SECURITIES AND EXCHANGE
COMMISSION


Washington,
D.C. 20549





FORM
10-Q


(Mark
One)




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




For the
quarterly period ended January 31, 2010




OR





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




For the
transition period from ______________ to ______________




Commission
File Number 000-52815





CODA
OCTOPUS GROUP, INC.


(Exact
name of registrant as specified in its charter)





Delaware
              
              34-200-8348(State
      or other jurisdiction of Incorporation or organization)
              
              (I.R.S.
      Employer Identification Number)164
      West, 25 th
      Street, 6R, New York
              
              10001(Address
      of principal executive offices)
              
              (Zip
      Code)Registrant's
      telephone number, including area code:
              
              (212)
      924-3442




Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No  o





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





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





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


Yes 
o No x





The
number of shares outstanding of issuer's common stock, $0.001 par value as of
March 17 2010 is 49,075,244.







INDEX





PagePART
      I - Financial Information
                      
                      1Item
      1: Financial Statements
                      
                      1Three
      Months Ended January 31, 2010 and  31
      October,   2009Condensed
      Consolidated Balance Sheet as of 31 January, 2010 (Unaudited) and 31
      October, 2009
                      
                      1Condensed
      Consolidated Statements of Operations and Comprehensive Income (Loss) for
      the Three Months Ended January 31, 2010  and  2009
      (Unaudited)
                      
                      2Condensed
      Consolidated Statement of Deficiency in Stockholders’ Equity for the
       (Unaudited) Three Months Ended January 31,
                        2010
                      
                      3Condensed
      Consolidated Statements of Cash Flows for the Three months ended January
      31, 2010 and 2009 (Unaudited)
                      
                      4Notes
      to Condensed Consolidated Financial Statements (Unaudited)
                      
                      5Item
      2: Management's Discussion and Analysis or Plan of
    Operation
                      
                      24Item 4T:   Controls and
      Procedures
                      
                      35PART
      II - Other Information
                      
                      36Item
      1: Legal Proceedings
                      
                      36Item
      2: Unregistered Sales of Equity Securities and Use of
    Proceeds
                      
                      36Item
      3: Defaults Upon Senior Securities
                      
                      36Item
      4: Submission of Matters to a Vote of Security Holders
                      
                      36Item
      5: Other Information
                      
                      36Item
      6: Exhibits
                      
                      36Signatures
                      
                      37





i




PART I. FINANCIAL INFORMATION





Item
1. Financial Statements




CODA
OCTOPUS GROUP, INC.
 CONDENSED
CONSOLIDATED BALANCE SHEET
 JANUARY
31, 2010 (UNAUDITED) and OCTOBER 31, 2009
 
 January 31,
                    
                    
                    October 31,2010
                    
                    
                    2009ASSETSCurrent
      assets:Cash
      and cash equivalents
                    
                    $
                    195,661
                    
                    
                    $
                    275,885Restricted
      cash, Note 2
                    
                    
                    966,525
                    
                    
                    
                    994,081Short-Term
      Investments, Note 4
                    
                    
                    25,500
                    
                    
                    
                    51,000Accounts
      receivable, net of allowance for doubtful accounts
                    
                    
                    1,739,314
                    
                    
                    
                    2,033,879Inventory
                    
                    
                    2,560,774
                    
                    
                    
                    2,798,425Unbilled
      receivables, Note 3
                    
                    
                    767,440
                    
                    
                    
                    690,344Other
      current assets, Note 5
                    
                    
                    212,720
                    
                    
                    
                    285,691Prepaid
      expenses
                    
                    
                    245,062
                    
                    
                    
                    247,134Total
      current assets
                    
                    
                    6,712,996
                    
                    
                    
                    7,376,439Property
      and equipment, net, Note 6
                    
                    
                    220,970
                    
                    
                    
                    267,964Deferred
      financing costs, net Note 13
                    
                    
                    1,210,638
                    
                    
                    
                    1,271,170Goodwill
      and other intangible assets, net, Note 7
                    
                    
                    4,189,298
                    
                    
                    
                    4,221,807Total
      assets
                    
                    $
                    12,333,902
                    
                    
                    $
                    13,137,380LIABILITIES
      AND DEFICIENCY IN STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable, trade
                    
                    $
                    2,311,029
                    
                    
                    $
                    2,390,039Accrued
      expenses and other current liabilities
                    
                    
                    4,454,068
                    
                    
                    
                    4,626,164Warrant
      liability, Note 10
                    
                    
                    798,987
                    
                    
                    
                    -Deferred
      revenues, Note 3
                    
                    
                    333,381
                    
                    
                    
                    398,482Deferred
      payment related to acquisitions
                    
                    
                    396,971
                    
                    
                    
                    404,274Total
      current liabilities
                    
                    
                    8,294,436
                    
                    
                    
                    7,818,959Loans
      and notes payable, long term, Note 13
                    
                    
                    13,612,668
                    
                    
                    
                    13,233,523Total
      liabilities
                    
                    
                    21,907,104
                    
                    
                    
                    21,052,482Defiency
      in Stockholders' equity:Preferred
      stock, $.001 par value; 5,000,000 shares authorized, 6,287 Series A issued
      and outstanding, as of January 31, 2010 and October 31, 2009
      respectively
                    
                    
                    6
                    
                    
                    
                    6Nil
      shares Series B issued and outstanding as of January 31, 2010 and October
      31, 2009 respectively
                    
                    
                    -
                    
                    
                    
                    -Common
      stock, $.001 par value; 150,000,000 shares authorized, 49,000,244 shares
      issued and outstanding as of January 31, 2010 and October 31, 2009
      respectively
                    
                    
                    49,000
                    
                    
                    
                    49,000Common
      Stock subscribed
                    
                    
                    96,350
                    
                    
                    
                    96,350Additional
      paid-in capital
                    
                    
                    46,843,356
                    
                    
                    
                    51,766,495Accumulated
      other comprehensive loss
                    
                    
                    (780,408
                    )
                    
                    
                    (696,617
                    )Accumulated
      deficit
                    
                    
                    (55,781,506
                    )
                    
                    
                    (59,130,336
                    )Total
      Defiency in stockholders' equity
                    
                    
                    (9,573,202
                    )
                    
                    
                    (7,915,102
                    )Total
      liabilities and Defiency in stockholders' equity
                    
                    $
                    12,333,902
                    
                    
                    $
                    13,137,380
 
 The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
  1
  CODA
OCTOPUS GROUP, INC.
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(LOSS)
 FOR THE
THREE MONTHS ENDED JANUARY 31, 2010 and 2009
 (UNAUDITED)
 
 January
      31,
                    
                    
                    January
      31,2010
                    
                    
                    2009Net
      revenue
                    
                    $
                    3,068,210
                    
                    
                    $
                    3,199,106Cost
      of revenue
                    
                    
                    1,305,979
                    
                    
                    
                    1,442,147Gross
      profit
                    
                    
                    1,762,231
                    
                    
                    
                    1,756,959Research
      and development
                    
                    
                    477,013
                    
                    
                    
                    603,681Selling,
      general and administrative expenses
                    
                    
                    1,635,426
                    
                    
                    
