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, 2009




OR





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




For the
transition period from ______________ to ______________




Commission
File Number 000-52815





CODA
OCTOPUS GROUP, INC.


(Exact
name of registrant as specified in its charter)





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




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





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





Large
      accelerated filer  o
            Accelerated
      filer  o
            Smaller
      reporting company x





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


Yes o No x





The
number of shares outstanding of issuer's common stock, $0.001 par value as of
June 12, 2009: 49,000,244.










INDEX





PagePART
      I - Financial Information
              
              
              1Item
      1: Financial Statements
              
              
              1Six
      Months Ended April 30, 2009 and 2008Condensed
      Consolidated Balance Sheet as of April 30, 2009 (Unaudited) and October
      31, 2008
              
              
              1Condensed
      Consolidated Statements of Operations and Comprehensive Loss for the Three
      and Six Months Ended April 30, 2009 and 2008 (Unaudited)
              
              
              2Condensed
      Consolidated Statement of Deficiency in Stockholders’ Equity for the
      Six Months Ended April 30, 2009 (Unaudited)
              
              
              3Condensed
      Consolidated Statements of Cash Flows for the Six Months Ended April 30,
      2009 and 2008 (Unaudited)
              
              
              4Notes
      to Condensed Consolidated Financial Statements (Unaudited)
              
              
              5Item
      2: Management's Discussion and Analysis or Plan of
    Operation
              
              
              22Item 4T:   Controls and
      Procedures
              
              
              32PART
      II - Other Information
              
              
              33Item
      1: Legal Proceedings
              
              
              33Item
      2: Unregistered Sales of Equity Securities and Use of
    Proceeds
              
              
              33Item
      3: Defaults Upon Senior Securities
              
              
              33Item
      4: Submission of Matters to a Vote of Security Holders
              
              
              33Item
      5: Other Information
              
              
              33Item
      6: Exhibits
              
              
              33Signatures
              
              
              34




i


PART
I. FINANCIAL INFORMATION





Item
1. Financial Statements




CODA
OCTOPUS GROUP, INC.


CONDENSED   CONSOLIDATED BALANCE
SHEET


APRIL
30, 2009 (UNAUDITED) AND OCTOBER 31, 2008





April 30,
                  2009
                  (Unaudited)
                
                
                October 31,
                  2008ASSETSCurrent
      assets:Cash
      and cash equivalents
                
                $
                179,383
                
                
                $
                3,896,149Restricted
      cash, Note 2
                
                
                1,505,837
                
                
                
                1,017,007Short-term
      investments, Note 4
                
                
                68,000
                
                
                
                153,000Accounts
      receivable, net of allowance for doubtful accounts
                
                
                2,584,084
                
                
                
                2,589,174Inventory
                
                
                3,010,876
                
                
                
                2,317,322Due
      from related parties, Note 13
                
                
                11,619
                
                
                
                54,166Unbilled
      receivables, Note 3
                
                
                964,836
                
                
                
                518,326Other
      current assets, Note 5
                
                
                211,142
                
                
                
                407,080Prepaid
      expenses
                
                
                347,950
                
                
                
                385,831Total
      current assets
                
                
                8,883,727
                
                
                
                11,338,055Property
      and equipment, net, Note 6
                
                
                378,143
                
                
                
                355,909Deferred
      financing costs, net of accumulated amortization of $268,096 in 2009 and
      $181,596 in 2008, Note 12
                
                
                1,426,797
                
                
                
                1,513,297Goodwill
      and other intangible assets, net, Note 7
                
                
                4,298,459
                
                
                
                3,832,023Total
      assets
                
                $
                14,987,126
                
                
                $
                17,039,284LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable, trade
                
                $
                1,907,240
                
                
                $
                1,159,849Accrued
      expenses and other current liabilities
                
                
                1,882,950
                
                
                
                2,347,522Deferred
      revenues, Note 3
                
                
                223,454
                
                
                
                268,650Deferred
      payment related to acquisitions, Note 14
                
                
                208,586
                
                
                
                -Accrued
      dividends on Series A preferred stock
                
                
                38,108
                
                
                
                53,874Due
      to related parties, Note 13
                
                
                -
                
                
                
                41,904Loans
      and notes payable, short term, Note 12
                
                
                12,802,982
                
                
                
                12,358,597Total
      current liabilities
                
                
                17,063,320
                
                
                
                16,230,396Loans
      and notes payable, long term, Note 12
                
                
                157,382
                
                
                
                162,700Total
      liabilities
                
                
                17,220,702
                
                
                
                16,393,096Deficiency
      in stockholders' equity, Note 8:Preferred
      stock, $.001 par value; 5,000,000 shares authorized, 6,287 series A issued
      and outstanding, as of April 30, 2009 and October 31, 2008
      respectively
                
                
                6
                
                
                
                6Common
      stock, $.001 par value; 150,000,000 shares authorized, 49,000,244 and
      48,853,664 shares issued and outstanding as of April 30, 2009 and October
      31, 2008 respectively
                
                
                49,000
                
                
                
                48,854Common
      stock subscribed
                
                
                120,000
                
                
                
                131,790Additional
      paid-in capital
                
                
                51,743,418
                
                
                
                51,433,049Accumulated
      other comprehensive loss
                
                
                (1,028,827
                )
                
                
                (1,317,696
                )Accumulated
      deficit
                
                
                ( 53,117,173
                )
                
                
                (49,649,815
                )Total
      deficiency in stockholders' equity
                
                
                (2,233,576
                )
                
                
                646,188Total
      liabilities and deficiency in stockholders' equity
                
                $
                14,987,126
                
                
                $
                17,039,284




See
accompanying notes to these unaudited condensed consolidated financial
statements.




1




CODA
OCTOPUS GROUP, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS


FOR THE   THREE AND SIX MONTHS ENDED APRIL 30,
2009 and 2008


(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 30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Net
      revenue
                    
                    $
                    4,307,447
                    
                    
                    $
                    5,096,684
                    
                    
                    $
                    7,506,553
                    
                    
                    $
                    8,223,915Cost
      of revenue
                    
                    
                    1,575,788
                    
                    
                    
                    1,306,776
                    
                    
                    
                    3,017,935
                    
                    
                    
                    2,949,552Gross
      profit
                    
                    
                    2,731,659
                    
                    
                    
                    3,789,908
                    
                    
                    
                    4,488,618
                    
                    
                    
                    5,274,363Research
      and development
                    
                    
                    456,477
                    
                    
                    
                    764,308
                    
                    
                    
                    1,060,158
                    
                    
                    
                    1,453,501Selling,
      general and administrative expenses
                    
                    
                    2,223,628
                    
                    
                    
                    2,802,193
                    
                    
                    
                    5,126,347
                    
                    
                    
                    5,859,122Debt
      modification cost
                    
                    
                    162,832
                    
                    
                    
                    -
                    
                    
                    
                    162,832
                    
                    
                    
                    -Operating
      income (loss)
                    
                    
                    (111,278
                    )
                    
                    
                    223,407
                    
                    
                    
                    (1,860,719
                    )
                    
                    
                    (2,038,260
                    )Other
      income (expense)Other
      income
                    
                    
                    3,547
                    
                    
                    
                    44,368
                    
                    
                    
                    31,187
                    
                    
                    
                    49,225Interest
      expense
                    
                    
                    (426,814
                    )
                    
                    
                    (455,334
                    )
                    
                    
                    (824,238
                    )
                    
                    
                    (569,305
                    )Impairment
      of investment in short term investment
                    
                    
                    (782,000
                    )
                    
                    
                    -
                    
                    
                    
                    (782,000
                    )
                    
                    
                    -Total
      other income (expense)
                    
                    
                    (1,205,267
                    )
                    
                    
                    (410,966
                    )
                    
                    
                    (1,575,051
                    )
                    
                    
                    (520,080
                    )Loss
      before income taxes
                    
                    
                    (1,316,545
                    )
                    
                    
                    (187,559
                    )
                    
                    
                    (3,435,770
                    )
                    
                    
                    (2,558,340
                    )Provision
      for income taxes
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Net
      loss
                    
                    
                    (1,316,545
                    )
                    
                    
                    (187,559
                    )
                    
                    
                    (3,435,770
                    )
                    
                    
                    (2,558,340
                    )Preferred
      Stock Dividends:Series
      A
                    
                    
                    (439
                    )
                    
