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 April 30, 2010




OR





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




For the
transition period from ______________ to ______________




Commission
File Number 000-52815





CODA
OCTOPUS GROUP, INC.


(Exact
name of registrant as specified in its charter)





Delaware
                
                34-200-8348(State
      or other jurisdiction of Incorporation or organization)
                
                (I.R.S.
      Employer Identification Number)Newport Office Center 1, 111 Town Square Place, Jersey City,Suite
      1201, New Jersey 07301
                
                07301(Address
      of principal executive offices)
                
                (Zip
      Code)Registrant's
      telephone number, including area code:
                
                (201)
      420 9100




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. Yesx  No  ̈





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):  ̈





Large
      accelerated filer  ̈
            Accelerated
      filer  ̈ Non-accelerated
      filer ̈
            Smaller
      reporting companyx





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


Yes  ̈ Nox





The
number of shares outstanding of issuer's common stock, $0.001 par value as of
June 14, 2010 is 49,075,244.








INDEX





PagePART
      I - Financial Information
              1Item
      1: Financial Statements
              1Six
      Months Ended  April 30, 2010 and  2009Condensed
      Consolidated Balance Sheet as of  April 30, 2010 (Unaudited) and
      October 31, 2009
              1Condensed
      Consolidated Statements of Operations and Comprehensive Income (Loss) for
      the Six Months Ended April 30, 2010  and  2009
      (Unaudited)
              2Condensed
      Consolidated Statement of  Stockholders’ Deficiency for the
        Six Months Ended  April 30, 2010
    (Unaudited)
              3Condensed
      Consolidated Statements of Cash Flows for the Six months ended April 30,
      2010 and 2009 (Unaudited)
              4Notes
      to Condensed Consolidated Financial Statements (Unaudited)
              5Item
      2: Management's Discussion and Analysis or Plan of
    Operation
              18Item
      4T:  Controls and Procedures
              29PART
      II - Other Information
              30Item
      1: Legal Proceedings
              30Item
      2: Unregistered Sales of Equity Securities and Use of
    Proceeds
              30Item
      3: Defaults Upon Senior Securities
              30Item
      4: Submission of Matters to a Vote of Security Holders
              30Item
      5: Other Information
              30Item
      6: Exhibits
              30Signatures
              31




i


PART
I. FINANCIAL INFORMATION





Item
1. Financial Statements





CODA
OCTOPUS GROUP, INC.


CONDENSED
CONSOLIDATED BALANCE SHEET


April 30,
2010 (UNAUDITED) and OCTOBER 31, 2009





April
      30,
                      
                      
                      October
      31,2010
                      
                      
                      2009ASSETSCurrent
      assets:Cash
      and cash equivalents
                      
                      $
                      84,322
                      
                      
                      $
                      275,885Restricted
      cash, Note 2
                      
                      
                      551,480
                      
                      
                      
                      994,081Short-Term
      Investments, Note 4
                      
                      
                      38,250
                      
                      
                      
                      51,000Accounts
      receivable, net of allowance for doubtful accounts
                      
                      
                      1,715,829
                      
                      
                      
                      2,033,879Inventory
                      
                      
                      1,824,788
                      
                      
                      
                      2,798,425Unbilled
      receivables, Note 3
                      
                      
                      2,465,067
                      
                      
                      
                      690,344Other
      current assets, Note 5
                      
                      
                      202,240
                      
                      
                      
                      285,691Prepaid
      expenses
                      
                      
                      260,626
                      
                      
                      
                      247,134Total
      current assets
                      
                      
                      7,142,602
                      
                      
                      
                      7,376,439Property
      and equipment, net, Note 6
                      
                      
                      161,166
                      
                      
                      
                      267,964Deferred
      financing costs, net of accumulated amortization of $544,787 in 2010 and
      $423,723 in 2009, Note 13
                      
                      
                      1,150,106
                      
                      
                      
                      1,271,170Goodwill
      and other intangible assets, net, Note 7
                      
                      
                      4,150,359
                      
                      
                      
                      4,221,807Total
      assets
                      
                      $
                      12,604,233
                      
                      
                      $
                      13,137,380LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable, trade
                      
                      $
                      2,081,759
                      
                      
                      $
                      2,390,039Accrued
      expenses and other current liabilities
                      
                      
                      4,543,225
                      
                      
                      
                      4,626,164Warrant
      liability, Note 10
                      
                      
                      5,987,321
                      
                      
                      
                      -Deferred
      revenues, Note 3
                      
                      
                      1,168,419
                      
                      
                      
                      398,482Deferred
      payment related to acquisitions
                      
                      
                      383,022
                      
                      
                      
                      404,274Total
      current liabilities
                      
                      
                      14,163,746
                      
                      
                      
                      7,818,959Loans
      and notes payable, long term, Note 13
                      
                      
                      13,733,065
                      
                      
                      
                      13,233,523Total
      liabilities
                      
                      
                      27,896,811
                      
                      
                      
                      21,052,482Contingencies
      and Commitments, Note 12Stockholders'
      deficiency:Preferred
      stock, $.001 par value; 5,000,000 shares authorized, 6,287 Series A issued
      and outstanding, as of April 30, 2010 and October 31, 2009,
      respectively
                      
                      
                      6
                      
                      
                      
                      6Nil
      shares Series B issued and outstanding as of April 30, 2010 and October
      31, 2009, respectively
                      
                      
                      -
                      
                      
                      
                      -Common
      stock, $.001 par value; 150,000,000 shares authorized, 49,075,244 and
      49,000,244 shares issued and outstanding as of April 30, 2010 and October
      31, 2009, respectively
                      
                      
                      49,075
                      
                      
                      
                      49,000Common
      Stock subscribed
                      
                      
                      96,350
                      
                      
                      
                      96,350Additional
      paid-in capital
                      
                      
                      46,860,154
                      
                      
                      