                    2,902,719Total
      operating expenses
                    
                    
                    2,112,439
                    
                    
                    
                    3,506,400Operating
      loss
                    
                    
                    (350,208
                    )
                    
                    
                    (1,749,441
                    )Other
      income (expenses)
                    
                    
                    9,983
                    
                    
                    
                    27,640Interest
      expense
                    
                    
                    (441,582
                    )
                    
                    
                    (397,424
                    )Gain
      on change in fair value of warrant liability
                    
                    
                    1,554,908
                    
                    
                    
                    -Total
      other income (expense)
                    
                    
                    1,123,309
                    
                    
                    
                    (369,784
                    )Income
      (Loss) before income taxes
                    
                    
                    773,101
                    
                    
                    
                    (2,119,225
                    )Provision
      for income taxes
                    
                    
                    -
                    
                    
                    
                    -Net
      income (loss)
                    
                    
                    773,101
                    
                    
                    
                    (2,119,225
                    )Preferred
      Stock Dividends:Series
      A
                    
                    
                    -
                    
                    
                    
                    (31,149
                    )Net
      Income (Loss) Applicable to Common Shares
                    
                    $
                    773,101
                    
                    
                    $
                    (2,150,374
                    )Net
      Income (Loss) per share, basic and diluted
                    
                    
                    0.02
                    
                    
                    
                    (0.04
                    )Net
      Loss per share, basic and diluted See Note 1
                    
                    
                    (0.02
                    )
                    
                    
                    -Weighted
      average shares outstanding
                    
                    
                    49,000,244
                    
                    
                    
                    48,902,367Comprehensive
      income (loss):Net
      income (loss)
                    
                    $
                    773,101
                    
                    
                    $
                    (2,119,225
                    )Foreign
      currency translation adjustment
                    
                    
                    (58,291
                    )
                    
                    
                    332,900Unrealized
      (loss) on investment
                    
                    
                    (25,500
                    )
                    
                    
                    (722,500
                    )Comprehensive
      income (loss)
                    
                    $
                    689,310
                    
                    
                    $
                    (2,508,825
                    )
  The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
  2
  CODA
OCTOPUS GROUP, INC.
 CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN DEFICIENCY IN STOCKHOLDERS'
EQUITY
 FOR THE
THREE MONTHS ENDED JANUARY 31, 2010
 (UNAUDITED)
 
 Additional
                                            
                                            
                                            AccumulatedPreferred Stock Series A
                                            
                                            
                                            Preferred Stock Series B
                                            
                                            
                                            Common Stock
                                            
                                            
                                            Stock
                                            
                                            
                                            Paid-in
                                            
                                            
                                            Other
                                            
                                            
                                            AccumulatedShares
                                            
                                            
                                            Amount
                                            
                                            
                                            Shares
                                            
                                            
                                            Amount
                                            
                                            
                                            Shares
                                            
                                            
                                            Amount
                                            
                                            
                                            Subscribed
                                            
                                            
                                            Capital
                                            
                                            
                                            Comprehensive loss
                                            
                                            
                                            Deficit
                                            
                                            
                                            TotalBalance,
      October 31, 2009
                                            
                                            
                                            6,287
                                            
                                            
                                            $
                                            6
                                            
                                            
                                            
                                            -
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            
                                            49,000,244
                                            
                                            
                                            $
                                            49,000
                                            
                                            
                                            $
                                            96,350
                                            
                                            
                                            $
                                            51,766,495
                                            
                                            
                                            $
                                            (696,617
                                            )
                                            
                                            $
                                            (59,130,336
                                            )
                                            
                                            $
                                            (7,915,102
                                            )Fair
      value of options issued as compensation
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            6,483
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            6,483Cumulative
      effect of warrant liability
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            (4,929,622
                                            )
                                            
                                            
                                            
                                            
                                            
                                            
                                            2,575,729
                                            
                                            
                                            
                                            (2,353,893
                                            )Foreign
      currency translation adjustment
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            (58,291
                                            )
                                            
                                            
                                            
                                            
                                            
                                            
                                            (58,291
                                            )Unrealized
      (loss) on marketable securities
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            (25,500
                                            )
                                            
                                            
                                            
                                            
                                            
                                            
                                            (25,500
                                            )Net
      income
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            773,101
                                            
                                            
                                            
                                            773,101Balance,
      January 31, 2010
                                            
                                            
                                            6,287
                                            
                                            
                                            
                                            6
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            49,000,244
                                            
                                            
                                            
                                            49,000
                                            
                                            
                                            
                                            96,350
                                            
                                            
                                            
                                            46,843,356
                                            
                                            
                                            
                                            (780,408
                                            )
                                            
                                            
                                            (55,781,506
                                            )
                                            
                                            
                                            (9,573,202
                                            )
 
 The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
  3
 CODA
OCTOPUS GROUP, INC.
 CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS
 FOR THE
THREE MONTHS ENDED JANUARY 31, 2010 and 2009
 (UNAUDITED)
 
 2010
                                        
                                        
                                        2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income/(loss)
                                        
                                        $
                                        773,103
                                        
                                        
                                        $
                                        (2,119,225
                                        )Adjustments
      to reconcile net loss to net cash used by operating
      activities:Depreciation
      and amortization
                                        
                                        
                                        123,376
                                        
                                        
                                        
                                        161,586Stock
      based compensation
                                        
                                        
                                        6,483
                                        
                                        
                                        
                                        196,485Change
      in fair value of warrant liability
                                        
                                        
                                        (1,554,908
                                        )
                                        
                                        
                                        -Financing
      costs
                                        
                                        
                                        383,562
                                        
                                        
                                        
                                        383,571Changes
      in operating assets and liabilities:(Increase)
      decrease in:Accounts
      receivable
                                        
                                        
                                        216,390
                                        
                                        
                                        
                                        520,222Inventory
                                        
                                        
                                        237,651
                                        
                                        
                                        
                                        (281,987
                                        )Prepaid
      expenses
                                        
                                        
                                        2,070
                                        
                                        
                                        
                                        21,586Other
      receivables
                                        
                                        
                                        33,948
                                        
                                        
                                        
                                        (251,692
                                        )Accounts
      payable and accrued expenses
                                        
                                        
                                        (211,033
                                        )
                                        
                                        
                                        (446,350
                                        )Due
      to related parties
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (40,283
                                        )Net
      cash provided by/(used in) operating activities
                                        
                                        
                                        10,642
                                        
                                        
                                        
                                        (1,856,087
                                        )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of property and equipment
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (36,587
                                        )Purchases
      of intangible assets
                                        
                                        
                                        (7,690
                                        )
                                        
                                        
                                        -Cash
      subject to restriction
                                        
                                        
                                        (27,556
                                        )
                                        
                                        
                                        1,017,007Acquisitions
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (208,495
                                        )Cash
      acquired in acquisitions
                                        
                                        
                                        -
                                        
                                        
                                        
                                        877Net
      cash used by investing activities
                                        
                                        
                                        (35,246
                                        )
                                        
                                        
                                        772,802CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from (repayment of) loans
                                        