                    
                    (28,931
                    )
                    
                    
                    (31,588
                    )
                    
                    
                    (75,024
                    )Net
      Loss Applicable to Common Shares
                    
                    $
                    (1,316,984
                    )
                    
                    $
                    (216,490
                    )
                    
                    $
                    (3,467,358
                    )
                    
                    $
                    (2,633,364
                    )Loss
      per share, basic and diluted
                    
                    
                    (0.03
                    )
                    
                    
                    (0.00
                    )
                    
                    
                    (0.07
                    )
                    
                    
                    (0.05
                    )Weighted
      average shares outstanding
                    
                    
                    49,000,244
                    
                    
                    
                    48,317,993
                    
                    
                    
                    48,950,494
                    
                    
                    
                    48,283,808Comprehensive
      loss:Net
      loss
                    
                    $
                    (1,316,545
                    )
                    
                    $
                    (187,559
                    )
                    
                    $
                    (3,435,770
                    )
                    
                    $
                    (2,558,340
                    )Foreign
      currency translation adjustment
                    
                    
                    (18,531
                    )
                    
                    
                    (4,289
                    )
                    
                    
                    (408,131
                    )
                    
                    
                    (121,950
                    )Unrealized
      loss on investment
                    
                    
                    -
                    
                    
                    
                    (195,500
                    )
                    
                    
                    -
                    
                    
                    
                    (382,500
                    )Comprehensive
      loss
                    
                    $
                    (1,335,076
                    )
                    
                    $
                    (387,348
                    )
                    
                    $
                    (3,843,901
                    )
                    
                    $
                    (3,062,790
                    )




See
accompanying notes to these unaudited condensed consolidated financial
statements.




2




CODA
OCTOPUS GROUP, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN DEFICIENCY IN STOCKHOLDERS'
EQUITY


FOR
THE SIX MONTHS ENDED APRIL 30, 2009


(UNAUDITED)




Preferred
      Stock
                                  Series
      A
                                
                                
                                Preferred
      Stock
                                  Series
      B
                                
                                
                                Common
      Stock
                                
                                
                                Common
                                  Stock
                                
                                
                                Additional
                                  Paid-in
                                
                                
                                Accumulated
                                  Other
                                  Comprehensive
                                
                                
                                AccumulatedShares
                                
                                
                                Amount
                                
                                
                                Shares
                                
                                
                                Amount
                                
                                
                                Shares
                                
                                
                                Amount
                                
                                
                                Subscribed
                                
                                
                                Capital
                                
                                
                                Loss
                                
                                
                                Deficit
                                
                                
                                TotalBalance,
      October 31, 2008
                                
                                
                                6,287
                                
                                
                                $
                                6
                                
                                
                                
                                -
                                
                                
                                $
                                -
                                
                                
                                
                                48,853,664
                                
                                
                                $
                                48,854
                                
                                
                                
                                131,790
                                
                                
                                $
                                51,433,049
                                
                                
                                $
                                (1,317,696
                                )
                                
                                $
                                (49,649,815
                                )
                                
                                $
                                646,188Stock
      issued for compensation
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                146,580
                                
                                
                                
                                147
                                
                                
                                
                                (11,790
                                )
                                
                                $
                                30,163
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                $
                                18,520Fair
      value of options issued for compensation
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                $
                                280,206
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                $
                                280,206Preferred
      stock dividends Series A
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                $
                                (31,588
                                )
                                
                                $
                                (31,588
                                )Foreign
      currency translation adjustment
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                $
                                (408,131
                                )
                                
                                
                                
                                
                                
                                $
                                (408,131
                                )Realized gain
      from marketable securities
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                $
                                697,000
                                
                                
                                
                                
                                
                                
                                $
                                697,000Net
      loss
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                $
                                (3,435,770
                                )
                                
                                $
                                (3,435,770
                                )Balance
      April 30, 2009
                                
                                
                                6,287
                                
                                
                                $
                                6
                                
                                
                                
                                -
                                
                                
                                $
                                -
                                
                                
                                
                                49,000,244
                                
                                
                                $
                                49,000
                                
                                
                                $
                                120,000
                                
                                
                                $
                                51,743,418
                                
                                
                                $
                                (1,028,827
                                )
                                
                                $
                                (53,117,173
                                )
                                
                                $
                                (2,233,576
                                )




See
accompanying notes to these unaudited condensed consolidated financial
statements.




3




CODA
OCTOPUS GROUP, INC.


CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS


FOR
THE SIX MONTHS ENDED APRIL 30, 2009 and 2008


(UNAUDITED)





2009
                
                
                2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                
                $
                (3,435,770
                )
                
                $
                (2,558,340
                )Adjustments
      to reconcile net loss to net cash used by operating
      activities:Depreciation
      and amortization
                
                
                291,953
                
                
                
                253,155Stock
      based compensation
                
                
                298,726
                
                
                
                196,189Financing
      costs
                
                
                767,143
                
                
                
                395,430Impairment
      of investment in marketable securities
                
                
                782,000
                
                
                
                -Changes
      in operating assets and liabilities:(Increase)
      decrease in:Accounts
      receivable
                
                
                106,836
                
                
                
                136,313Inventory
                
                
                (658,302
                )
                
                
                203,795Prepaid
      expenses
                
                
                37,880
                
                
                
                16,843Other
      receivables
                
                
                (197,986
                )
                
                
                (407,638
                )Increase
      (decrease) in:Accounts
      payable and accrued expenses
                
                
                741,698
                
                
                
                (492,299
                )Due
      to related parties
                
                
                (41,904
                )
                
                
                (169,784
                )Net
      cash used in operating activities
                
                
                (1,307,726
                )
                
                
                (2,426,336
                )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of property and equipment
                
                
                (52,814
                )
                
                
                (63,154
                )Purchases
      of intangible assets
                
                
                -
                
                
                
                (97,827
                )Increase
      in restricted cash
                
                
                (488,830
                )
                
                
                -Acquisitions
                
                
                (214,317
                )
                
                
                (763,936
                )Cash
      acquired from acquisitions
                
                
                877
                
                
                
                -Net
      cash used in investing activities
                
                
                (755,084
                )
                
                
                (924,917
                )CASH
      FLOWS FROM FINANCING ACTIVITIES:(Payments
      for) proceeds from loans, net
                
                
                (1,019,124
                )
                
                
                10,437,753Preferred
      stock dividend paid
                
                
                (47,354
                )
                
                
                (64,491
                )Net
      cash (used in) provided by financing activities
                
                
                (1,066,478
                )
                
                
                10,373,262Effect
      of exchange rate changes on cash
                
                
                (587,478
                )
                
                
                (214,460
                )Net
      decrease in cash
                
                
                (3,716,766
                )
                
                
                6,807,549Cash
      and cash equivalents, beginning of period
                
                
                3,896,149
                
                
                
                916,257Cash
      and cash equivalents, end of period
                
                $
                179,383
                
                
                $
                7,723,806Cash
      paid for:Interest
                
                $
                1,077,095
                
                
                $
                282,805Income
      taxes
                
                
                -
                
                
                
                -




Supplemental
Disclosures:





During
the six months ended April 30, 2009, 146,580 shares of common stock were issued,
43,694 of which were subscribed for in the year ended October 31, 2008, and the
other 102,886 shares were issued as payment of $18,520 of
compensation.





During
the six months ended April 30, 2008, 37,488 shares of common stock were issued
as payment of $3,250 of compensation that was earned, $4,200 of non-cash
financing charges and $35,016 of Series A preferred stock
dividends.




Acquisition of Tactical
Intelligence





Equipment,
      net
                  
                  $
                  5,000Customer
      relationships acquired
                  
                  
                  60,000Non-compete
      agreements acquired
                  
                  
                  50,000Goodwill
                  
                  
                  135,000Deferred
      payments
                  
                  
                  (125,000
                  )Cash
      paid for acquisition
                  
                  $
                  125,000





Acquisition of Dragon Design
Ltd





Current
      assets acquired
                  
                  $
                  147,039Equipment,
      net
                  
                  
                  51,336Current
      liabilities assumed
                  
                  
                  (201,166
                  )Customer
      relationships acquired
                  
                  
                  29,740Non-compete
      agreements acquired
                  
                  
                  29,740Goodwill
                  
                  
                  282,533Cash
      acquired
                  
                  
                  877Deferred
      payments
                  
                  
                  (250,782
                  )Cash
      paid for acquisition
                  
                  $
                  89,317




See
accompanying notes to these unaudited condensed consolidated financial
statements.