                      51,766,495Accumulated
      other comprehensive loss
                      
                      
                      (903,823
                      )
                      
                      
                      (696,617
                      )Accumulated
      deficit
                      
                      
                      (61,394,340
                      )
                      
                      
                      (59,130,336
                      )Total
      stockholders' deficiency
                      
                      
                      (15,292,578
                      )
                      
                      
                      (7,915,102
                      )Total
      liabilities and stockholders' deficit
                      
                      $
                      12,604,233
                      
                      
                      $
                      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 LOSS


FOR THE
THREE MONTHS ENDED April 30, 2010 and 2009


(UNAUDITED)





For
      the three months
                        
                        
                        For
      the three months
                        
                        
                        For
      the six months
                        
                        
                        For
      the six monthsended
      April 30,
                        
                        
                        ended
      April 30,
                        
                        
                        ended
      April 30,
                        
                        
                        ended
      April 30,2010
                        
                        
                        2009
                        
                        
                        2010
                        
                        
                        2009Net
      revenue
                        
                        $
                        3,713,585
                        
                        
                        $
                        4,307,447
                        
                        
                        $
                        6,781,795
                        
                        
                        $
                        7,506,553Cost
      of revenue
                        
                        
                        1,422,884
                        
                        
                        
                        1,575,788
                        
                        
                        
                        2,728,863
                        
                        
                        
                        3,017,935Gross
      profit
                        
                        
                        2,290,701
                        
                        
                        
                        2,731,659
                        
                        
                        
                        4,052,932
                        
                        
                        
                        4,488,618Research
      and development
                        
                        
                        455,173
                        
                        
                        
                        456,477
                        
                        
                        
                        932,186
                        
                        
                        
                        1,060,158Selling,
      general and administrative expenses
                        
                        
                        1,848,938
                        
                        
                        
                        2,386,460
                        
                        
                        
                        3,484,364
                        
                        
                        
                        5,289,179Operating
      income (loss)
                        
                        
                        (13,410
                        )
                        
                        
                        (111,278
                        )
                        
                        
                        (363,618
                        )
                        
                        
                        (1,860,719
                        )Other
      income (expense)Other
      income
                        
                        
                        27,962
                        
                        
                        
                        3,547
                        
                        
                        
                        37,945
                        
                        
                        
                        31,187Interest
      expense
                        
                        
                        (454,802
                        )
                        
                        
                        (426,814
                        )
                        
                        
                        (896,384
                        )
                        
                        
                        (824,238
                        )Loss
      on change in fair value of derivative liability
                        
                        
                        (5,188,334
                        )
                        
                        
                        
                        
                        
                        
                        (3,633,426
                        )Gain
      on sale of investment in marketable securities
                        
                        
                        15,750
                        
                        
                        
                        
                        
                        
                        
                        15,750Impairment
      of investment in marketable securities
                        
                        
                        -
                        
                        
                        
                        (782,000
                        )
                        
                        
                        -
                        
                        
                        
                        (782,000
                        )Total
      other income (expense)
                        
                        
                        (5,599,424
                        )
                        
                        
                        (1,205,267
                        )
                        
                        
                        (4,476,115
                        )
                        
                        
                        (1,575,051
                        )Loss
      before income taxes
                        
                        
                        (5,612,834
                        )
                        
                        
                        (1,316,545
                        )
                        
                        
                        (4,839,733
                        )
                        
                        
                        (3,435,770
                        )Provision
      for income taxes
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Net
      loss
                        
                        
                        (5,612,834
                        )
                        
                        
                        (1,316,545
                        )
                        
                        
                        (4,839,733
                        )
                        
                        
                        (3,435,770
                        )Preferred
      Stock Dividends:Series
      A
                        
                        
                        -
                        
                        
                        
                        (439
                        )
                        
                        
                        -
                        
                        
                        
                        (31,588
                        )Net
      Loss Applicable to Common Shares
                        
                        $
                        (5,612,834
                        )
                        
                        $
                        (1,316,984
                        )
                        
                        $
                        (4,839,733
                        )
                        
                        $
                        (3,467,358
                        )Loss
      per share, basic and diluted
                        
                        
                        (0.11
                        )
                        
                        
                        (0.03
                        )
                        
                        
                        (0.10
                        )
                        
                        
                        (0.07
                        )Weighted
      average shares outstanding
                        
                        
                        49,050,244
                        
                        
                        
                        49,000,244
                        
                        
                        
                        49,029,133
                        
                        
                        
                        48,950,494Comprehensive
      loss:Net
      loss
                        
                        $
                        (5,612,834
                        )
                        
                        $
                        (1,316,545
                        )
                        
                        $
                        (4,839,733
                        )
                        
                        $
                        (3,435,770
                        )Foreign
      currency translation adjustment
                        
                        
                        (145,925
                        )
                        
                        
                        (18,531
                        )
                        
                        
                        (204,206
                        )
                        
                        
                        (408,131
                        )Unrealized
      gain (loss) on investment
                        
                        
                        38,250
                        
                        
                        
                        -
                        
                        
                        
                        12,750
                        
                        
                        
                        -Comprehensive
      loss
                        
                        $
                        (5,720,509
                        )
                        
                        $
                        (1,335,076
                        )
                        
                        $
                        (5,031,189
                        )
                        
                        $
                        (3,843,901
                        )





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 STOCKHOLDERS' DEFICIENCY


FOR THE
SIX MONTS ENDED APRIL 30, 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
                              )Shares
      issued for compensation
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              75,000
                              
                              
                              
                              75
                              
                              
                              
                              -
                              
                              
                              
                              4,425
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              4,500Fair
      value of options issued as compensation
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              18,856
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              18,856Cumulative
      effect of warrant liability
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (4,929,622
                              )
                              
                              
                              
                              
                              
                              
                              2,575,729
                              
                              
                              
                              (2,353,893
                              )Foreign
      currency translation adjustment
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (204,206
                              )
                              