                                        
                                        -
                                        
                                        
                                        
                                        38,026Preferred
      stock dividend
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (47,354
                                        )Net
      cash provided by financing activities
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (9,328
                                        )Effect
      of exchange rate changes on cash
                                        
                                        
                                        (55,620
                                        )
                                        
                                        
                                        (384,059
                                        )Net
      (decrease) in cash
                                        
                                        
                                        (80,224
                                        )
                                        
                                        
                                        (1,476,672
                                        )Cash
      and cash equivalents, beginning of period
                                        
                                        
                                        275,885
                                        
                                        
                                        
                                        3,896,149Cash
      and cash equivalents, end of period
                                        
                                        $
                                        195,661
                                        
                                        
                                        $
                                        2,419,477Cash
      paid for:Interest
                                        
                                        $
                                        58,020
                                        
                                        
                                        $
                                        13,853Income
      taxes
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Supplemental Disclosures:During
      the three months ended January 31, 2009, 146,580 shares of common stock
      were issued, 43,694 of which were subscribed for in the year ended October
      31, 2008, and the other 102,886 shares were issued as payment of $18,520
      compensation.
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        18,520.00Acquisition of Dragon:Current
      assets acquired
                                        
                                        
                                        -
                                        
                                        
                                        
                                        147,039Cash
      acquired
                                        
                                        
                                        -
                                        
                                        
                                        
                                        877Equipment
      acquired
                                        
                                        
                                        -
                                        
                                        
                                        
                                        51,336Goodwill
      and other intangible assets
                                        
                                        
                                        -
                                        
                                        
                                        
                                        342,013Liabilities
      assumed
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (201,166
                                        )Deferred
      payments
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (250,782
                                        )Cash
      Paid for Acquisition
                                        
                                        
                                        -
                                        
                                        
                                        
                                        89,317Acquisition of Tactical:Current
      assets acquired
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Cash
      acquired
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Equipment
      acquired
                                        
                                        
                                        -
                                        
                                        
                                        
                                        5,000Goodwill
      and other intangible assets
                                        
                                        
                                        -
                                        
                                        
                                        
                                        252,400Options
      issued
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (7400
                                        )Deferred
      note payable
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (125,000
                                        )Cash
      Paid for Acquisition
                                        
                                        
                                        -
                                        
                                        
                                        
                                        125,000
  The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
  4





CODA
OCTOPUS GROUP, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




NOTE
1 - SUMMARY OF ACCOUNTING POLICIES




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




General





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





In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Accordingly,
the results from operations for the three month period ended January 31,2010,
are not necessarily indicative of the results that may be expected for the year
ended October 31, 2010. The unaudited condensed financial statements should be
read in conjunction with the consolidated October 31, 2009 financial statements
and footnotes thereto included in the Company’s 10K filed on January 29, 2010
with the Securities Exchange Commission (SEC) as amended.





Business
and Basis of Presentation




Coda
Octopus Group, Inc. ( ”we ” , “us”, “ our company ” or “Coda” ), a corporation
formed under the laws of the State of Florida in 1992 (since re-domiciled to
Delaware in 2004), is a developer of underwater technologies and equipment for
imaging, mapping, defense and survey applications. We are based in New York,
with research and development, sales and manufacturing facilities located in the
Utah, the United Kingdom and Norway, and additional sales locations in Florida
and Washington, D.C.




The
unaudited condensed 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 statements.




Use
of Estimates




The
preparation of unaudited condensed consolidated 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
withFASB ASC Topic 605 - Revenue
Recognition.Our revenue is derived from sales of
underwater technologies and equipment for imaging, mapping, defense and survey
applications, as well as from the performance of various engineering and
manufacturing contracts. Revenue is recognized when persuasive evidence of an
arrangement exists, delivery has occurred or services have been rendered, the
contract price is fixed or determinable, and collectability is reasonably
assured. No right of return privileges are granted to customers after
shipment.





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
withASC 605,and recognize revenue for equipment
upon delivery and for installation and other services as
performed.


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.





5




CODA
OCTOPUS GROUP, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




Foreign
Currency Translation




Coda
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 carry-forwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be removed or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
the consolidated statements of operations in the period that includes the
enactment date.




Cash
and Cash Equivalents




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




Concentrations
of Credit Risk




Financial
instruments and related items, which potentially subject us to concentrations of
credit risk, consist primarily of cash and cash equivalents and accounts
receivable. We place our cash and temporary cash investments with credit quality
institutions. At times, such investments may be in excess of applicable
government mandated insurance limits.





Accounts
Receivable




We
periodically review our trade receivables in determining our allowance for
doubtful accounts. Allowance for doubtful accounts was $66,256 for the
period ended January 31, 2010 and  $255,789 for the year ended October
31, 2009.




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.





FASB
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 non-performance. FASB 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.  FASN 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.





6




CODA
OCTOPUS GROUP, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




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 the accompanying
financial statements consisted of the following items as of January 31,
2010:





Quoted Prices
                      in Active
                      Markets for
                      Identical
                      Instruments
                    
                    
                    Significant
                      Other
                      Observable
                      Inputs
                    
                    
                    Significant
                      Unobservable
                      InputsTotal
                    
                    
                    Level 1
                    
                    
                    Level 2
                    
                    
                    Level 3Assets:Restricted
      Cash
                    
                    $
                    966,525
                    
                    
                    $
                    966,525Short
      term Investment
                    
                    $
                    25,500
                    
                    
                    $
                    25,500Total
                    
                    $
                    992,025
                    
                    
                    $
                    992,025
                    
                    
                    
                    -
                    
                    
                    
                    -Liabilities:Warrant
      liability
                    
                    
                    798,987
                    
                    
                    
                    -
                    
                    
                    
                    798,987
                    
                    
                    
                    -Notes
      Payable
                    
                    $
                    13,612,668
                    
                    
                    $
                    -
                    
                    
                    
                    13,612,668
                    
                    
                    
                    -Total
                    
                    $
                    14,411,655
                    
                    
                    $
                    -
                    
                    
                    
                    14,411,655
                    
                    
                    
                    -




With the
exception of assets and liabilities included within the scope of FASB ASC
820-10-55, the Company adopted the provisions of FASB 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 FASB ASC
820-10-55, the Company will be required to adopt the provisions of FASB ASC 820
prospectively as of the year beginning November 1, 2009.  The adoption
of  FASB 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 FASB ASC 820-10-55 will have a material impact on our financial
position or results of operations.




The fair
value of restricted cash and short term investments at January
31, 2010 was grouped as Level 1 valuation as the market price was readily
available.





Loans and
notes payables are recorded at their face amounts which approximates fair
value.




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.




7





CODA
OCTOPUS GROUP, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




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 January 31, 2010 and
October 31, 2009:




2010
                        
                        
                        2009Raw
      materials
                        
                        $
                        1,213,400
                        
                        
                        $
                        1,384,043Work
      in process
                        
                        
                        11,860
                        
                        
                        
                        48,389Finished
      goods
                        
                        
                        1,335,514
                        
                        
                        
                        1,365,993Total
      inventory
                        
                        $
                        2,560,774
                        
                        
                        $
                        2,798,425





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




FASB ASC
Topic 360 Property, Plant and Equipment (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 period ended January 31, 2010 or the year ended October 31,
2009.