4






CODA
OCTOPUS GROUP, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




NOTE
1 - SUMMARY OF ACCOUNTING POLICIES




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




General





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





In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Accordingly,
the results from operations for the six month period ended April 30, 2009, are
not necessarily indicative of the results that may be expected for the year
ended October 31, 2009. The unaudited condensed financial statements should be
read in conjunction with the consolidated October 31, 2008 financial statements
and footnotes thereto included in the Company’s 10K filed on March 18, 2009 with
the Securities Exchange Commission (SEC) as amended.





Business
and Basis of Presentation




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




The
unaudited condensed consolidated financial statements include the accounts of
Coda and our domestic and foreign subsidiaries that are more than 50% owned and
controlled. All significant intercompany transactions and balances have been
eliminated in the consolidated financial statements.




Use
of Estimates




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




Revenue
Recognition




We record
revenue in accordance with the guidance of the SEC's Staff Accounting Bulletin
SAB No.
104 (SAB 104), which supersedes SAB No. 101 in order
to encompass Emerging Issues Task Force (EITF) No. 00-21,
Revenue Arrangements with
Multiple Deliverables. Our revenue is derived from sales of underwater
technologies and equipment for imaging, mapping, defense and survey
applications, as well as from the performance of various engineering and
manufacturing contracts. Revenue is recognized when persuasive evidence of an
arrangement exists, delivery has occurred or services have been rendered, the
contract price is fixed or determinable, and collectability is reasonably
assured. No right of return privileges are granted to customers after
shipment.





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




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




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






5




CODA
OCTOPUS GROUP, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




Foreign
Currency Translation




Coda
translates the foreign currency financial statements of its foreign subsidiaries
in accordance with the requirements of SFAS No. 52, Foreign Currency Translation.
Assets and liabilities are translated at exchange rates existing at the balance
sheet dates, related revenue and expenses are translated at average exchange
rates in effect during the period and stockholders’ equity, fixed assets and
long-term investments are recorded at historical exchange rates. Resulting
translation adjustments are recorded as a separate component in stockholders'
equity as part of accumulated other comprehensive income (loss). Foreign
currency transaction gains and losses are included in the statement of
income.




Income
Taxes




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




Cash
and Cash Equivalents




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




Concentrations
of Credit Risk




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





Accounts
Receivable




We
periodically review our trade receivables in determining our allowance for
doubtful accounts. Allowance for doubtful accounts was nil for the period ended
April 30, 2009 and $74,897 for the year ended October 31, 2008.




Fair
Value of Financial Instruments




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





SFAS
No. 157 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. SFAS No. 157 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. SFAS
No. 157 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,
2009:
  Quoted Prices
                    in Active
                    Markets for
                    Identical
                    Instruments
                  
                  
                  Significant
                    Other
                    Observable
                    Inputs
                  
                  
                  Significant
                    Unobservable
                    InputsTotal
                  
                  
                  Level 1
                  
                  
                  Level 2
                  
                  
                  Level 3Assets:Short
      term Investment
                  
                  $
                  68,000
                  
                  
                  $
                  68,000Total
                  
                  $
                  68,000
                  
                  
                  $
                  68,000
                  
                  
                  
                  -
                  
                  
                  
                  -Liabilities:Notes
      Payable
                  
                  $
                  12,800,786
                  
                  
                  $
                  12,800,786
                  
                  
                  
                  -
                  
                  
                  
                  -Total
                  
                  
                  12,800,786
                  
                  
                  
                  12,800,786
                  
                  
                  
                  -
                  
                  
                  
                  -
 With the
exception of assets and liabilities included within the scope of FSP FAS No.
157-2, the Company adopted the provisions of SFAS No. 157 prospectively
effective as of the beginning of the year ended October 31, 2008.  For
financial assets and liabilities included within the scope of FSP FAS No. 157-2,
the Company will be required to adopt the provisions of SFAS No. 157
prospectively as of the year beginning November 1, 2009.  The adoption
of SFAS No. 157 did not have a material impact on our financial position or
results of operations, and the Company do not believe that the adoption of FSP
FAS No. 157-2 will have a material impact on our financial position or results
of operations.
  The fair
value of the short term investments and notes payable at April 30, 2009 was
grouped as Level 1 valuation as the market price was readily available, and
there has been no change to the fair value at April 30, 2009.


Debt
and Equity Securities




The
Company follows the provisions of Statement of Financial Accounting Standards
No. 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS
115). The Company classifies debt and equity securities into one of three
categories: held-to-maturity, available-for-sale or trading. These security
classifications may be modified after acquisition only under certain specified
conditions. Securities may be classified as held-to-maturity only if the Company
has the positive intent and ability to hold them to maturity. Trading securities
are defined as those bought and held principally for the purpose of selling them
in the near term. All other securities must be classified as
available-for-sale.




6


CODA
OCTOPUS GROUP, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




Held-to-maturity
securities are measured at amortized cost in the consolidated balance sheets.
Unrealized holding gains and losses are not included in earnings or in a
separate component of capital. They are merely disclosed in the notes to the
consolidated financial statements.




Available-for-sale
securities are carried at fair value on the consolidated balance sheets.
Unrealized holding gains and losses are not included in earnings but are
reported as a net amount (less expected tax) in a separate component of capital
until realized.




Trading
securities are carried at fair value on the consolidated balance sheets.
Unrealized holding gains and losses for trading securities are included in
earnings.




Declines
in the fair value of held-to-maturity and available-for-sale securities below
their cost that are deemed to be other than temporary are reflected in earnings
as realized losses.





Inventory




Inventory
is stated at the lower of cost or market using the first-in first-out method.
Inventory is comprised of the following components at April 30, 2009 and October
31, 2008:




2009
                
                
                2008Raw
      materials
                
                $
                1,324,473
                
                
                $
                1,917,566Work
      in process
                
                
                164,219
                
                
                
                113,942Finished
      goods
                
                
                1,522,185
                
                
                
                285,814Total
      inventory
                
                $
                3,010,876
                
                
                $
                2,317,322




Property
and Equipment




We record
our equipment at historical cost. We expense maintenance and repairs as
incurred. Depreciation is provided for by the straight-line method over three to
four years, the estimated useful lives of the property and
equipment.




Long-Lived
Assets




We follow
SFAS No. 144, "Accounting for Impairment of Disposal of Long-Lived Assets",
which established a "primary asset" approach to determine the cash flow
estimation period for a group of assets and liabilities that represents the unit
of accounting for a long-lived asset to be held and used. Long-lived assets to
be held and used are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The carrying amount of a long-lived asset is not recoverable if it
exceeds the sum of the undiscounted cash flows expected to result from the use
and eventual disposition of the asset. Long-lived assets to be disposed of are
reported at the lower of carrying amount or fair value less cost to sell. No
impairment loss was recognized during the period ended April 30, 2009 or the
year ended October 31, 2008.




7




CODA
OCTOPUS GROUP, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




Research
and Development




Research
and development costs consist of expenditures for the present and future patents
and technology, which cannot be capitalized. We are eligible for United Kingdom
tax credits related to our qualified research and development expenditures. Tax
credits are classified as a reduction of research and development expense. We
recorded no tax credits during the period ended April 30, 2009 or the year ended
October 31, 2008.




Marketing




We charge
the costs of marketing to expense as incurred. For the period ended April 30,
2009 marketing costs were $460,779 and $1,237,175 for the year ended October 31,
2008.





Intangible
Assets




Intangible
assets consist principally of the excess of cost over the fair value of net
assets acquired (or goodwill), customer relationships, non-compete agreements
and licenses. Goodwill was allocated to our reporting units based on the
original purchase price allocation. Customer relationships, non-compete
agreements and licenses are being amortized on a straight-line basis over
periods of 2 to 10 years. The Company amortizes its intangible assets using the
straight-line method over their estimated period of benefit. We periodically
evaluate the recoverability of intangible assets and take into account events or
circumstances that warrant revised estimates of useful lives or that indicate
that impairment exists.