                              
                              
                              
                              
                              
                              (204,206
                              )Unrealized
      gain (loss) on marketable securities
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              12,750
                              
                              
                              
                              
                              
                              
                              
                              12,750Realized
      gain reclassed on sale of marketable securities
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (15,750
                              )
                              
                              
                              
                              
                              
                              
                              (15,750
                              )Net
      loss
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (4,839,733
                              )
                              
                              
                              (4,839,733
                              )Balance,
      April 30, 2010
                              
                              
                              6,287
                              
                              
                              
                              6
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              49,075,244
                              
                              
                              
                              49,075
                              
                              
                              
                              96,350
                              
                              
                              
                              46,860,154
                              
                              
                              
                              (903,823
                              )
                              
                              
                              (61,394,340
                              )
                              
                              
                              (15,292,578
                              )





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
SIX MONTHS ENDED APRIL 30, 2010 and 2009


(UNAUDITED)





April
      30,
                              
                              
                              April
      30,2010
                              
                              
                              2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                              
                              $
                              (4,839,733
                              )
                              
                              $
                              (3,435,770
                              )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                              
                              
                              275,988
                              
                              
                              
                              291,953Stock
      based compensation
                              
                              
                              23,356
                              
                              
                              
                              298,726Change
      in fair value of warrant liability
                              
                              
                              3,633,426
                              
                              
                              
                              -Financing
      costs
                              
                              
                              512,134
                              
                              
                              
                              767,143Impairment
      of investment in marketable securities
                              
                              
                              -
                              
                              
                              
                              782,000Gain
      on sale of investment in marketable securities
                              
                              
                              (15,750
                              )
                              
                              
                              -Changes
      in operating assets and liabilities:(Increase)
      decrease in current assets:Accounts
      receivable
                              
                              
                              318,050
                              
                              
                              
                              106,836Inventory
                              
                              
                              973,637
                              
                              
                              
                              (658,302
                              )Prepaid
      expenses
                              
                              
                              (13,492
                              )
                              
                              
                              37,880Unbilled
      receivables and other current assets
                              
                              
                              (1,657,271
                              )
                              
                              
                              (197,986
                              )Increase
      (decrease) in current liabilities:Accounts
      payable and other current liabilities
                              
                              
                              357,448
                              
                              
                              
                              741,698Due
      to related parties
                              
                              
                              -
                              
                              
                              
                              (41,904
                              )Net
      cash used in operating activities
                              
                              
                              (432,207
                              )
                              
                              
                              (1,307,726
                              )CASH
      FLOWS FROM INVESTING ACTIVITIES:Sale
      (purchase) of property and equipment
                              
                              
                              16,102
                              
                              
                              
                              (52,814
                              )Purchases
      of intangible assets
                              
                              
                              (7,690
                              )
                              
                              
                              -Cash
      subject to restriction
                              
                              
                              442,601
                              
                              
                              
                              (488,830
                              )Acquisitions
                              
                              
                              -
                              
                              
                              
                              (214,317
                              )Cash
      acquired from acquisitions
                              
                              
                              -
                              
                              
                              
                              877Net
      cash provided by (used in) investing activities
                              
                              
                              451,013
                              
                              
                              
                              (755,084
                              )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from/(repayment of) loans
                              
                              
                              -
                              
                              
                              
                              (1,019,124
                              )Preferred
      stock dividend
                              
                              
                              -
                              
                              
                              
                              (47,354
                              )Net
      cash used in financing activities
                              
                              
                              -
                              
                              
                              
                              (1,066,478
                              )Effect
      of exchange rate changes on cash
                              
                              
                              (210,369
                              )
                              
                              
                              (587,478
                              )Net
      decrease in cash
                              
                              
                              (191,563
                              )
                              
                              
                              (3,716,766
                              )Cash
      and cash equivalents, beginning of period
                              
                              
                              275,885
                              
                              
                              
                              3,896,149Cash
      and cash equivalents, end of period
                              
                              $
                              84,322
                              
                              
                              $
                              179,383Cash
      paid for:Interest
                              
                              $
                              384,250
                              
                              
                              $
                              1,077,095Income
      taxes
                              
                              
                              -
                              
                              
                              
                              -Supplemental Disclosures:Acquisition 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
                              
                              
                              -
                              
                              
                              
                              89,317Net
      cash invested
                              
                              
                              -
                              
                              
                              
                              88,440Acquisition of Tactical:Current
      assets acquired
                              
                              
                              -
                              
                              
                              
                              -Cash
      acquired
                              
                              
                              -
                              
                              
                              
                              -Equipment
      acquired
                              
                              
                              -
                              
                              
                              
                              5,000Goodwill
      and other intangible assets
                              
                              
                              -
                              
                              
                              
                              245,000Liabilities
      assumed
                              
                              
                              -
                              
                              
                              
                              -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 and Regulation S-X of the Securities Exchange
Act of 1934, as amended. 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 six month period ended April 30, 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 Annual Report on Form 10-K filed
with the Securities Exchange Commission (SEC) on January 29, 2010.





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 Jersey,
with research and development, sales and manufacturing facilities located in the
Utah, the United Kingdom and Norway.




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.




Accounts
Receivable




We
periodically review our trade receivables in determining our allowance for
doubtful accounts. Allowance for doubtful accounts was $62,896 for the period
ended April 30, 2010 and $255,789 for the year ended October 31,
2009.




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 April 30, 2010 and October
31, 2009:




2010
                
                
                2009Raw
      materials
                
                $
                714,949
                
                
                $
                1,384,043Work
      in process
                
                
                61,648
                
                
                
                48,389Finished
      goods
                
                
                1,048,191
                
                
                
                1,365,993Total
      inventory
                
                $
                1,824,788
                
                
                $
                2,798,425




5


CODA
OCTOPUS GROUP, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





Liquidity




As
of April 30, 2010, we have cash and cash equivalents of $ 84,322 and restricted
cash of $551,480 a working capital deficit of $7,021,144 and a deficiency in
stockholders’ equity of $15,292,578.  For the period ended April 30, 2010,
we had a net loss of $4,839,733 and negative cash flow from operations of
$432,207. We also have an accumulated deficit of $61,394,340 at April 30, 2010.
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 (See Note 2).