8




CODA
OCTOPUS GROUP, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




Research
and Development




Research
and development costs consist of expenditures for the present and future patents
and technology, which cannot be capitalized. We are eligible for United Kingdom
tax credits related to our qualified research and development expenditures. Tax
credits are classified as a reduction of research and development expense. We
recorded tax credits of  nil during the period ended January 31, 2010
and $358,346 during the year ended October 31, 2009.




Marketing




We charge
the costs of marketing to expense as incurred. For the period ended January 31,
2010 marketing costs were $33,084 and $522,576 for the year ended October 31,
2009.





Goodwill
and other Intangible Assets




The
Company accounts for goodwill and other intangibles assets in accordance with
FASB ASC 350. ASC 350 requires that goodwill and identifiable intangible assets
to be tested for impairment at least annually or more often if events and
circumstances warrant.




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 test for impairment at the reporting
unit level as defined in FASB ASC Topic 350-Intangibles - Goodwill and Other(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.




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.




9




CODA
OCTOPUS GROUP, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




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 13).
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 $60,532 and $ 242,128 in
the period ended January 31,2010  and the year ended October 31, 2009,
respectively.




Loss
Per Share





Net income
(loss) per share
     
 Three
      Months Ended
                January 31, 2010Net
      income used in computing basic net income per share
              
              $
              773,101Impact
      of assumed assumptions:Gain
      on warrant liability marked to fair value
              
              
              (1,554,908
              )Net
      loss in computing diluted net loss per share:
              
              $
              (781,807
              )
  Per share
basic and diluted net income amounted to $0.02 for the period ended January 31,
2010.  Per share basic and diluted net loss amounted to $0.04 for the
period ended January 31, 2009. For the periods ended January 31, 2010 and
2009, 50,999,796 and 46,203,559 potential shares, respectively, were excluded
from the shares used to calculate diluted earnings per share as their inclusion
would reduce net loss per share.




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.




10




CODA
OCTOPUS GROUP, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





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.The adoption of ASC 805 did not have a material impact on
the Company’s consolidated financial position, results of operations or cash
flow.




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.




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).




11




CODA
OCTOPUS GROUP, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




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




As of
January 31, 2010, we have cash and cash equivalents of $ 195,661 and restricted
cash of 966,525, a working capital deficit of $1,581,440 and a deficiency in
stockholders' equity of $9,573,202. For the period ended January 31, 2010, we
had net income of $773,101 and positive cash flow from operations of $10,642. We
also have an accumulated deficit of $55,781,506 at January 31,
2010.





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, 2011. 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 2010.




At
January 31, 2010 we have received net advances from this facility of
$1,183,475.





12




CODA
OCTOPUS GROUP, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




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 $767,440 and $690,344 as of January 31, 2010
and October 31, 2009 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 $32,349 and $111,463 as of January 31, 2010 and October 31, 2009
respectively.




Revenue
received as part of sales of equipment includes a provision for warranty and is
treated as deferred revenue, along with extended warranty sales, with these
amounts amortized over 12 months from the date of sale. These amounts are stated
on the balance sheet as Deferred Revenue of $301,032 and $287,018 as of January
31, 2009 and October 31, 2009 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.





Items
recorded or measured at fair value on a recurring basis in the accompanying
financial statements consisted of the following items as of January 31,
2010:




Quoted Prices
                    in Active
                    Markets for
                    Identical
                    Instruments
                  
                  
                  Significant
                    Other
                    Observable
                    Inputs
                  
                  
                  Significant
                    Unobservable
                    InputsTotal
                  
                  
                  Level 1
                  
                  
                  Level 2
                  
                  
                  Level 3Assets:Restricted
      Cash
                  
                  $
                  966,525
                  
                  
                  $
                  966,525
                  
                  
                  $
                  -
                  
                  
                  $
                  -Short
      term Investment
                  
                  $
                  25,500
                  
                  
                  $
                  25,500
                  
                  
                  $
                  -
                  
                  
                  $
                  -Total
                  
                  $
                  992,025
                  
                  
                  $
                  992,025
                  
                  
                  $
                  -
                  
                  
                  
                  -Liabilities:Warrant
      liability
                  
                  
                  798,897
                  
                  
                  
                  -
                  
                  
                  
                  798,897
                  
                  
                  
                  -Loans
      and Notes Payable
                  
                  $
                  13,612,668
                  
                  
                  $
                  -
                  
                  
                  $
                  13,612,668
                  
                  
                  $
                  -Totals
                  
                  $
                  14,411,655
                  
                  
                  $
                  -
                  
                  
                  $
                  14,411,655
                  
                  
                  $
                  -




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 restricted cash and short term investments, at January 31, 2010 was
grouped as Level 1 valuation as the market price was readily available, compared
to a fair value of $51,000 for short term investments at October 31,
2009.





Loans and
notes payable are recorded at their face amounts which approximates fair
value.





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, 2008, the Company had an investment of $153,000 that was considered
available-for-sale for financial reporting purposes which included an unrealized
loss of $697,000 included in the determination of comprehensive loss. As of
April 30, 2009, this investment had a value of $68,000, with an unrealized loss
of $782,000. This unrealized loss had, until now been included in the
determination of comprehensive loss, but during the year ended October 31, 2009
, we have determined that this investment in marketable securities is impaired
because we believe that the fair market value of the investment has permanently
declined. Accordingly, we have written off the $782,000 during the year ended
October 31,2009. The remaining fair value of this investment is $25,500 as of
January 31, 2010.




13





CODA
OCTOPUS GROUP, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




NOTE
5 - OTHER CURRENT ASSETS




Other
current assets on the balance sheet total $212,720 and $285,690 at January
31,2010  and October 31, 2009 respectively. These totals comprise the
following:





2010
                        
                        
                        2009Deposits
                        
                        $
                        103,755
                        
                        
                        $
                        96,277Value
      added tax (VAT)
                        
                        
                        75,337
                        
                        
                        
                        113,636Other
      receivable
                        
                        
                        33,628
                        
                        
                        
                        75,778Total
                        
                        $
                        212,720
                        
                        
                        $
                        285,690





NOTE
6 - FIXED ASSETS





Property
and equipment at January 31,2010 and October 31, 2009 is summarized as
follows:




2010
                
                
                2009Machinery
      and equipment
                
                $
                928,326
                
                
                $
                1,001,385Accumulated
      depreciation
                
                
                (707,356
                )
                
                
                (733,420
                )Net
      property and equipment assets
                
                $
                220,970
                
                
                $
                267,964




Depreciation
expense recorded in the statement of operations for the period ended January 31,
2010 and year ended October 31, 2009 is $30,076 and $238,632,
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, are evaluated on  an annual
basis, and when there is reason to believe that their values have been
diminished or impaired write-downs will be included in results from
operations.