We test
for impairment at the reporting unit level as defined in SFAS No. 142,
“Goodwill and Other Intangible Assets”. This test is a two-step process. The
first step of the goodwill impairment test, used to identify potential
impairment, compares the fair value of the reporting unit with its carrying
amount, including goodwill. If the fair value, which is based on future cash
flows, exceeds the carrying amount, goodwill is not considered impaired. If the
carrying amount exceeds the fair value, the second step must be performed to
measure the amount of the impairment loss, if any. The second step compares the
implied fair value of the reporting unit’s goodwill with the carrying amount of
that goodwill. In the fourth quarter of each year, we evaluate goodwill on a
separate reporting unit basis to assess recoverability, and impairments, if any,
are recognized in earnings. An impairment loss would be recognized in an amount
equal to the excess of the carrying amount of the goodwill over the implied fair
value of the goodwill. SFAS No. 142 also requires that intangible
assets with determinable useful lives be amortized over their respective
estimated useful lives and reviewed annually for impairment in accordance with
SFAS No. 144.




Stock
Based Compensation




SFAS
No. 123, “Accounting for Stock-Based Compensation”, established and
encouraged the use of the fair value based method of accounting for stock-based
compensation arrangements under which compensation cost is determined using the
fair value of stock-based compensation determined as of the date of the grant or
the date at which the performance of the services is completed and is recognized
over the periods in which the related services are rendered. The statement also
permitted companies to elect to continue using the current intrinsic value
accounting method specified in Accounting Principles Board (“APB”) Opinion
No. 25, “Accounting for Stock Issued to Employees”, to account for
stock-based compensation to employees. Prior to the adoption of SFAS 123(R) we
elected to use the intrinsic value based method for grants to our employees and
directors and have disclosed the pro forma effect of using the fair value based
method to account for our stock-based compensation to employees.




On
December 16, 2004, the Financial Accounting Standards Board (FASB) issued SFAS
No. 123R (revised 2004), “Share-Based Payment” (“Statement 123R”) which is a
revision of SFAS No. 123.




Statement
123R supersedes APB opinion No. 25 and amends SFAS No. 95, “Statement of Cash
Flows”. Generally, the approach in Statement 123R is similar to the approach
described in Statement 123. However, Statement 123R requires all share-based
payments to employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values. Pro-forma
disclosure is no longer an alternative. This statement does not change the
accounting guidance for share based payment transactions with parties other than
employees provided in SFAS No. 123(R). This statement does not address the
accounting for employee share ownership plans, which are subject to AICPA
Statement of Position 93-6, “Employers’ Accounting for Employee Stock Ownership
Plans.” On April 14, 2005, the SEC amended the effective date of the provisions
of this statement. The effect of this amendment by the SEC is that the Company
had to comply with Statement 123R and use the Fair Value based method of
accounting no later than the first quarter of 2006. We implemented SFAS
No. 123(R) on January 1, 2006 using the modified prospective method.
The fair value of each option grant issued after January 1, 2006 will be
determined as of grant date, utilizing the Black-Scholes option pricing model.
The amortization of each option grant will be over the remainder of the vesting
period of each option grant.  We did not have any unvested amounts of stock
based compensation grants issued and outstanding at the date of
implementation.




8




CODA
OCTOPUS GROUP, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




We use
the fair value method for equity instruments granted to non-employees and use
the Black-Scholes model for measuring the fair value. The stock based fair value
compensation is determined as of the date of the grant or the date at which the
performance of the services is completed (measurement date) and is recognized
over the periods in which the related services are rendered.




Comprehensive
Income




SFAS No.
130, "Reporting Comprehensive Income", establishes standards for reporting and
displaying of comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except those
resulting from investments by owners and distributions to owners. Among other
disclosures, SFAS 130 requires that all items that are required to be recognized
under current accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. Comprehensive income includes gains and losses on
foreign currency translation adjustments and is included as a component of
stockholders' equity.





Deferred
Financing Costs




Deferred
financing costs primarily include debt issuance costs incurred by the Company in
connection with the issuance of convertible debt in February 2008 (see Note 12).
Amortization is provided on a straight-line basis over the terms of the
respective debt instruments to which the costs relate and is included in
interest expense. Deferred financing cost expense was $86,500 and $181,596 in
the period ended April 30, 2009 and the year ended October 31, 2008,
respectively.





Loss
Per Share




We use
SFAS No. 128, “Earnings per Share” for calculating the basic and diluted
loss per share. We compute basic loss per share by dividing net loss and net
loss attributable to common shareholders by the weighted average number of
common shares outstanding. Diluted loss per share is computed similar to basic
loss per share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the potential
shares had been issued and if the additional shares were dilutive. Common
equivalent shares are excluded from the computation of net loss per share if
their effect is anti-dilutive.




Per share
basic and diluted net loss amounted to $0.07 and $0.05 for the periods ended
April 30, 2009 and 2008, respectively. For the periods ended April 30, 2009 and
2008, 50,571,559 and 48,796,759 potential shares, respectively, were excluded
from the shares used to calculate diluted earnings per share as their inclusion
would reduce net loss per share.




New
Accounting Pronouncements




In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – Including an Amendment of FASB
Statement No. 115” (“SFAS No. 159”).  SFAS No. 159 permits entities to
choose to measure many financial instruments and certain other items at fair
value.  Most of the provisions of SFAS No. 159 apply only to entities
that elect the fair value option. However, the amendment to SFAS No. 115
“Accounting for Certain Investments in Debt and Equity Securities” applies to
all entities with available-for-sale and trading securities.  SFAS No.
159 is effective as of the beginning of an entity’s first fiscal year that
begins after November 15, 2007.  Early adoption is permitted as of the
beginning of a fiscal year that begins on or before November 15, 2007, provided
the entity also elects to apply the provision of SFAS No. 157, “Fair Value
Measurements”.  The adoption of SFAS No. 159 is not expected to have a
material impact on the Company’s consolidated financial position, results of
operations or cash flows.




In
December 2007, the FASB issued SFAS No. 141(R), “Business
Combinations” (“SFAS No. 141(R)”), which establishes principles and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and any
non-controlling interest in an acquiree, including the recognition and
measurement of goodwill acquired in a business combination. SFAS No. 141(R) is
effective as of the beginning of the first fiscal year beginning on or after
December 15, 2008. The company has adopted SFAS No. 141(R) for its
acquisition in the current quarter.




In
December 2007, the FASB issued SFAS No. 160, “Non-controlling Interest
in Consolidated Financial Statements, an amendment of ARB
No. 51” (“SFAS No. 160”), which will change the accounting and
reporting for minority interests, which will be re-characterized as
non-controlling interests and classified as a component of equity within the
consolidated balance sheets. SFAS No. 160 is effective as of the beginning of
the first fiscal year beginning on or after December 15, 2008. Earlier
adoption is prohibited and the Company is currently evaluating the effect, if
any that the adoption will have on its consolidated financial position, results
of operations or cash flows.




9




CODA
OCTOPUS GROUP, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




In June
2007, the FASB ratified the consensus in EITF Issue No. 07-3, “Accounting
for Nonrefundable Advance Payments for Goods or Services to be Used in Future
Research and Development Activities” (EITF 07-3), which requires that
nonrefundable advance payments for goods or services that will be used or
rendered for future research and development (R&D) activities be deferred
and amortized over the period that the goods are delivered or the related
services are performed, subject to an assessment of recoverability.
EITF 07-3 will be effective for fiscal years beginning after
December 15, 2007. The Company does not expect that the adoption of
EITF 07-3 will have a material impact on its consolidated financial
position, results of operations or cash flows.




In
December 2007, the FASB ratified the consensus in EITF Issue No. 07-1,
“Accounting for Collaborative Arrangements” (EITF 07-1). EITF 07-1
defines collaborative arrangements and requires collaborators to present the
result of activities for which they act as the principal on a gross basis and
report any payments received from (made to) the other collaborators based on
other applicable authoritative accounting literature, and in the absence of
other applicable authoritative literature, on a reasonable, rational and
consistent accounting policy is to be elected. EITF 07-1 also provides for
disclosures regarding the nature and purpose of the arrangement, the entity’s
rights and obligations, the accounting policy for the arrangement and the income
statement classification and amounts arising from the agreement. EITF 07-1
will be effective for fiscal years beginning after December 15, 2008, which
will be the Company’s fiscal year 2010, and will be applied as a change in
accounting principle retrospectively for all collaborative arrangements existing
as of the effective date. The Company has not yet evaluated the potential impact
of adopting EITF 07-1 on its consolidated financial position, results of
operations or cash flows.




