and
intangible assets acquired.
 
 Acquisition of Dragon Design
Ltd
 
 In
December 2008, the Company acquired  all the issued and outstanding
sharesof Dragon Design Ltd (“Dragon”), an electronics manufacturing and design
business based in Weymouth, UK, and situated next to its Martech subsidiary.
Management believes the companies have complementary skills and capabilities
that can enhance revenues and opportunities for both companies. The purchase
price for the assets consisted of an initial cash outlay of £56,250 ($83,000)
and a further £56,250 in deferred consideration, payable on the first
anniversary of closing. This payments has not been made as of the date of this
filing.  The terms of the acquisition also included a potential earn out
payment of £112,500, which is dependent on Dragon meeting future agreed
performance criteria, that has also been accrued on the acquisition
date.
  The
acquisition of Dragon was accounted for using the purchase method in accordance
with ASC 805. The results of operations for Dragon have been included in the
Consolidated Statements of Operations since the date of acquisition. In
accordance with ASC 805, 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 estimates. The total
purchase price was allocated to the assets and liabilities acquired as
follows:
 
 Current
      assets acquired
              
              $
              147,039Equipment,
      net
              
              
              51,336Current
      liabilities assumed
              
              
              (201,166
              )Customer
      relationships acquired
              
              
              29,740Non-compete
      agreements acquired
              
              
              29,740Goodwill
              
              
              282,533Cash
      acquired
              
              
              877Total
      purchase price
              
              $
              340,099
  F-23
  CODA
OCTOPUS GROUP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 OCTOBER 31, 2009
AND 2008
  The
intangible assets acquired, comprising customer relationships and non-compete
agreements, have an estimated useful life of 3 years each and as such will be
amortized monthly over those periods. Goodwill of $282,533 represented the
excess of the purchase price over the fair value of the net tangible and
intangible assets acquired.
  The
following unaudited pro forma results of operations for the period ended
October 31, 2009 assume that the acquisition of Dragon and Tactical occurred on
November 1, 2008. These unaudited pro forma results are not necessarily
indicative of the actual results of operations that would have been achieved nor
are they are necessarily indicative of future results of
operations.
 
 2009Revenue
              
              $
              13,358,086Net
      loss
              
              
              (9,475,990
              )Loss
      per common share
              
              $
              (0.19
              )
 
 NOTE
15 - SEGMENT INFORMATION
  Due to the nature
of our businesses, we are operating in two reportable segments, which are
managed separately based upon fundamental differences in their operations.
Martech, Dragon, Colmek, Tactical and Innalogic operate as contractors, and the
balance of our operations is comprised of product sales.
  Segment
operating income is total segment revenue reduced by operating expenses
identifiable with the business segment. Corporate includes general corporate
administrative costs.
  The
Company evaluates performance and allocates resources based upon operating
income. The accounting policies of the reportable segments are the same as those
described in the summary of accounting policies.
 
 There are
inter-segment sales between our engineering contracting businesses and our
products businesses, which have been removed from the information shown
below.
  The
following table summarizes asset and operating balances by reportable
segment.
  October
      31, 2009
                
                
                October
      31, 2008Contracting
                
                
                Products
                
                
                Corporate
                
                
                Contracting
                
                
                Products
                
                
                CorporateCurrent
      assets, excl. interco.
                
                $
                3,033,658
                
                
                $
                2,706,461
                
                
                $
                1,636,319
                
                
                $
                3,370,812
                
                
                $
                4,181,440
                
                
                $
                3,785,801Property
      and equipment, net
                
                
                98,277
                
                
                
                99,131
                
                
                
                70,556
                
                
                
                159,752
                
                
                
                141,190
                
                
                
                51,483Deferred
      financing costs
                
                
                -
                
                
                
                -
                
                
                
                1,271,170
                
                
                
                -
                
                
                
                -
                
                
                
                1,513,297Goodwill
                
                
                3,462,224
                
                
                
                62,315
                
                
                
                -
                
                
                
                3,037,260
                
                
                
                62,315
                
                
                
                -Other
      intangible assets
                
                
                640,928
                
                
                
                -
                
                
                
                56,341
                
                
                
                689,759
                
                
                
                -
                
                
                
                42,689Total
      assets
                
                
                7,235,301
                
                
                
                2,867,907
                
                
                
                3,034,386
                
                
                
                7,261,070
                
                
                
                4,384,945
                
                
                
                5,393,270Current
      liabilities, excl. interco.
                