The identifiable intangible assets acquired and
their carrying value at January 31, 2010 and October 31, 2009
is:





2010
                
                
                2009Customer
      relationships (weighted average life of 10 years)
                
                $
                784,243
                
                
                $
                784,243Non-compete
      agreements (weighted average life of 3 years)
                
                
                278,651
                
                
                
                278,651Patents
      (weighted average life of 10 years)
                
                
                73,805
                
                
                
                67,837Licenses
      (weighted average life of 2 years)
                
                
                100,000
                
                
                
                100,000Total
      amortized identifiable intangible assets - gross carrying
      value
                
                
                1,236,699
                
                
                
                1,230,731Less
      accumulated amortization
                
                
                (571,939
                )
                
                
                (533,462
                )Net
                
                
                664,760
                
                
                
                697,269Residual
      value
                
                $
                664,760
                
                
                $
                697,269





14





CODA
OCTOPUS GROUP, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





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 $142,500 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 January 31, 2010  is as
follows:





2010
                    
                    $
                    99,7032011
                    
                    
                    151,3642012
                    
                    
                    77,6852013
      and thereafter
                    
                    
                    336,008Total
                    
                    $
                    664,760




Amortization
of patents, customer relationships, non-compete agreements and licenses included
as a charge to income amounted to $ 38,477  and
$231,321  for the period ended January 31, 2010 and year ended October
31, 2009, 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 January 31, 2010.The carrying
amount of goodwill for the period ended January 31, 2010 and October 31, 2009 is
recorded below.





2010
                
                
                2009Beginning
      goodwill balance at November 1:CodaOctopus
      Colmek, Inc.
                
                $
                2,038,699
                
                
                $
                2,038,699CodaOctopus
      Martech Ltd
                
                
                998,591
                
                
                
                998,591CodaOctopus
      Products Ltd
                
                
                62,315
                
                
                
                62,315Goodwill
      recorded upon acquisition:CodaOctopus
      Tactical Intelligence, Inc.
                
                
                142,400
                
                
                
                142,430Dragon
      Design Ltd
                
                
                282,533
                
                
                
                282,533Balance
      at January 31, 2010 and October 31, 2009
                
                $
                3,524,538
                
                
                $
                3,524,538





Considerable
management judgment is necessary to estimate fair value. We enlist the
assistance of an independent valuation consultant to determine the values of our
intangible assets and goodwill, both at the dates of acquisition and at specific
dates annually. Based on various market factors and projections used by
management, actual results could vary significantly from managements'
estimates.




NOTE
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 January 31, 2010 and October 31, 2009, the
Company has issued and outstanding 49,000,244 shares and 49,000,244 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 January 31, 2010 and October 31, 2009
respectively, and nil Series B preferred shares outstanding at the same
dates.




15




CODA
OCTOPUS GROUP, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





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.




Common
Stock





During
the period ending January 31, 2010, we did not issue any common
stock.





During
the year 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.





Other Equity
Transactions




During
the period ending January 31, 2010, we did not issue any common share purchase
options. However, options issued in earlier periods vested resulting in a charge
of $6,483 in this period.




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.


16





CODA
OCTOPUS GROUP, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)


NOTE
9 - WARRANTS AND STOCK OPTIONS




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





Warrants
                
                Three months ended
                  January 31, 2010
                
                
                Year ended
                  October 31, 2009Number
                
                
                Weighted
                  Average Exercise
                  Price
                
                
                Number
                
                
                Weighted
                  Average Exercise
                  PriceOutstanding
      at beginning of the period
                
                
                32,583,418
                
                
                $
                1.42
                
                
                
                32,583,418
                
                
                $
                1.42Granted
      during the period
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Terminated
      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
January 31, 2010 are as follows:





Range of
                  Exercise Prices
                
                Number
                  Outstanding
                
                
                Weighted Average
                  Contractual Life
                  (Yrs)
                
                
                Total Exercisable0.50
                
                
                750,000
                
                
                
                1.24
                
                
                
                750,0000.58
                
                
                400,000
                
                
                
                1.16
                
                
                
                400,0001.00
                
                
                2,750,000
                
                
                
                2.10
                
                
                
                2,750,0001.30
                
                
                14,341,709
                
                
                
                1.92
                
                
                
                14,341,7091.50
                
                
                -
                
                
                
                -
                
                
                
                -1.70
                
                
                14,341,709
                
                
                
                1.92
                
                
                
                14,341,7091.80
                
                
                -
                
                
                
                -
                
                
                
                -Totals
                
                
                32,583,418
                
                
                
                1.97
                
                
                
                32,583,418




Stock Options
                  
                  Three months ended
                    January 31, 2010
                  
                  
                  Year ended
                    October 31, 2009Number
                  
                  
                  Weighted
                    Average Exercise
                    Price
                  
                  
                  Number
                  
                  
                  Weighted
                    Average Exercise
                    PriceOutstanding
      at beginning of the period
                  
                  
                  5,595,900
                  
                  
                  $
                  1.18
                  
                  
                  
                  5,755,900
                  
                  
                  $
                  1.18Granted
      during the period
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  50,000
                  
                  
                  
                  1.30Terminated
      during the period
                  
                  
                  (1,170,000
                  )
                  
                  
                  1.29
                  
                  
                  
                  (210,000
                  )
                  
                  
                  1.32Outstanding
      at the end of the period
                  
                  
                  4,425,900
                  
                  
                  $
                  1.15
                  
                  
                  
                  5,595,900
                  
                  
                  $
                  1.18Exercisable
      at the end of the period
                  
                  
                  4,174,499
                  
                  
                  $
                  1.14
                  
                  
                  
                  5,214,149
                  
                  
                  $
                  1.17





The
number and weighted average exercise prices of stock purchase options
outstanding as of January 31, 2010 are as follows:





Range of
                  Exercise Prices
                
                Number
                  Outstanding
                
                
                Weighted Average
                  Contractual Life
                  (Yrs)
                
                
                Total Exercisable0.50
                
                
                -
                
                
                
                -
                
                
                
                -0.58
                
                
                -
                
                
                
                -
                
                
                
                -1.00
                
                
                2,650,900
                
                
                
                0.57
                
                
                
                2,650,9001.30
                
                
                1,325,000
                
                
                
                3.00
                
                
                
                1,073,6001.50
                
                
                190,000
                
                
                
                2.09
                
                
                
                190,0001.70
                
                
                260,000
                
                
                
                2.41
                
                
                
                260,0001.80
                
                
                -
                
                
                
                -
                
                
                
                -Totals
                
                
                4,425,900
                
                
                
                1.47
                
                
                
                4,174,499




17




NOTE
10 – DERIVATIVE LIABILITY




In June
2008, the FASB issued new accounting guidance which requires entities to
evaluate whether an equity-linked financial instrument (or embedded feature) is
indexed to its own stock by assessing the instrument’s contingent exercise
provisions and settlement provisions. Instruments not indexed to their own stock
fail to meet the scope exception of ASC 815 and should be classified as a
liability and marked-to-market. The statement is effective for fiscal years
beginning after December 15, 2008 and is to be applied to outstanding
instruments upon adoption with the cumulative effect of the change in accounting
principle recognized as an adjustment to the opening balance of retained
earnings. The Company has assessed its outstanding equity-linked financial
instruments and has concluded that, effective November 1, 2009, the value
our warrants will need to be recorded as a derivative liability due to the fact
that the conversion price is subject to adjustment based on subsequent sales of
securities. The cumulative effect of the change in accounting principle on
November 1, 2009 includes an increase in our derivative liability related
to the fair value of the conversion feature of $2,353,893. Fair value at
November 1, 2009 was determined using the Black-Scholes method based on the
following assumptions:  (1) risk free interest rate
of 1.06%; (2) dividend yield of 0%; (3) volatility factor of the
expected market price of our common stock of 302.22%; (4) an average
expected life of the warrants of 2.22 years and (5) estimated fair
value of common stock of $0.08 per share.