In March
2008, the FASB” issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities – an amendment to FASB Statement No. 133” (“SFAS No.
161”). SFAS No. 161 is intended to improve financial standards for derivative
instruments and hedging activities by requiring enhanced disclosures to enable
investors to better understand their effects on an entity’s financial position,
financial performance, and cash flows.  Entities are required to
provide enhanced disclosures about: (a) how and why an entity uses derivative
instruments; (b) how derivative instruments and related hedged items are
accounted for under SFAS No. 133 and its related interpretations; and (c) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows.  It is effective for
financial statements issued for fiscal years beginning after November 15, 2008,
with early adoption encouraged.  The Company is currently evaluating
the impact of SFAS No. 161, if any, will have on its consolidated financial
position, results of operations or cash flows.





In April
2008, the FASB issued FSP No. SFAS No. 142-3, “Determination of the Useful Life
of Intangible Assets”. This FSP amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under SFAS No. 142, “Goodwill and Other
Intangible Assets”.   The Company is required to adopt FSP 142-3 on
September 1, 2009, earlier adoption is prohibited.  The guidance in
FSP 142-3 for determining the useful life of a recognized intangible asset shall
be applied prospectively to intangible assets acquired after adoption, and the
disclosure requirements shall be applied prospectively to all intangible assets
recognized as of, and subsequent to, adoption.  The Company is
currently evaluating the impact of FSP 142-3 on its consolidated financial
position, results of operations or cash flows.




In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS No. 162”).  SFAS No. 162
identifies the sources of accounting principles and the framework for selecting
the principles used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with generally
accepted accounting principles (the GAAP hierarchy).  SFAS No.
162 will become effective 60 days following the SEC’s approval of the
Public Company Accounting Oversight Board amendments to
AU Section 411, “The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles.”  The Company does not
expect the adoption of SFAS No. 162 to have a material effect on its
consolidated financial position, results of operations or cash
flows.






In May
2008, the FASB issued FSP Accounting Principles Board (“APB”) 14-1, “Accounting
for Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement)” (“FSP APB 14-1”).   FSP
APB 14-1 requires the issuer of certain convertible debt instruments that
may be settled in cash (or other assets) on conversion to separately account for
the liability (debt) and equity (conversion option) components of the instrument
in a manner that reflects the issuer’s non-convertible debt borrowing
rate.  FSP APB 14-1 is effective for fiscal years beginning after
December 15, 2008 on a retroactive basis. The Company is currently
evaluating the potential impact, if any, of the adoption of FSP APB 14-1 on
its consolidated financial position, results of operations or cash
flows.




In
June 2008, the FASB issued FSP Emerging Issues Task Force
(EITF) No. 03-6-1, “Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities.” Under the FSP,
unvested share-based payment awards that contain rights to receive
non-forfeitable dividends (whether paid or unpaid) are participating securities,
and should be included in the two-class method of computing EPS. The FSP is
effective for fiscal years beginning after December 15, 2008, and interim
periods within those years. The Company does not expect the adoption of FSP EITF
No. 03-6-1 to have a material effect on its consolidated financial
position, results of operations or cash flows.




Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not, or are not believed by
management to, have a material impact on the Company’s present or future
condensed consolidated financial statements.





In June
2008, the FASB issued Emerging Issues Task Force No. 07-5 (EITF 07-5),
Determining Whether an
Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock.
EITF 07-5 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
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities, paragraph 11(a), 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 is assessing the impact of this pronouncement on
its financial statements.





10




CODA
OCTOPUS GROUP, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




Liquidity




As of
April 30, 2009 we have cash and cash equivalents of $179,383, a working capital
deficit of $8,179,593 and a deficiency in stockholders' equity of $2,233,576.
For the period ended April 30, 2009, we had a net loss of $3,435,770 and
negative cash flow from operations of $1,307,726. We also have an accumulated
deficit of $53,117,173 at April 30, 2009.





NOTE
2 – RESTRICTED CASH





Under
terms of the Company’s secured convertible debenture dated February 26, 2008, we
maintained a $1,000,000 interest-bearing deposit in a restricted bank account
until such time as advances under an accounts receivable factoring agreement
were repaid in full and the agreement and related liens were
terminated.  As of October 31, 2008, the Company had $1,017,007 in the
restricted cash account, which was released to the Company in December 2008
after the factoring agreement was terminated and settled in full in October 2008
and the debenture holders perfected their security in December
2008.





On March
16, 2009, the Company and the holder of the secured convertible debenture (“the
Noteholder”) entered into a Cash Control Framework Agreement, pursuant to which
it is assumed that, subject to the Company being fully compliant with the terms
of this agreement and those set out in the Transaction Documents entered into
between the Company and the Noteholder on February 21, 2008, no adverse actions
will be taken by the Noteholder. The agreement provides, among other things, for
the placement of approximately $2.15 million into a segregated cash
account. Under the terms of the agreement, we may request the release of
funds from the account from time to time for working capital purposes, subject
to the Noteholder’s consent and agreed upon terms and conditions. Under the
terms of the agreement, we must also adhere to a strict cost cutting program
which involves reducing our SG&A, R&D and capital expenditure by an
annualized $3.35 million. We believe that the terms of this agreement will
provide us with sufficient liquidity to operate for fiscal 2009.





At April
30, 2009 we have received net advances from this facility of
$645,163.





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 $964,836 and $518,326 as of April 30, 2009 and
October 31, 2008 respectively.




Billings
in excess of cost and estimated earnings on uncompleted contracts represent
project invoices billed to customers that have not been earned as of the date of
the balance sheet. These amounts are stated on the balance sheet as Deferred
Revenue of $33,334 and $57,513 as of April 30, 2009 and October 31, 2008
respectively.




Revenue
received as part of sales of equipment includes a provision for warranty and is
treated as deferred revenue, along with extended warranty sales, with these
amounts amortized over 12 months from the date of sale. These amounts are stated
on the balance sheet as Deferred Revenue of $190,120 and $211,137 as of April
30, 2009 and October 31, 2008 respectively.




NOTE
4 - INVESTMENTS




11




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 has, until now been included in the
determination of comprehensive loss, but, during the period ended April 30,
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
period ended April 30, 2009. The remaining fair value of this investment is
$68,000 as of April 30, 2009.




12


CODA
OCTOPUS GROUP, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




NOTE
5 - OTHER CURRENT ASSETS




Other
current assets on the balance sheet total $211,142 and $407,080 at April 30,
2009 and October 31, 2008 respectively. These totals comprise the
following:





2009
                    
                    
                    2008Deposits
                    
                    $
                    86,955
                    
                    
                    $
                    110,548Value
      added tax (VAT)
                    
                    
                    26,622
                    
                    
                    
                    262,090Other
      receivable
                    
                    
                    97,565
                    
                    
                    
                    34,442Total
                    
                    $
                    211,142
                    
                    
                    $
                    407,080





NOTE
6 - FIXED ASSETS




Property
and equipment at April 30, 2009 and October 31, 2008 is summarized as
follows:




2009
                      
                      
                      2008Machinery
      and equipment
                      
                      $
                      1,183,741
                      
                      
                      $
                      1,076,950Accumulated
      depreciation
                      
                      
                      (805,598
                      )
                      
                      
                      (721,041
                      )Net
      property and equipment assets
                      
                      $
                      378,143
                      
                      
                      $
                      355,909




Depreciation
expense recorded in the statement of operations for the period ended April 30,
2009 and year ended October 31, 2008 is $84,876 and $176,147,
respectively.





NOTE
7 - INTANGIBLE ASSETS AND GOODWILL




The
Company has adopted SFAS No. 142, Goodwill and Other Intangible Assets, whereby
the Company periodically tests its intangible assets for impairment. On an
annual basis, and when there is reason to suspect that their values have been
diminished or impaired, these assets are tested for impairment, and write-downs
will be included in results from operations.