                
                3,062,818
                
                
                
                1,253,173
                
                
                
                3,502,967
                
                
                
                1,470,179
                
                
                
                900,709
                
                
                
                13,859,509Long
      term liabilities
                
                
                -
                
                
                
                165,594
                
                
                
                13,067,929
                
                
                
                -
                
                
                
                162,700
                
                
                
                -Total
      liabilities
                
                
                3,062,818
                
                
                
                1,418,767
                
                
                
                16,570,896
                
                
                
                1,470,179
                
                
                
                1,063,409
                
                
                
                13,859,509Capital
      expenditure
                
                
                7,825
                
                
                
                32,747
                
                
                
                7,186
                
                
                
                33,381
                
                
                
                58,064
                
                
                
                18,931Year
      ended October 31, 2009
                
                
                
                Year
      ended October 31, 2008Revenues
                
                
                8,355,041
                
                
                
                4,869,393
                
                
                
                -
                
                
                
                7,699,801
                
                
                
                9,269,121
                
                
                
                -Gross
      profit (loss)
                
                
                3,033,337
                
                
                
                3,875,137
                
                
                
                -
                
                
                
                4,737,327
                
                
                
                5,290,337
                
                
                
                -Research
      and development
                
                
                2,240,189
                
                
                
                412,524
                
                
                
                -
                
                
                
                2,845,028
                
                
                
                678,995
                
                
                
                1000Selling,
      general & administrative
                
                
                2,493,261
                
                
                
                1,679,450
                
                
                
                6,085,784
                
                
                
                3,197,847
                
                
                
                2,332,500
                
                
                
                6,059,320Stock
      based compensation
                
                
                73,305
                
                
                
                -
                
                
                
                217,417
                
                
                
                121,898
                
                
                
                6,037
                
                
                
                939,286Depreciation
      & amortization
                
                
                311,246
                
                
                
                98,677
                
                
                
                279,821
                
                
                
                272,966
                
                
                
                76,216
                
                
                
                198,185Total
      operating expenses
                
                
                5,118,001
                
                
                
                2,190,651
                
                
                
                6,583,022
                
                
                
                6,437,738
                
                
                
                3,093,748
                
                
                
                7,197,791Operating
      income (loss)
                
                
                (2,084,664)
                
                
                
                1,676,804
                
                
                
                (6,583,022
                )
                
                
                (1,700,411
                )
                
                
                2,266,490
                
                
                
                (7,267,722
                )Other
      income
                
                
                343,834
                
                
                
                (153,494)
                
                
                
                11,408
                
                
                
                15,519
                
                
                
                210,813
                
                
                
                97,534Interest
      expense
                
                
                (184,396)
                
                
                
                (27,722)
                
                
                
                (1,634,765
                )
                
                
                (140,640)
                
                
                
                (307,700)
                
                
                
                (1,090,384
                )Impairment
      of investment
                
                
                -
                
                
                
                -
                
                
                
                (782,595
                )
                
                
                -
                
                
                
                -
                
                
                
                -Loss
      before income taxes
                
                
                (1,925,226)
                
                
                
                1,495,588
                
                
                
                (8,981,292
                )
                
                
                (1,825,532
                )
                
                
                2,169,603
                
                
                
                (8,260,572
                )
  F-24
 
 CODA
OCTOPUS GROUP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 OCTOBER 31, 2009
AND 2008
  The
Company’s reportable business segments operate in two geographic locations.
Those geographic locations are:
 
 * United
States
 *
Europe
 
 The
Company evaluates performance and allocates resources based upon operating
income. The accounting policies of the reportable segments are the same as those
described in the summary of accounting policies. There are inter-segment sales
which have been removed upon consolidation and for the purposes of the
information shown below.
 
 Information
concerning principal geographic areas is presented below according to the area
where the activity is taking place for the years ended October 31, 2009 and 2008
respectively:
 
 2009
              
              
              2008Revenues:United
      States
              
              $
              5,939,535
              
              
              $
              7,362,966Europe
              
              
              7,284,899
              
              
              
              9,605,956Corporate
      and other
              
              
              -
              
              
              
              -Total
      Revenues
              
              $
              13,224,435
              
              
              $
              16,968,922Assets:United
      States
              
              $
              5,882,644
              
              
              $
              4,357,042Europe
              
              
              4,220,350
              
              
              
              5,478,233Corporate
      and other
              
              
              3,034,386
              
              
              
              7,204,009Total
      Assets
              
              $
              13,137,380
              
              
              $
              17,039,284
  NOTE
16 - SUBSEQUENT EVENTS
  The
Company evaluated subsequent events through January 29, 2010, which is the date
the financials were filed.
  The Cash
Control Framework Agreement with the Noteholder was extended for a further
period of 12 months and now expires on March 16, 2011. On January 18, 2010, the
Noteholder notified us in writing that it had waived its right to demand
repayment of the loan as a result of our failure to observe certain specified
loan covenants.  The waiver will expire on the first anniversary of
the waiver letter, January 18, 2011.
  
  F-25