NOTE
2 – RESTRICTED CASH





Under
terms of the Company’s secured convertible debenture dated February 21, 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 2011. We have been formally advised
by the Noteholder’s agent that the waiver will be extended through June 30,
2011 on the same terms and conditions.




At April 30, 2010 we have received net advances from
this facility of $1,598,520.





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 $2,465,067 and $690,344 as of April 30, 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 $944,908 and $111,463 as of April 30, 2010 and October 31, 2009
respectively.


6


CODA
OCTOPUS GROUP, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




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 $223,511 and $287,018 as of April
30, 2010 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 April 30,
2010:


Quoted Prices
      in
                  Active
      Markets
                  For
      Identical
                  Instruments
                
                
                Significant
                  Other
                  Observable
                  Inputs
                
                
                Significant
                  Unobservable
                  InputsTotal
                
                
                Level 1
                
                
                Level 2
                
                
                Level 3Assets:Restricted
      Cash
                
                $
                551,480
                
                
                $
                551,480
                
                
                $
                -
                
                
                $
                -Short
      term Investment
                
                $
                38,250
                
                
                $
                38,250
                
                
                $
                -
                
                
                $
                -Total
                
                $
                589,730
                
                
                $
                589,730
                
                
                $
                -
                
                
                
                -Liabilities:Warrant
      liability
                
                
                5,987,320
                
                
                
                -
                
                
                
                5,987,320
                
                
                
                -Loans
      and Notes Payable
                
                $
                13,733,065
                
                
                $
                -
                
                
                $
                13,733,065
                
                
                $
                -Totals
                
                $
                19,720,385
                
                
                $
                -
                
                
                $
                19,720,385
                
                
                $
                -




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 of $551,480 and $38,250
respectively, at April 30, 2010 was grouped as Level 1 valuation as the market
price was readily available, compared to a fair value of $51,000 and $994,081for
short term investments and restricted cash respectively at October 31,
2009.





Loans and
notes payable are recorded at their face amounts which approximates fair
value. Warrant liability is recorded at fair value as is determined by
observable market price and based on the Black-Scholes model.


7


CODA
OCTOPUS GROUP, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





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.  In April 2010, the company sold half of its
investment for $49,750, resulting in a realized gain (on the written down value)
of $15,750.  The remaining fair value of this investment is $38,250 as
of April 30, 2010.




NOTE
5 - OTHER CURRENT ASSETS




Other
current assets on the balance sheet total $202,240 and $285,691 at April
30,2010  and October 31, 2009 respectively. These totals comprise the
following:





2010
                
                
                2009Deposits
                
                $
                99,836
                
                
                $
                96,277Value
      added tax (VAT)
                
                
                17,526
                
                
                
                113,636Other
      receivable
                
                
                84,878
                
                
                
                75,778Total
                
                $
                202,240
                
                
                $
                285,691





NOTE
6 - FIXED ASSETS





Property
and equipment at April 30, 2010 and October 31, 2009 is summarized as
follows:


2010
                
                
                2009Machinery
      and equipment
                
                $
                856,210
                
                
                $
                1,001,385Accumulated
      depreciation
                
                
                (695,044
                )
                
                
                (733,420
                )Net
      property and equipment assets
                
                $
                161,166
                
                
                $
                267,964




Depreciation
expense recorded in the statement of operations for the period ended April 30,
2010 and year ended October 31, 2009 is $77,507 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 April 30,
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
                
                
                (610,879
                )
                
                
                (533,462
                )Net
                
                
                625,820
                
                
                
                697,269Residual
      value
                
                $
                625,820
                
                
                $
                697,269





8


CODA
OCTOPUS GROUP, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





Estimated
annual amortization expense as of April 30, 2010 is as
follows:





2011
                      
                      $
                      65,8382012
                      
                      
                      131,6762013
                      
                      
                      76,8352014
                      
                      
                      75,1832015
      and thereafter
                      
                      
                      276,288Total
                      
                      $
                      625,820




Amortization
of patents, customer relationships, non-compete agreements and licenses included
as a charge to income amounted to $ 77,417  and
$231,321  for the period ended April 30, 2010 and year ended October
31, 2009, respectively. Goodwill is not being amortized.


9





CODA
OCTOPUS GROUP, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





NOTE
8 - CAPITAL STOCK





During
the period ended April 30, 2010, we issued 75,000 shares of our common stock,
proportionately to three (3) employees as part of their bonus
plans.





In April
2010, we undertook to issue 100,000 of common stock as part of directors’
compensation. These shares will only be issued if the director serves one year
on the Board.





During
the year ended 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 ended October 31, 2008, leaving a
charge for compensation in the period  ended October 31, 2009 of
$18,520.





Other
Equity Transactions




During
the period ended January 31, 2010, we did not issue any common share
purchase options. However, options issued in earlier periods vested resulting in
a charge of $18,856 for the six months ended April 30, 2010.




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.





In April
2010, we undertook to grant 50,000 options to purchase our common stock as part
of directors’ compensation. 25,000  of these vests on June 1, 2010 and
the remainder after one year.