The
identifiable intangible assets acquired and their carrying value at April 30,
2009 and October 31, 2008 is:





2009
                      
                      
                      2008Customer
      relationships (weighted average life of 9.2 years)
                      
                      $
                      784,242
                      
                      
                      $
                      694,503Non-compete
      agreements (weighted average life of 2.8 years)
                      
                      
                      278,650
                      
                      
                      
                      198,911Patents
      (weighted average life of 10 years)
                      
                      
                      63,695
                      
                      
                      
                      63,695Licenses
      (weighted average life of 2 years)
                      
                      
                      100,000
                      
                      
                      
                      100,000Total
      amortized identifiable intangible assets - gross carrying
      value
                      
                      
                      1,226,587
                      
                      
                      
                      1,057,109Less
      accumulated amortization
                      
                      
                      (445,238
                      )
                      
                      
                      (324,661
                      )Net
                      
                      
                      781,349
                      
                      
                      
                      732,448Residual
      value
                      
                      $
                      781,349
                      
                      
                      $
                      732,448




13


CODA
OCTOPUS GROUP, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




Our
acquisition of Dragon Design Ltd (“Dragon”) in December 2008 resulted in the
valuation of Dragon’s customer relationships and covenants not to compete as
intangible assets (see Note 14), which have an estimated useful life of 3 years
each, and as such are being amortized on a straight-line basis over that period.
In addition, we recognized goodwill of $282,533 that represents the excess of
the purchase price we paid over the fair value of Dragon’s net tangible and
intangible assets we acquired.




Our
acquisition of the assets of Tactical Intelligence, LLC (“Tactical”) In November
2008 resulted in the valuation of Tactical’s customer relationships and
covenants not to compete as intangible assets (see Note 14), which have an
estimated useful life of 3 years each, and as such are being amortized monthly
over that period. In addition, we recognized goodwill of $135,000 that
represents the excess of the purchase price we paid over the fair value of
Tactical’s net tangible and intangible assets acquired.





Estimated
annual amortization expense as of April 30, 2009 is as follows:





2009
                    
                    $
                    101,4982010
                    
                    
                    142,7212011
                    
                    
                    130,66
      62012
                    
                    
                    75,8242013
      and thereafter
                    
                    
                    330,640Total
                    
                    $
                    781,349




Amortization
of patents, customer relationships, non-compete agreements and licenses included
as a charge to income amounted to $120,577 and $189,621 for the period ended
April 30, 2009 and year ended October 31, 2008, respectively. Goodwill is not
being amortized.




As a
result of the acquisitions of Martech, Colmek, Dragon and Tactical, the Company
has goodwill in the amount of $3,517,108 as of April 30, 2009 and $3,099,575 as
of October 31, 2008. The changes in the carrying amount of goodwill for the
period ended April 30, 2009 and year ended October 31, 2008 are recorded
below.





2009
                    
                    
                    2008Beginning
      goodwill balance at November 1
                    
                    $
                    3,099,575
                    
                    
                    $
                    3,099,575Goodwill
      recorded upon acquisition
                    
                    
                    417,533
                    
                    
                    
                    -Balance
      at April 30, 2009 and October 31, 2008
                    
                    $
                    3,517,108
                    
                    
                    $
                    3,099,575




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




NOTE
8 - CAPITAL STOCK




The
Company is authorized to issue 150,000,000 shares of common stock with a par
value of $.001 per share. As of April 30, 2009 and October 31, 2008, the Company
has issued and outstanding 49,000,244 shares and 48,853,664 shares of common
stock, respectively. The Company is also authorized to issue 5,000,000 shares of
preferred stock with a par value of $.001 per share. We have designated 50,000
preferred shares as Series A preferred stock and 50,000 preferred shares as
Series B preferred stock. The remaining 4,900,000 shares of preferred stock is
undesignated. There were 6,287 Series A preferred shares outstanding at April
30, 2009 and October 31, 2008 respectively, and nil Series B preferred shares
outstanding at the same dates.




Series A Preferred
Stock




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




During
the year ended October 31, 2008, we issued 200 shares of Series A Preferred
Stock, which were subscribed for in March 2007 and converted 320 shares of
Series A Preferred Stock into 32,000 shares of common stock. The total of Series
A preferred stock outstanding is 6,287 shares at October 31, 2008 and April 30,
2009, convertible into 1,013,670 shares of common stock.





Series B Preferred
Stock




We
designated 50,000 shares of our preferred stock, par value $.001, as Series B
Preferred Stock. The Series B Preferred Stock ranks junior to our issued and
outstanding Series A preferred Stock and senior to all classes of common stock.
The Series B Preferred Stock has a dividend rate of 8% per year. The Series B
Preferred Stock and accrued dividends are convertible at the option of the
holder into shares of our common stock at a conversion price of $1.00 per share.
As of October 31, 2008 and April 30, 2009, we have no shares of Series B
Preferred Stock outstanding.


14


CODA
OCTOPUS GROUP, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




Common
Stock




During
the period ending April 30, 2009 we issued 146,580 shares of common stock,
valued at $30,310, to employees, directors and consultants for services, of
which $11,790 was subscribed for during the year ending October 31, 2008,
leaving a charge for compensation in the period ending April 30, 2009 of
$18,520.





During the year ended October 31, 2008
we issued 452,937 shares of common stock, valued at $263,476, to employees,
directors and consultants for services. We also issued 38,319 shares as
dividends on Series A Preferred Stock, which had accrued over the period August
2006 to April 2008, valued at $41,537. A further 60,000 shares of common stock
were issued to an investor, which were subscribed for during the year to October
31, 2007, plus 4,200 shares for financing, and 56,640 shares to an investor on
conversion of 320 shares of Series A Preferred stock.




Other Equity
Transactions




During
the period ended April 30, 2009, we did not issue any common share purchase
options. However, options issued in earlier periods vested, resulting in a
charge of $280,206 in this period. There were also 210,000 options cancelled
connected with staff departures, of which 95,000 were exercisable.




During
the year ended October 31, 2008, we issued in the aggregate 1,870,000 common
share purchase options to employees and consultants, with exercise prices of
$1.30 to $1.50. The initial fair value of the options was $872,170 using the
Black-Scholes method at the date of grant of the options based on the following
assumptions: (1) risk free interest rate of 3.43%-5.25%; (2) dividend yield of
0%; (3) volatility factor of the expected market price of our common stock of
222% - 246%; and (4) an expected life of the options of 2 years. The fair value
of the options has been expensed in this period. In accordance with EITF 96-18,
the fair value of consultant vesting options will be recomputed at each
reporting period and any increase will be charged to expense. Due to staff
departures, 50,000 options were cancelled, all of which had exercise prices of
$1.70. During the year ended October 31, 2008, $257,547 was charged to
expense.


15


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:




Six months ended
                          April
      30, 2009
                        
                        
                        Year ended
                          October 31, 2008Number
                        
                        
                        Weighted
                          Average Exercise
                          Price
                        
                        
                        Number
                        
                        
                        Weighted
                          Average Exercise
                          PriceOutstanding
      at beginning of the period
                        
                        
                        38,339,318
                        
                        
                        $
                        1.39
                        
                        
                        
                        36,519,318
                        
                        
                        $
                        1.29Granted
      during the period
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,870,000
                        
                        
                        
                        1.36Terminated
      during the period
                        
                        
                        (210,000
                        )
                        
                        
                        1.32
                        
                        
                        
                        (50,000
                        )
                        
                        
                        1.70Outstanding
      at the end of the period
                        
                        
                        38,129,318
                        
                        
                        $
                        1.39
                        
                        
                        
                        38,339,318
                        
                        
                        $
                        1.39Exercisable
      at the end of the period
                        
                        
                        37,066,418
                        
                        
                        $
                        1.39
                        
                        
                        
                        37,161,418
                        
                        
                        $
                        1.39





The
number and weighted average exercise prices of stock purchase options and
warrants outstanding as of April 30, 2009 are as
follows:





Range of
                        Exercise Prices
                      
                      Number
                        Outstanding
                      
                      
                      Weighted Average
                        Contractual Life
                        (Yrs)
                      
                      
                      Total Exercisable0.50
                      
                      
                      750,000
                      
                      
                      
                      2.00
                      
                      
                      
                      750,0000.58
                      
                      
                      400,000
                      
                      
                      
                      1.92
                      
                      
                      
                      400,0001.00
                      
                      
                      5,795,900
                      
                      
                      
                      2.07
                      
                      
                      
                      5,739,8001.30
                      
                      
                      16,046,709
                      
                      
                      
                      2.79
                      
                      
                      
                      15,186,9591.50
                      
                      
                      425,000
                      
                      
                      
                      2.71
                      
                      
                      
                      400,2501.70
                      
                      
                      14,651,709
                      
                      
                      
                      2.67
                      
                      
                      
                      14,549,4091.80
                      
                      
                      60,000
                      
                      
                      
                      3.40
                      
                      
                      
                      40,000Totals
                      
                      
                      38,129,318
                      
                      
                      
                      2.61
                      
                      
                      
                      37,066,418




NOTE
10 - INCOME TAXES




The
Company has adopted Financial Accounting Standard No. 109 which requires the
recognition of deferred tax liabilities and assets for the expected future tax
consequences of events that have been included in the financial statement or tax
returns. Under this method, deferred tax liabilities and assets are determined
based on the difference between financial statements and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Temporary differences between taxable
income reported for financial reporting purposes and income tax purposes are
insignificant.