At
January 31, 2010 we recalculated the fair value of the conversion feature
subject to derivative accounting and have determined that the fair value at
January 31, 2010 is $798,897. The fair value of the conversion features was
determined using the Black-Scholes method based on the following
assumptions:  (1) risk free interest rate of 0.74%;
(2) dividend yield of 0%; (3) volatility factor of the expected market
price of our common stock of 304%; (4) an average expected life of the
conversion feature of 1.97 years and (5) estimated fair value of
common stock of $0.03 per share.




We have
recorded a credit of $1,554,908 during the three months ended January 31, 2010
related to the change in fair value during the quarter.





NOTE
11 - 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 $4,368,141, with no expiration. The deferred tax asset
related to the carry-forward is approximately $2,670,000. 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.





18




CODA
OCTOPUS GROUP, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




Income
tax expense for 2009 and 2010 represents income taxes on our Norwegian
subsidiary.




Components
of deferred tax assets as of January 31,2010 and October 31, 2009 are as
follows:





Non-Current
                      
                      2010
                      
                      
                      2009Net
      Operating Loss Carry Forward
                      
                      $
                      18,106,000
                      
                      
                      $
                      17,736,000Valuation
      Allowance
                      
                      
                      (18,106,000
                      )
                      
                      
                      (17,736,000
                      )Net
      Deferred Tax Asset
                      
                      $
                      -
                      
                      
                      $
                      -




NOTE
12 - CONTINGENCIES AND COMMITMENTS




Litigation




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.




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 $1,219,963, with the
minimum future rentals due under these leases as of Jannuary 31,2010 as
follows:




$2010
                  
                  
                  277,7052011
                  
                  
                  370,2342012
                  
                  
                  231,3392013
      and thereafter
                  
                  
                  340,685Total
                  
                  $
                  1,219,963





Concentrations




We had no
concentrations of purchases of over 5% during the period ended January 31, 2010.
We had sales concentrations of over 5% during the period ended January 31, 2010
due to sales to total four separate customers for $1,178,835.





19





CODA
OCTOPUS GROUP, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




NOTE
13 - NOTES AND LOANS PAYABLE




A summary
of notes payable at January 31,2010  and October 31, 2009 is as
follows:





January 31,
                              2010
                            
                            
                            October 31,
                              2009The
      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.
                            
                            $
                            13,451,500
                            
                            
                            $
                            13,067,929The
      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.
                            
                            
                            161,168
                            
                            
                            
                            165,594The
      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.
                            
                            
                            -
                            
                            
                            
                            -Total
                            
                            $
                            13,612,668
                            
                            
                            $
                            13,233,523Less:
      current portion
                            
                            
                            
                            
                            
                            
                            -Total
      long-term portion
                            
                            $
                            13,612,668
                            
                            
                            $
                            13,233,523




In
connection with the secured convertible debenture noted above and the Cash
Control Framework Agreement (see below), we carry $1,210,638 deferred financing
costs as an asset on the consolidated balance sheet at January 31, 2010, which
represents $1,694,893 in financing closing costs we incurred, net of $ 484,255
in amortization expense at January 31, 2010 and $423,723 in amortization expense
at October 31, 2009. 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.




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.




Subsequent
to the year end the agreement was extended for a further period of 12 months and
now expires on March 16, 2011.




20





CODA
OCTOPUS GROUP, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




NOTE 14 - SEGMENT INFORMATION





The Company's two reportable segments are managed separately
based on fundamental differences in their operations.   Coda
Octopus Colmek and Coda Octopus Martech make up the contracting part of the
business, and Coda Octopus Products Limited and Coda Octopus Products Inc. make
up the product sales.




As a
result of the Company’s internal reorganization the Company has restated
previously reported segment information.




The
contracting segment deals mainly with Government agencies and defense prime
contractors and have expertise in designing and producing specific devices and
components for such customers, with an emphasis on sub-sea
technology.  This segment also manufactures the Group’s products (for
Coda Octopus Products).




The
products segment designs and produces, through its arrangements with the
contracting segment, sub-sea software and hardware products aimed at the Oil and
Gas, Underwater Construction, and Port and Harbor Security markets.




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




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




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 segment asset and operating balances by reportable
segment.
  Three
      months endedJanuary
      31, 2010
                
                
                January 31,
      2009Net
      Sales to External Customers:Contracting
                
                $
                1,449,165
                
                
                $
                2,306,889Products
                
                
                1,619,045
                
                
                
                892,217Total
      Sales to External Customers
                
                $
                3,068,210
                
                
                $
                3,199,106Depreciation
      and Amortization:Contracting
                
                $
                40,383
                
                
                $
                74,868Products
                
                
                9,580
                
                
                
                15,337Corporate
                
                
                73,413
                
                
                
                71,380Total
      Depreciation and Amortization
                
                $
                123,376
                
                
                $
                161,585General
      and Administrative Expense:Contracting
                
                $
                745,369
                
                
                $
                894,454Products
                
                
                409,622
                
                
                
                504,399Corporate
                
                
                349,636
                
                
                
                1,503,866Total
      General and Administrative Expense
                
                $
                1,504,627
                
                
                $
                2,902,719Capital
      Expenditures:Contracting
                
                $
                -
                
                
                $
                18,952Products
                
                
                7,690
                
                
                
                14,275Corporate
                
                
                
                
                
                
                3,360Total
      Capital Expenditures
                
                $
                7,690
                
                
                $
                36,587Operating
      Income (Losses):Contracting
                
                $
                (773,464
                )
                
                $
                376,786Products
                
                
                846,306
                
                
                
                (160,739
                )Corporate
                
                
                (423,049
                )
                
                
                (1,965,488Total
      Segment Operating Losses
                
                $
                (350,207
                )
                
                $
                (1,749,441
  21
  For
      the period endedJanuary
      31, 2010
                  
                  
                  October  31,
      2009Segment
      Assets:Contracting
                  
                  $
                  7,464,714
                  
                  
                  $
                  7,235,301Products
                  
                  
                  2,032,276
                  
                  
                  
                  2,867,693Corporate
                  
                  
                  2,836,912
                  
                  
                  
                  3,034,386Total
      Segment Assets
                  
                  $
                  12,333,902
                  
                  
                  $
                  13,137,380


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 period ended January 31, 2010 and the
year ended October 31, 2009:




Three
      months endedJanuary
      31, 2010
                          
                          January
      31,
                              2009NET
      SALES TO EXTERNAL CUSTOMERS:United
      States
                          
                          $
                          980,934
                          
                          
                          $
                          1,550,570Europe
                          
                          
                          2,087,276
                          
                          
                          
                          1,648,536TOTAL
      SALES TO EXTERNAL CUSTOMERS
                          
                          $
                          3,068,210
                          
                          
                          $
                          3,199,106For
      the period endedJanuary
      31, 2010
                          
                          
                          October
      31, 2009ASSETS:United
      States
                          
                          $
                          7,367,788
                          
                          
                          $
                          7,919,830Europe
                          
                          
                          4,966,114
                          
                          
                          
                          5,217,550TOTAL
      ASSETS
                          
                          $
                          12,333,902
                          
                          
                          $
                          13,137,380




22





CODA
OCTOPUS GROUP, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




NOTE 15 – SUBSEQUENT
EVENTS




The
Company evaluated subsequent events through March 17, 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.