10


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
                
                Six months ended
                  April 30, 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 April
30, 2010 are as follows:





Range of
                  Exercise Prices
                
                Number
                  Outstanding
                
                
                Weighted Average
                  Contractual Life
                  (Yrs)
                
                
                Total Exercisable0.50
                
                
                750,000
                
                
                
                1.00
                
                
                
                750,0000.58
                
                
                400,000
                
                
                
                0.92
                
                
                
                400,0001.00
                
                
                2,750,000
                
                
                
                1.86
                
                
                
                2,750,0001.30
                
                
                14,341,709
                
                
                
                1.68
                
                
                
                14,341,7091.50
                
                
                -
                
                
                
                -
                
                
                
                -1.70
                
                
                14,341,709
                
                
                
                1.68
                
                
                
                14,341,7091.80
                
                
                -
                
                
                
                -
                
                
                
                -Totals
                
                
                32,583,418
                
                
                
                1.73
                
                
                
                32,583,418




Stock Options
                
                Six months ended
                  April 30, 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
                
                
                (2,095,000
                )
                
                
                1.29
                
                
                
                (210,000
                )
                
                
                1.32Outstanding
      at the end of the period
                
                
                3,500,900
                
                
                $
                1.13
                
                
                
                5,595,900
                
                
                $
                1.18Exercisable
      at the end of the period
                
                
                3,246,299
                
                
                $
                1.12
                
                
                
                5,214,149
                
                
                $
                1.17




11


The
number and weighted average exercise prices of stock purchase options
outstanding as of April 30, 2010 are as follows:





Range of
                  Exercise Prices
                
                Number
                  Outstanding
                
                
                Weighted Average
                  Contractual Life
                  (Yrs)
                
                
                Total Exercisable0.50
                
                
                -
                
                
                
                -
                
                
                
                -0.58
                
                
                -
                
                
                
                -
                
                
                
                -1.00
                
                
                2,400,900
                
                
                
                0.35
                
                
                
                2,400,9001.30
                
                
                700,000
                
                
                
                3.30
                
                
                
                445,4001.50
                
                
                140,000
                
                
                
                1.97
                
                
                
                140,0001.70
                
                
                260,000
                
                
                
                2.17
                
                
                
                260,0001.80
                
                
                -
                
                
                
                -
                
                
                
                -Totals
                
                
                3,500,900
                
                
                
                1.14
                
                
                
                3,246,299





NOTE
10 – DERIVATIVE LIABILITY




In June
2008, the FASB issued new accounting guidance (FASB ASC 815-40)  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 of 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 April
30, 2010 we recalculated the fair value of the conversion feature subject to
derivative accounting and have determined that the fair value at April 30, 2010
is $5,987,320. 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 303.75%; (4) an average expected life of
the conversion feature of 1.97 years and (5) estimated fair value of
common stock of $0.21 per share.




We have
recorded a charge of $3,633,426 during the six months ended April 30, 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.


12


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 o April 30, 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 three 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. We filed a motion
on June 8, 2011 for Partial Summary Judgment.




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.





On April
28, 2010 we instituted legal action in the Supreme Court of the State of New
York against our ex- Chief Executive Officer, ex-Chief Financial Officer and two
other ex-officers of the Company for, among other things, breach of contract.
 The defendants’ answer is due by June 15, 2010.





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 $1,132,298, with the
minimum future rentals due under these leases as of April 30, 2010 as
follows:





2011
                      
                      $
                      218,5172012
                      
                      
                      363,2592013
                      
                      
                      219,0272014
                      
                      
                      176,5682015
      and thereafter
                      
                      
                      154,927Total
                      
                      $
                      1,132,298





Concentrations




We had no
concentrations of purchases of over 5% during the period ended April 30, 2010.
We had sales concentrations of over 5% during the period ended April 30, 2010
due to sales to a total of four separate customers for $
2,178,952.


13


CODA OCTOPUS GROUP,
INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




NOTE
13 - NOTES AND LOANS PAYABLE




A summary
of notes payable at April 30, 2010  and October 31, 2009 is as
follows:





April 30,
                                  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.
                                
                                $
                                13,835,072
                                
                                
                                $
                                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.
                                
                                
                                152,993
                                
                                
                                
                                165,594Total
                                
                                $
                                13,733,065
                                
                                
                                $
                                13,233,523




In
connection with the secured convertible debenture noted above and the Cash
Control Framework Agreement (see below), we carry $1,150,106 deferred financing
costs as an asset on the consolidated balance sheet to April 30, 2010, which
represents $1,694,893 in financing closing costs we incurred, net of $ 544,787
in amortization expense at April 30, 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 ended October 31, 2009, the Cash Control Framework Agreement
was extended to March 16, 2011. We have been formally advised by the
Noteholder’s agent that


14


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
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.


Six
      months endedApril 30,2010
                      
                      
                      April 30, 2009Net
      Sales to External Customers:Contracting
                      
                      $
                      3,026,557
                      
                      
                      $
                      4,899,495Products
                      
                      
                      3,755,238
                      
                      
                      
                      2,607,058Total
      Sales to External Customers
                      
                      $
                      6,781,795
                      
                      
                      $
                      7,506,553Depreciation
      and Amortization:Contracting
                      
                      $
                      120,288
                      
                      
                      $
                      151,837Products
                      
                      
                      11,053
                      
                      
                      
                      31,006Corporate
                      
                      
                      144,647
                      
                      
                      
                      109,109Total
      Depreciation and Amortization
                      
                      $
                      275,988
                      
                      
                      $
                      291,953General
      and Administrative Expense:Contracting
                      
                      $
                      1,439,262
                      
                      
                      $
                      1,569,180Products
                      
                      
                      1,159,809
                      
                      
                      
                      986,180Corporate
                      
                      
                      885,293
                      
                      
                      
                      2,733,819Total
      General and Administrative Expense
                      
                      $
                      3,484,364
                      
                      
                      $
                      5,289,179Capital
      Expenditures:Contracting
                      
                      $
                      -
                      
                      
                      $
                      9,250Products
                      
                      
                      -
                      
                      
                      
                      10,237Corporate
                      
                      
                      7,690
                      
                      
                      
                      33,327Total
      Capital Expenditures
                      
                      $
                      7,690
                      
                      
                      $
                      52,814Operating
      Income (Losses):Contracting
                      
                      $
                      (1,216,105
                      )
                      