For
income tax reporting purposes, the Company's aggregate US unused net operating
losses approximate $44,600,000 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 $15,168,000. 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 $7,355,000, with no expiration. The deferred tax asset
related to the carry-forward is approximately $2,216,000. 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.


16


CODA
OCTOPUS GROUP, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




Income
tax expense for 2008 represents income taxes on our Norwegian
subsidiary.




Components
of deferred tax assets as of April 30, 2009 and October 31, 2008 are as
follows:





Non-Current
                      
                      2009
                      
                      
                      2008Net
      Operating Loss Carry Forward
                      
                      $
                      17,384,000
                      
                      
                      $
                      16,485,000Valuation
      Allowance
                      
                      
                      (17,384,000
                      )
                      
                      
                      (16,485,000
                      )Net
      Deferred Tax Asset
                      
                      $
                      -
                      
                      
                      $
                      -





NOTE
11 - CONTINGENCIES AND COMMITMENTS




Litigation




The
Company is currently engaged in a lawsuit involving the former Chief Executive
Officer of its subsidiary, Coda Octopus Colmek, Inc. The former CEO 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 on November 10, 2008 and an amended complaint on December 10,
2008. We answered the amended complaint on December 22, 2008 denying the
allegations, raising affirmative defenses and intend to defend ourselves
vigorously.  We believe that the final disposition should not have a
material adverse effect on our financial position or results of
operations.





We may
become subject to other legal proceedings and claims, which arise in the
ordinary course of our business. Although occasional adverse decisions or
settlements may occur, we believe that the final disposition of any matters
should not have a material adverse effect on our financial position or results
of operations.




Factoring
Agreement




Until October 31, 2008, we factored
certain of our receivables pursuant to a number of factoring agreements with
Faunus Group International (“FGI”). Advances received pursuant to the agreement
are secured by our accounts receivable and other assets of the Company.
An initial factoring agreement
was entered into on August 17, 2005 between FGI and Coda Octopus Group, Inc.,
for a maximum borrowing in the US of up to $1 million. Subsequent agreements
were added in November 2006 covering our UK businesses, Martech Systems Ltd and
Coda Octopus Products Ltd. Under the arrangement, FGI typically advanced to the
Company 80% of the total amount of accounts receivable factored. FGI retained
20% of the outstanding factored accounts receivable as a reserve, which it holds
until the customer pays the factored invoice to FGI. The cost of funds for the
accounts receivable portion of the borrowings with FGI was 1.85% for the initial
30 day credit period, up to a maximum of 45 days; thereafter, an additional fee
of 0.5% was charged for each 10 day period.





Over the course of the year ended
October 31, 2008, we factored invoices totaling $7,545,200 in receivables and we
received $5,828,550 in proceeds from FGI. As of October 31, 2008 all FGI
agreements were terminated and advances repaid in full.




On
February 20, 2008, FGI, RBS entered into an inter-creditor agreement with the
Company, regulating the priority of each creditor’s debts.





Operating
Leases




We occupy
our various office and warehouse facilities pursuant to both term and
month-to-month leases. Our term leases expire at various times through September
2013. Future minimum lease obligations are approximately $1,756,088, with the
minimum future rentals due under these leases as of April 30, 2009 as
follows:




2009
                  
                  $
                  258,8942010
                  
                  
                  481,2142011
                  
                  
                  444,1642012
                  
                  
                  245,1382013
      and thereafter
                  
                  
                  326,678Total
                  
                  $
                  1,756,088





Concentrations




We had no
concentrations of purchases of over 5% during either of the period ended April
30, 2009 and year ended October 31, 2008. We had a sales concentration of over
5% for the period ended April 30, 2009 and for the year ended October 31, 2008
due to a sale to a customer for $777,781 and $1,557,130
respectively.


17


CODA
OCTOPUS GROUP, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




NOTE
12 - NOTES AND LOANS PAYABLE




A summary
of notes payable at April 30, 2009 and October 31, 2008 is as
follows:


April 31,
                          2009
                        
                        
                        October 31,
                          2008The
      Company has a secured convertible debenture for $12M with a life of 7
      years from February 26, 2008, maturing at 130% of face value, and with
      interest payable every six months, starting in February 2009, at a rate of
      8.5%; During the term, the debentures are convertible into our common
      stock at the option of the Noteholders at a conversion price of $1.05. We
      may also force the conversion of these Notes into our common stock after
      two years in the event that we obtain a listing on a national exchange and
      our stock price closes on 40 consecutive trading days at or above $2.50
      between the second and third anniversaries of this agreement; $2.90
      between the third and fourth anniversaries of this agreement; and $3.50
      after the fourth anniversary of this agreement or where the daily volume
      weighted average price of our stock as quoted on OTCBB or any other US
      National Exchange on which our securities are then listed has, for at
      least 40 consecutive trading days closed at the agreed price. The Company
      has failed to comply with certain covenants contained in the debenture
      agreement.
                        
                        $
                        12,800,786
                        
                        
                        $
                        12,348,493The
      Company, through its UK subsidiary Coda Octopus Products Ltd has a 7 year
      unsecured loan note for £100,000; interest rate of 12% annually; repayable
      at borrower’s instigation or convertible into common stock when the share
      price reaches $3.
                        
                        
                        148,598
                        
                        
                        
                        162,700The
      Company through its US subsidiary Coda Octopus Colmek, Inc., has an
      unsecured loan note payable to a director and former officer of the
      Company, which is being repaid in the short term.
                        
                        
                        -
                        
                        
                        
                        10,104The
      Company through its UK subsidiary, Dragon Design Ltd, has an outstanding
      loan note payable for £14,000 over 36 months, commencing in November 2007,
      with monthly payments of £454.42 and an annual interest rate of 14.5%. By
      the end of April 2009, 20 payments remained on this note.
                        
                        
                        10,980
                        
                        
                        
                        -The
      Company through its UK subsidiary, Dragon Design Ltd, has an unsecured
      revolving line of credit with their bank for £40,000, which is repayable
      on demand. The amount outstanding on this line of credit was reduced to
      zero in February 2009.
                        
                        
                        -
                        
                        
                        
                        -Total
                        
                        $
                        12,960,364
                        
                        
                        $
                        12,521,297Less:
      current portion
                        
                        
                        12,802,982
                        
                        
                        
                        12,358,597Total
      long-term portion
                        
                        $
                        157,382
                        
                        
                        $
                        162,700





In
connection with the secured convertible debenture noted above and the Cash
Control Framework Agreement (see below), we carry $1,426,797 deferred financing
costs as an asset on the consolidated balance sheet at April 30, 2009, which
represents $1,694,893 in financing closing costs we incurred, net of $86,500 in
amortization expense for the period ended April 30, 2009 and $181,596 in
amortization expense for the year ended October 31, 2008.  We amortize
deferred financing costs over the life of the financing facility using the
straight line method.





On March
16, 2009, the Company and the holder of the secured convertible debenture (“the
Noteholder”) entered into a Cash Control Framework Agreement, pursuant to which
it is assumed that, subject to the Company being fully compliant with the terms
of this agreement and those set out in the Transaction Documents entered into
between the Company and the Noteholder on February 21, 2008, no adverse actions
will be taken by the Noteholder. The agreement provides, among other things, for
the placement of approximately $2.15 million into a segregated cash
account. Under the terms of the agreement, we may request the release of
funds from the account from time to time for working capital purposes, subject
to the Noteholder’s consent and agreed upon terms and conditions. Under the
terms of the agreement, we must also adhere to a strict cost cutting program
which involves reducing our SG&A, R&D and capital expenditure by an
annualized $3.35 million. We believe that the terms of this agreement will
provide us with sufficient liquidity to operate for fiscal 2009.