In
March 2010 we issued 75,000 shares of common stock to three (3) of our employees
as part of their bonus package.




23




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 theEchoscope®. 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, oil and gas
exploration and security, underwater port 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 the United States.




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.


24


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 prime
contractors.




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 is
with government authorities both in the US and throughout the world. Here in the
US, the Company has deployed systems with Jacksonville Sheriff, FL, and in Contra Costa
County, CA, with further 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 15 th 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:





            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.





25





            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.





            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.





            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.





            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:





            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.




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




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




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




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




Further,
we believe the 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.





26





Revenue
Recognition




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




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.





27





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 two reporting units. 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




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.




In
addition, on January 18, 2010, the debt holder waived for one year 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.





28





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 the year
ended  October 31, 2009.  Actual savings for the year
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 year ended
October 31, 2009:




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




Between
September 2009 and December 2009, we 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 during the current fiscal year.




Reorganization




The
Company commenced a reorganization program in which the R&D unit has 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.





29





Within
our products company in Edinburgh, we 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.




Comparison
of quarter ended January 31, 2010, compared to quarter ended January 31,
2009.




Revenue: Total revenues for
the quarter ended January 31, 2010 (the “2010 Period”) and the quarter ended
January 31, 2009 (the “2009 Period”) were $3,068,210 and $3,199,106
respectively, representing a decrease of 4.1%. Contributing factors to this lack
of growth were adverse exchange rate movements combined with the global economic
downturn which still affected the business in this quarter.




Gross
Margins:Margins were stronger in the 2010 Period at 57.4%
(gross profit of $1,762,231) compared to 54.9% ($1,756,959) in the 2009 Period,
reflecting a slightly different mix of sales in our businesses (products versus
project work).




Research and Development
(R&D). R&D spending decreased from $603,681 in the 2009 Period to
$477,013 in the 2010 Period In line with our cost cutting plan . However, this
level of spending still allows us to devote considerable R&D resources to
introduce product variants of our core technology  to the market over the
next months.




Selling, General and Administrative
Expenses (SG&A). SG&A expenses for the 2010 Period decreased
to  $1,635,426 from $2,902,719 in 2009, a reduction
of  43.6% which reflects activity under the cost reduction plan that
was executed during the fiscal year ended October 31, 2009 and hitherto in
2010.




Across the Group, key areas of 2010Period expenditure include wages and
salaries, where we spent $1,234,167or 75.9%during the 2010Period against $1,900,261or65.5% of our SG&A cost during the
2009Period; legal and professional fees,
including accounting, audit
and investment banking services, where we spent $147,036or7% in 2010 against $272,186 or
9.4% of our SG&A costs in 2009; travel
costs reduced to $99,142or4.7% in 2010from $127,751or4.1% of SG&A in the 2009Period, rent for our various locationsdecreasedin 2010to $141,664or6.7% against $155,139or5.3%of SG&A in 2009; marketing reduced in the
2010Period to $33,084or1.6%of SG&A against $274,132or9.1%of SG&A in 2009, as we reduced the number of
consultants engaged in the Business.


Operating Loss. We incurred a
loss from operations of $350,207  in the 2010 Period against
$1,749,441in the 2009 Period.  This reduced loss is attributable to
significant cost reductions in the Business, mainly at the HQ
level..




Interest Expense . Interest
expense increased in the 2010 Period to $441,582 from the 2009 Period interest
costs which were $397,424. In both periods we have included amortization of the
30% redemption premium for our convertible note, at a cost of $128,571. We have
accrued interests on the convertible note of $450,150 ahead of payment in
February 2010.




Dividends and Other Stock
Charges. In the 2010 Period, no dividends were due to be paid on the
Series A Preferred stock, versus $31,149 in 2009 due to the fact that we had no
surplus or net profits from which to declare and pay such
dividends.




Examining
HQ SG&A, which is where we have concentrated our cost cutting exercise, we
find that overall HQ SG&A (defined as Group Headquarters, and the UK and US
Holding Companies) has reduced from $1,241,092 in Q1 2009 to $343,636 in Q1
2010. Components of this reduction are Rent and Utilities where we have reduced
from $61,304 to $25,094, Office Expenses reduced from  $60,087 in 2009
to $16,641 in Q1 2010, Payroll reduced from $515,997 to $83,573, Insurances
increased from $44,470 to $60,857, Professional Services reduced from $305,902
to $134,447, Forex reduced from$36,740 to $6,841, Marketing reduced from
$172,615 to ($8,428), and Travel from $43,977 to $30,611. Moving forward we
would plan to increase the HQ SG&A , in line with increasing revenues, in a
couple of key areas where we need to add one or two more staff.


Segment Analysis.
  This section should be read in
conjunction with Note 15 to the Condensed Consolidated Financial
Statements.
  We operate in two business
segments, Contracting
Sales, and Product Sales Our contracting business consists of Coda Octopus
Colmek, Coda Octopus Martech (including the acquired Dragon Design) and Coda
Octopus Tactical Intelligence. Our Products business consists of Coda Octopus
Products Limited and Coda Octopus Products
Inc.
  Revenues from Contracting in during the
quarter ended January 31, 2010 were $1,449,165 or 47% of the Group revenues
versus $2,306,889 in the quarter ended January 31, 2009, whereas revenues from
Products were $1,619,035
and were 53% of the Group revenues, versus $892,217 in 2009.
  SG&A costs incurred in our
contracting businesses were $745,369 in the quarter ended January 31, 2010
versus $894,454 in the quarter ended January 31, 2009. SG&A costs in our
Products business in the
quarter ended January 31, 2010 were $409,622 versus $504,399 in the quarter
ended January 31, 2009.
  Operating loss in our contracting
business was $773,464 in the quarter ended January 31, 2010 versus an operating
profit of $376,786 in the quarter ended January 31,
2009.  In the quarter ended January 31, 2010 we made an operating
profit of $846,306 in our Products business versus an operating loss of $160,739
in the quarter ended January 31, 2009.