                      $
                      1,191,605Products
                      
                      
                      1,737,780
                      
                      
                      
                      1,029,483Corporate
                      
                      
                      (885,293
                      )
                      
                      
                      (4,081,808
                      )Total
      Segment Operating Losses
                      
                      $
                      (363,618
                      )
                      
                      $
                      (1,860,720
                      )




15





For the period endedApril 30, 2010
                
                
                October 31, 2009Segment
      Assets:Contracting
                
                $
                7,370,611
                
                
                $
                7,235,301Products
                
                
                2,874,785
                
                
                
                2,867,693Corporate
                
                
                2,358,837
                
                
                
                3,034,386Total
      Segment Assets
                
                $
                12,604,233
                
                
                $
                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 April 30, 2010 and the
year ended October 31, 2009:




Six months endedApril 30, 2010
                      
                      
                      April 30,
                        2009NET
      SALES TO EXTERNAL CUSTOMERS:United
      States
                      
                      $
                      3,325,751
                      
                      
                      $
                      3,382,695Europe
                      
                      
                      3,456,044
                      
                      
                      
                      4,123,858TOTAL
      NET SALES TO EXTERNAL CUSTOMERS
                      
                      $
                      6,781,795
                      
                      
                      $
                      7,506,553FortheperiodendedApril30,2010
                      
                      
                      October31,
                        2009ASSETS:United
      States
                      
                      $
                      8,372,318
                      
                      
                      $
                      7,919,830Europe
                      
                      
                      4,231,915
                      
                      
                      
                      5,217,550TOTAL
      ASSETS
                      
                      $
                      12,604,233
                      
                      
                      $
                      13,137,380


16





CODA
OCTOPUS GROUP, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




NOTE 15 – SUBSEQUENT
EVENTS




As part
of our continued restructuring program, we have filled three vacancies on our
Board of Director and have entered into service agreements with each of these
directors. The
Company has agreed to pay each of the new directors $1,875 per board meeting
plus expense reimbursement. With immediate effect, each will be granted options
to purchase 50,000 shares of Company common stock at $1.05 per share annually or
such other price as the Board or Compensation Committee shall deem fit. In
addition, each will be granted 100,000 shares of common stock upon the
completion of the first year of his board membership. One of the new directors
will also be granted 50,000 options for acting as Chairman of the Company’s
Audit Committee and paid an additional fee of $10,000 per annum.




The
Company has also entered into a new service agreement with Taktos Limited for
the services of Geoff Turner, our Chief Executive Officer on June 1, 2010.




In
addition, on June 1, 2010, we entered into an employment agreement with Judith
Wallace our Chief Financial Officer. She will
be paid an annual base salary of $200,000. In addition, she will be paid a
monthly car allowance of $850.




17




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 Jersey City, New Jersey, 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 the USA, 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.




18




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 including defense 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. 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 15th 2008 and is based in
Weymouth, Dorset, United Kingdom.




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




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




Products
and Services




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




 ̈
            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.




19




 ̈
            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 our products 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 Annual Consolidated Financial Statements on Form 10-K.




20




Revenue
Recognition




We record
revenue in accordance with 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.


21




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 into a “Cash Control Framework Agreement” with the
Royal Bank of Scotland (the debenture 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.





In
addition, on January 18, 2010, the debenture holder waived for one year the
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. We
have been formally advised by the Noteholder’s agent that the waiver will be
extended through June 30, 2011 on the same terms and
conditions.




22




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 theyear ended October 31, 2009.
Actual savings for the year ended October 31, 2009 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), Chief 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.





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), Chief Financial Officer, CTO (who
also manages the Group’s R&D), and the CEOs of the various Group Companies.





Since the
beginning of the current financial year, a number of vacancies on the Board of
Directors have been filled and the Board now consists of two executive directors
and three non-executive directors.




23




Comparison
of three months ended April 30, 2010, compared to three months ended April 30,
2009.




Revenue:
Total revenues for the quarter ended April 30, 2010 (the “2010 Period”) and the
quarter ended April 30, 2009 (the “2009 Period”) were $3,713,585 and $4,307,447
respectively, representing a decrease of 13.8%. 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
slightly weaker in the 2010 Period at 61.7% (gross profit of $2,290,701)
compared to 63.4% ($2,731,659 in the 2009 Period, reflecting a slightly
different mix of sales in our businesses (products versus project work) combined
with lower revenues.




Research and Development
(R&D). R&D spending decreased very marginally from $456,477 in
the 2009 Period to $455,173 in the 2010 Period In line with our cost cutting
plan . 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
$1,848,938 from $2,386,460 in 2009, a reduction of 22.5% which reflects activity
under the cost reduction plan that was executed during the fiscal year ended
October 31, 2009 and in quarter one of 2010.





Across
the Group, key areas of 2010 Period expenditure include wages and salaries,
where we spent $1,211,940 or 66.1% during the 2010 Period against $1,775,417 or
62.4% of our SG&A cost during the 2009 Period; legal and professional fees,
including accounting, audit and investment banking services, where we spent
$175,706 or 9.6% in 2010 against $371,777 or 13.1% of our SG&A costs in
2009; travel costs increased to $121,334 or 6.6% in 2010 from $54,368 or 1.9% of
SG&A in the 2009 Period, rent for our various locations increased in 2010 to
$156,260 or 8.5% against $153,523 or 5.4% of SG&A in 2009; marketing reduced
in the 2010 Period to $130,834 or 7.1% of SG&A against $186,647 or 6.6% of
SG&A in 2009, as we reduced the number of consultants engaged in the
Business.




Operating Income/Loss. We had
an operating loss of $13,410 in the 2010 Period against an operating loss of
$111,278 in the 2009 Period.





Derivative
Liability





In June
2008, the FASB issued new accounting guidance (FASB ASC 815-40) 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. The Company has assessed its
outstanding equity-linked financial instruments and has concluded that, the
value of our warrants will need to be recorded as a derivative
liability





Fair
value at November 1 2009 was determined using the Black-Scholes method based and
produced an estimated fair value of common stock of $0.08 per share. At April
30, 2010 we recalculated the fair value of the conversion feature subject to
derivative accounting and have determined that the fair value at April 30, 2010
is $5,987,320. Accordingly, we have recorded a charge of $5,188,334 during the
three months ended April 30, 2010 related to the change in fair value during the
quarter.


.


Interest Expense . Interest
expense increased in the 2010 Period to $454,802 from the 2009 Period interest
costs which were $426,814. 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.




Dividends and Other Stock
Charges. In the 2010 Period, no dividends were due to be paid on the
Series A Preferred stock, versus $439 in 2009, This was due to the fact that we
had no surplus or net profits from which to declare and pay such
dividends.





Segment
Analysis





This
section should be read in conjunction with Note 14 to the Condensed Consolidated
Financial Statements.




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) was reduced from $1,906,411 in the 2009
Period to $358,110 in the 2010 Period. Components of this reduction are
Rent and Utilities reduced from $54,016 to $27,202, Office Expenses reduced from
$56,106 in 2009 to $16,882 in Q2 2010, Payroll reduced from $437,976 to $
63,294, Insurances decreased from $78,226 to $3,668, Professional Services
reduced from $356,696 to $176,420, Forex reduced from $971 to $92, Marketing
reduced from $107,425 to $11,390, and Travel from $32,218 to $63,821. Moving
forward we are planning to increase the HQ SG&A, in line with increasing
revenues, in a couple of key areas where we may need to add additional staff. We
have begun this process and have added a Chief Financial Officer and with
expected increasing revenues anticipate additional financial staff to address
material weakness identified.




24




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 April 30, 2010 were $1,577,392 or
42% of the Group revenues versus $2,592,596 in the quarter ended April 30, 2009,
whereas revenues from Products were $2,136,193 and were 58% of the Group
revenues, versus $1,714,841 in 2009.




SG&A
costs incurred in our contracting businesses were $573,605 in the quarter ended
April 30, 2010 versus $674,726 in the quarter ended April 30, 2009. SG&A
costs in our Products business in the quarter ended April 30, 2010 were $739,134
versus $481,781 in the quarter ended April 30, 2009.




Operating
loss in our contracting business was $442,641 in the quarter ended April 30,
2010 versus an operating profit of $814,819 in the quarter ended April 30, 2009.
In the quarter ended April 30, 2010 we made an operating profit of $891,474 in
our Products business versus an operating profit of $1,190,222 in the quarter
ended April 30, 2009.





Comparison
of six month period ended April 30, 2010, compared to six month period ended
April 30, 2009.




Revenue:
Total revenues for the six month period ended April 30, 2010 (the “2010 Period”)
and the quarter ended April 30, 2009 (the “2009 Period”) were $6,781,795 and
$7,506,553 respectively, representing a decrease of 9.6%. Contributing factors
to this lack of growth were adverse exchange rate movements combined with the
global economic downturn and particularly in the oil and gas industry at the
start of the year, which still affected the business in this
period.




Gross Margins:Margins for
the 2010 Period were 59.8% (gross profit of $4,052,932) compared to 59.8%
($4,488,618 in the 2009 Period, reflecting a slightly different mix of sales in
our businesses (products versus project work) combined with lower
revenues.




Research and Development
(R&D). R&D spending decreased from $1,060,158 in the 2009 Period
to $932,186 in the 2010 Period in line with our cost cutting plan. 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
$3,484,364 from $5,289,179 in 2009, a reduction of 34.1% which reflects activity
under the cost reduction plan that was executed during the fiscal year ended
October 31, 2009 and in quarter one of 2010.




Across
the Group, key areas of 2010 Period expenditure include wages and salaries,
where we spent $2,446,107 or 55.6% during the 2010 Period against $3,675,378 or
50.0% of our SG&A cost during the 2009 Period; legal and professional fees,
including accounting, audit and investment banking services, where we spent
$322,741 or 7.3% in 2010 against $643,964 or 8.8% of our SG&A costs in 2009;
travel costs increased to $220,476 or 5.0%in 2010 from $182,119 or 2.5% of
SG&A in the 2009 Period; rent for our various locations decreased in 2010 to
$297,924 or 6.8% against $308,662 or 4.2% of SG&A in 2009; marketing reduced
in the 2010 Period to $163,918 or 3.7% of SG&A against $460,779 or 6.3% of
SG&A in 2009.,





Operating Loss. We made a
loss from operations of $363,618 in the 2010 Period against an operating loss of
$1,860,719 in the 2009 Period. This reduction in operating loss is due to the
significant cost reductions at the HQ level.





Derivative
Liability





Fair
value at November 1, 2009 was determined using the Black-Scholes method based
and produced an estimated fair value of common stock of $0.08 per share. At
April 30, 2010 we recalculated the fair value of the conversion feature subject
to derivative accounting and have determined that the fair value at April 30,
2010 is $5,987,320. Accordingly, we have recorded a charge of $3,633,426 during
the six months ended April 30, 2010 related to the change in fair value during
the quarter.





Interest Expense . Interest
expense increased in the 2010 Period to $896,384 from the 2009 Period interest
costs which were $824,238. 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.




Dividends and Other Stock
Charges. In the 2010 Period, no dividends were due to be paid on the
Series A Preferred stock, versus $31,588 in 2009. This was due to the fact that
we had no surplus or net profits in 2010 from which to declare and pay such
dividends.




Segment
Analysis




This
section should be read in conjunction with Note 14 to the Condensed Consolidated
Financial Statements.