30





Financial Instruments Measured at
Fair Value




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, 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 January 31,
2010:




Quoted Prices
                                      in Active
                                      Markets for
                                      Identical
                                      Instruments
                                    
                                    
                                    Significant
                                      Other
                                      Observable
                                      Inputs
                                    
                                    Significant
                                      Unobservable
                                      InputsTotal
                                    
                                    
                                    Level
      1
                                    
                                    
                                    Level
      2
                                    
                                    Level
      3AssetsRestricted
      Cash
                                    
                                    $
                                    966,525
                                    
                                    
                                    $
                                    966,525
                                    
                                    
                                    -
                                    
                                    -Short
      Term Inv
                                    
                                    $
                                    25,500
                                    
                                    
                                    $
                                    25,500
                                    
                                    
                                    -
                                    
                                    -Total
                                    
                                    $
                                    992,025
                                    
                                    
                                    $
                                    992,025LiabilitiesWarrant
      liability
                                    
                                    $
                                    798,897
                                    
                                    
                                    
                                    -
                                    
                                    $
                                    798,897
                                    
                                    -Notes
      Payable
                                    
                                    $
                                    13612,668
                                    
                                    
                                    
                                    -
                                    
                                    $
                                    13,612,668
                                    
                                    -Total
                                    
                                    $
                                    14,411,655
                                    
                                    
                                    
                                    
                                    
                                    $
                                    14,411,655





31




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 restricted cash and short term investments, at January 31,
2009 was grouped as Level 1 valuation as the market price was readily
available.




Loans
and notes payable is recorded at face amount, which approximates fair
value.




Liquidity
and Capital Resources




For
the period ended January 31, 2010, the Company has an accumulated deficit of
$55,781,506 negative working capital of $1,581 ,440, a capital deficit of
$9,573,202 and generated a positive cash flow from operations of $10,642 in 2010
Period against a deficit of $839,020 in the 2009 Period. The Company is
dependent upon its 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 its commitment to maintain
SG&A at around the $8.5 million level until the business is profitable and
based upon our reorganization of our business, prospects have been enhanced and
this is evidenced by our being in receipt of approximately $8.1 million dollars
of additional contracts and purchase orders received in this financial year and
up to the date of this filing; 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 dependent upon achieving profitable operations and generating sufficient cash
flows from operations to meet future obligations.




Financing
Activities




For the
most part, we have financed our operations through the issuance to the investors
of shares of our common stock and preferred stock and warrants.




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.




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.





32




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, as a resultof the cost cutting program discussed
above and by further adjusting our operations if and to the extent needed , we
believe thatwe 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 during the current fiscal
year, we estimate that we need to generate additional cash  beyond
that which is available to us Cash Control Framework
Agreement to be able to continue our operations at their current levels. 
However, there can be no assurance that we will be successful in generating
sufficient revenues from operations.
  Other than disclosed herein,
wepresently 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
generated sufficient liquidity. We will need to continue to raise
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.  We have
entered into negotiations to amend these restrictions contained in the Purchase
Agreements.  Without such amendments,  we may be unable to
raise additional equity financing on terms that are commercially acceptable to
us. 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 stockwas recently stricken from the OTC
Bulletin Board for failure to make our periodic filings on a timely basis.
This  may further impact on the liquidity of our stock putting further
downward pressure on its price and making it less likely that we will beable to raise equity financing on
acceptable terms.
  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 termobligation to a
long term obligation.  These discussions have been successful and 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
curtailits 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 wouldforce 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 holdersof our common stock. If additional
financing is not available or is not available on acceptable terms, we
willhave to curtail our
operations.


33





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.




The
Company’s operations are conducted in the United States, and through its
wholly-owned subsidiaries, in the United Kingdom. As a result, fluctuations in
currency exchange rates do 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 addition, we are also subject to currency fluctuation risk with
respect to certain foreign currency denominated receivables and payables. The
Company cannot predict the extent to which currency fluctuations may or will
affect the Company's business and financial position, and there is a risk that
such fluctuations will have an adverse impact on the Company's sales, profits
and financial position. Also because differing portions of our revenues and
costs are denominated in foreign currency, movements can impact our margins by,
for example, decreasing our foreign revenues when the dollar strengthens without
correspondingly decreasing our expenses. The Company does not currently hedge
its currency exposure.




The
translation of the Company’s UK operations’ pound Sterling denominated balance
sheets into US dollars has been affected by the weakening of the average value
of the US dollar against the British pound sterling in the relevant time periods
from $1.49 in 2009, to $1.63 in 2010, an approximate 9.2% depreciation 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 $0.154 during 2009, to $0.175 during 2010, an approximate 12% change in
value. These are the values that have been used in the calculations
below.




The
impact of these currency fluctuations on the 2010 Period is shown
below:




PoundSterling
                
                
                NorwegianKronerActual
                  Results
                
                
                Constant
                  Rates
                
                
                Actual
                  Results
                
                
                Constant
                  Rates
                
                
                TotalEffectRevenues
                
                $
                2,087,276
                
                
                $
                1,900,363
                
                
                $
                
                
                
                $
                
                
                
                $
                (186,913)Costs
                
                
                1,892,702
                
                
                
                1,723,213
                
                
                
                126,460
                
                
                
                111,584
                
                
                
                (184,336)Net
      Income/(Losses)
                
                
                194,713
                
                
                
                177,150
                
                
                
                (126,460)
                
                
                
                (111,584)
                
                
                
                (2,547)Assets
                
                
                17,744,431
                
                
                
                16,106
      ,959
                
                
                
                841,002
                
                
                
                871,192
                
                
                
                (1,607,271)Liabilities
                
                
                14,279,196
                
                
                
                14,808,239
                
                
                
                708,928
                
                
                
                735,194
                
                
                
                555,308Net
      Assets
                
                
                3,465,235
                
                
                
                1,298,731
                
                
                
                132,073
                
                
                
                135,998
                
                
                
                (2,162,580)




This
table shows that the effect of constant exchange rates, versus the actual
exchange rate fluctuations, reduced profits for the year by $2,547 and reduced
net assets by $2,162,580. In addition, the Company booked transactional exchange
rate gains of $611 during 2010. All of these amounts are material to our overall
financial results.





34





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 4T. Controls and
Procedures





a)
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 January 31,
2010.  Based upon that evaluation, 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.





The
Company continues to improve procedures with regard to its disclosure
controls and procedures.





(b)
Changes in Internal Controls.




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





35





PART II - OTHER INFORMATION





Item
1. 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
2. Unregistered Sales of Equity Securities and Use of Proceeds




Not
Applicable.





Item
3. Defaults Upon Senior Securities




None.





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




None.





Item
5. Other Information




None.





Item
6. Exhibits




31
                Certifications
      of the Chief Executive Officer and Chief Financial Officer pursuant to
      Rule 13a-14(a)32
                Certifications
      of Chief Executive Officer and Chief Financial Officer pursuant to 18
      U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of
2002







36




SIGNATURES




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





Coda
      Octopus Group, Inc.
                (Registrant)Date:  March
      17, 2010
              
              /s/ Geoff TurnerGeoff
      TurnerChief
      Executive OfficerDate:
      March 17, 2010
              
              /s/ Geoff TurnerGeoff
      TurnerChief
      Financial Officer





37