25




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 $3,147,503 in the 2009 period to $701,538 in
the same period of 2010. Components of this reduction are Rent and Utilities
where we have reduced from $115,320 to $52,296, Office Expenses reduced from
$116,193 in 2009 to $33,523 in 2010, Payroll reduced from $953,973 to $146,867,
Insurances from $122,696 to $64,525, Professional Services reduced from $662,598
to $310,867, Forex reduced from $37,711 to $447, Marketing reduced from $280,040
to 2,962, whilst Travel increased from $76,195 to $94,324. Moving forward we are
increasing the HQ SG&A in line with increasing revenues, in a couple of key
areas where we need to add additional staff.




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 during the period ended April 30, 2010 were $3,026,557 or 45%
of the Group revenues versus $4,899,495 in the period ended April 30, 2009,
whereas revenues from Products were $3,755,238 and were 55% of the Group
revenues, versus $2,607,058 in 2009.




SG&A
costs incurred in our contracting businesses were $1,439,262 in the period ended
April 30, 2010 versus $1,569,180 in the period ended April 30, 2009. SG&A
costs in our Products business in the period ended April 30, 2010 were
$1,159,809 versus $986,180 in the period ended April 30, 2009.




Operating
loss in our contracting business was $1,216,105 in the period ended April 30,
2010 versus an operating profit of $1,191,605 in the period ended April 30,
2009. In the period ended April 30, 2010 we made an operating profit of
$1,737,780 in our Products business versus an operating profit of $1,029,483 in
the period ended April 30, 2009.




Liquidity
and Capital Resources




For the
period ended April 30, 2010, the Company has an accumulated deficit of
$61,394,340, negative working capital of $7,021,144, a capital deficit of
$15,292,578 and generated a negative cash flow from operations of $432,207 in
2010 Period against a deficit of $1,307,726 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 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 $11.8 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 13
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. We have been formally advised by the Noteholder’s
agent that the waiver will be extended through June 30, 2011 on the same
terms and conditions. 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 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 $2,000,000
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.




26




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. We have been advised by the noteholder agent,
that the waiver will be extended until June 30, 2011 on the same terms and
conditions.




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 result of the cost cutting program discussed above and by further adjusting
our operations if and to the extent needed, we believe that we will have
sufficient capital resources to meet projected cash flow deficits. However, if
during fiscal 2010 we are not successful in generating sufficient liquidity from
operations or in raising sufficient capital resources, on terms acceptable to
us, this could have a material adverse effect on our business, results of
operations liquidity and financial condition. In order to fund our operations
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, we presently do not have any available credit, bank
financing or other external sources of liquidity. Due to our brief history and
historical operating losses, our operations have not 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 stock was
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 be able 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 term obligation 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, the
Company may have to curtail its business operations significantly.




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




27




Inflation
and Foreign Currency




The
Company maintains its books in local currency: US Dollars, Pounds Sterling and
Norwegian Kroner for its United States, 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 mayor 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 $1.47 in 2009, to $1.58 in 2010, an approximate 7.5% 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 $0.146 during 2009, to $0.172 during 2010, an approximate 17% 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:




Pound Sterling
                
                
                Norwegian KronerActual
                  Results
                
                
                Constant
                  Rates
                
                
                Actual
                  Results
                
                
                Constant
                  Rates
                
                
                Total EffectRevenues
                
                $
                3,456,044
                
                
                $
                3,198,514
                
                
                $
                
                
                
                $
                
                
                
                $
                (257,530
                )Costs
                
                
                3,619,622
                
                
                
                3,349,903
                
                
                
                318,294
                
                
                
                269,490
                
                
                
                (318,524
                )Net
      Income/(Losses)
                
                
                (163,578
                )
                
                
                (151,389
                )
                
                
                (318,294
                )
                
                
                (269,490
                )
                
                
                60,994Assets
                
                
                17,121,788
                
                
                
                16,727,146
                
                
                
                737,173
                
                
                
                663,171
                
                
                
                (468,644
                )Liabilities
                
                
                13,999,717
                
                
                
                12,549,821
                
                
                
                796,755
                
                
                
                714,238
                
                
                
                (1,532,413
                )Net
      Assets
                
                
                3,122,071
                
                
                
                4,177,326
                
                
                
                (59,582
                )
                
                
                (51,067
                )
                
                
                1,063,769




This
table shows that the effect of constant exchange rates, versus the actual
exchange rate fluctuations, increased profits for the year by $60,994 and
increased net assets by $1,063,769. In addition, the Company booked
transactional exchange rate gains of $50,454 during 2010. All of these amounts
are material to our overall financial results.




28




Off-Balance
Sheet Arrangements




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




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 the 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 April 30,
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.
During the period ended April 30, 2010 Management commissioned an independent
evaluation designed to provide recommendations to address control and procedure
issues identified in the prior report and the current evaluation. Management has
commenced the process of implementing these recommendations designed to
remediate the material weakness previously identified. As part of these actions,
the Company appointed a Chief Financial Officer. This appointment is expected to
improve approval procedures, enhance segregation of duties and the quality of
financial reporting.





The
Company continues to investigate ways to improve 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.




29





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 three 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. We filed a motion on June 8, 2011 for Partial Summary
Judgment.




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.




On April
28, 2010 we instituted legal action in the Supreme Court of the State of New
York against our ex- Chief Executive Officer, ex-Chief Financial Officer and two
other ex-officers of the Company for, among other things, breach of contract.
The defendants’ answer is due by June 15, 2010.




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




10.28
                              Consultancy
      Agreement between the Company and Taktos Limited dated June 1, 201010.29
                              Employment
      Agreement between the Company and Judith Wallace dated June 1,
      201010.30
                              Letter
      of Appointment issued by the Company in respect of Rear Admiral
      Christopher Parry dated June 1, 201031
                              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




30




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:
      June 14, 2010
              
              /s/ Geoff TurnerGeoff
      TurnerChief
      Executive OfficerDate:
      June 14, 2010
              
              /s/Judith Wallace,CA, CPA, Msc, FCCAJudith
      WallaceChief
      Financial Officer




31