NOTE
13 - RELATED PARTY TRANSACTIONS




We have
been indebted to various related parties for advances for payments of operating
expenses and dividends. These related parties include our biggest shareholder
and other entities controlled by this shareholder. Advances are non interest
bearing and are due on demand. At the end of the period ending April 30, 2009,
nil was due to related parties, compared with $41,904 for the year ending
October 31, 2008.




We are
also owed by related parties a sum of $11,619 at April 30, 2009 compared to
$54,166 at October 31, 2008.


18


CODA
OCTOPUS GROUP, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




NOTE 14 -
ACQUISITIONS





Acquisition of Tactical
Intelligence





In
November 2008, the Company formed a new subsidiary called Coda Octopus Tactical
Intelligence, Inc. (“Tactical”) to facilitate our entry into the
counter-terrorism and anti-piracy training markets, which we believe are
integral to our efforts to help major customers deploy real time 3D sonar
systems in hot spots around the world.  On November 10, 2008, Tactical
acquired the assets of Tactical Intelligence International, LLC and Tactical
Executive Services, LLC, which consisted of some plant and machinery, valued at
$5,000, customer relationships, valued at $60,000, non-compete agreements,
valued at $50,000, and goodwill, valued at $135,000.The purchase price consisted
of an initial cash outlay of $125,000, a convertible promissory note in the
amount of $125,000 due on November 10, 2009, and 50,000 options to acquire
common shares of Coda Octopus Group, Inc., which are due to be issued in June
2009. As part of the transaction we acquired the services of two specialists in
the field of real world security training for domestic and international
military units and government agencies to spearhead this drive. These
individuals have designed or led more than 50 such training programs throughout
the world since September 11, 2001, using up to 100 freelance specialists on a
contract basis. The expertise of this part of the Group will be used to leverage
our Echoscope and UIS capabilities in sales and training.





The
acquisition of Tactical was accounted for using the purchase method in
accordance with SFAS 141. The results of operations for Tactical have been
included in the Consolidated Statements of Operations since the date of
acquisition. In accordance with SFAS No. 141, the total purchase price was
allocated to the estimated fair value of assets acquired and liabilities
assumed. The estimate of fair value of the assets acquired was based on
management’s estimates. The total purchase price was allocated to the assets and
liabilities acquired as follows:





Equipment,
      net
                  
                  $
                  5,000Customer
      relationships acquired
                  
                  
                  60,000Non-compete
      agreements acquired
                  
                  
                  50,000Goodwill
                  
                  
                  135,000Total
      purchase price
                  
                  $
                  250,000




The
intangible assets acquired consisted of customer relationships and non-compete
agreements, which have an estimated useful life of 3 years each and as such will
be amortized monthly over those periods. Goodwill of $135,000 represented the
excess of the purchase price over the fair value of the net tangible and
intangible assets acquired.





Acquisition of Dragon Design
Ltd





In
December 2008, the Company acquired the assets of Dragon Design Ltd (“Dragon”),
an electronics manufacturing and design business based in Weymouth, UK, and
situated next to its Martech subsidiary. Management believes the companies have
complementary skills and capabilities that can enhance revenues and
opportunities for both companies. The purchase price for the assets consisted of
an initial cash outlay of £56,250 ($83,000) and a further £56,250 in deferred
consideration, payable on the first anniversary of closing. The terms of the
acquisition also included a potential earn out payment of £112,500, which is
dependent on Dragon meeting future agreed performance criteria, that has also
been accrued on the acquisition date.




The
acquisition of Dragon was accounted for using the purchase method in accordance
with SFAS 141(R). The results of operations for Dragon have been included in the
Consolidated Statements of Operations since the date of acquisition. In
accordance with SFAS No. 141(R), the total purchase price was allocated to the
estimated fair value of assets acquired and liabilities assumed. The estimate of
fair value of the assets acquired was based on management’s estimates. The total
purchase price was allocated to the assets and liabilities acquired as
follows:





Current
      assets acquired
                  
                  $
                  147,039Equipment,
      net
                  
                  
                  51,336Current
      liabilities assumed
                  
                  
                  (201,166
                  )Customer
      relationships acquired
                  
                  
                  29,740Non-compete
      agreements acquired
                  
                  
                  29,740Goodwill
                  
                  
                  282,533Cash
      acquired
                  
                  
                  877Total
      purchase price
                  
                  $
                  340,099


19


CODA
OCTOPUS GROUP, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




The
intangible assets acquired, comprising customer relationships and non-compete
agreements, have an estimated useful life of 3 years each and as such will be
amortized monthly over those periods. Goodwill of $282,533 represented the
excess of the purchase price over the fair value of the net tangible and
intangible assets acquired.




The
following unaudited pro forma results of operations for the period ended
April 30, 2009 assume that the acquisition of Dragon occurred on November 1,
2008. These unaudited pro forma results are not necessarily indicative of the
actual results of operations that would have been achieved nor are they are
necessarily indicative of future results of operations.





2009Revenue
                  
                  $
                  7,638,252Net
      loss
                  
                  
                  (2,546,002
                  )Loss
      per common share
                  
                  $
                  (0.05
                  )





NOTE
15 - SEGMENT INFORMATION




Due to
the nature of our businesses, we are operating in two reportable segments, which
are managed separately based upon fundamental differences in their operations.
Martech, Dragon, Colmek, Tactical and Innalogic operate as contractors, and the
balance of our operations is comprised of product sales.




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




The
Company evaluates performance and allocates resources based upon operating
income. The accounting policies of the reportable segments are the same as those
described in the summary of accounting policies.





There are
inter-segment sales between our engineering contracting businesses and our
products businesses.




The
following table summarizes segment asset and operating balances by reportable
segment.





Contracting
                  
                  
                  Products
                  
                  
                  Corporate
                  
                  
                  TotalsRevenues
                  
                  $
                  3,805,323
                  
                  
                  $
                  2,607,058
                  
                  
                  $
                  1,094,173
                  
                  
                  $
                  7,506,553Operating
      profit/(loss)
                  
                  
                  97,432
                  
                  
                  
                  1,029,483
                  
                  
                  
                  (2,987,635
                  )
                  
                  
                  (1,860,720
                  )Identifiable
      assets
                  
                  
                  5,912,632
                  
                  
                  
                  3,000,278
                  
                  
                  
                  6,074,216
                  
                  
                  
                  14,987,126Capital
      expenditure
                  
                  
                  259,250
                  
                  
                  
                  10,237
                  
                  
                  
                  33,327
                  
                  
                  
                  302,814Selling,
      general & administrative
                  
                  
                  1,569,180
                  
                  
                  
                  986,180
                  
                  
                  
                  2,570,987
                  
                  
                  
                  5,126,347Depreciation
      & amortization
                  
                  
                  151,837
                  
                  
                  
                  31,006
                  
                  
                  
                  109,109
                  
                  
                  
                  291,953Interest
      expense
                  
                  
                  7,342
                  
                  
                  
                  13,295
                  
                  
                  
                  803,601
                  
                  
                  
                  824,238





The
Company’s reportable business segments operate in two geographic locations.
Those geographic locations are:





* United
States


* United
Kingdom





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, 2009 and the
year ended October 31, 2008:





2009
                      
                      
                      2008Revenues:United
      States
                      
                      $
                      2,384,933
                      
                      
                      $
                      7,362,966United
      Kingdom
                      
                      
                      4,027,448
                      
                      
                      
                      9,605,956Corporate
      and other
                      
                      
                      1,094,173
                      
                      
                      
                      -Total
      Revenues
                      
                      $
                      7,506,553
                      
                      
                      $
                      16,968,922Assets:United
      States
                      
                      $
                      4,512,475
                      
                      
                      $
                      4,357,042United
      Kingdom
                      
                      
                      4,400,435
                      
                      
                      
                      5,478,233Corporate
      and other
                      
                      
                      6,074,216
                      
                      
                      
                      7,204,009Total
      Assets
                      
                      $
                      14,987,126
                      
                      
                      $
                      17,039,284




20


CODA
OCTOPUS GROUP, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




NOTE
16 - SUBSEQUENT EVENTS




On May
13, 2009, the Company entered into an agreement with Pacific Wave Partners LLC,
an investment bank, to raise $7m in new equity, on a best efforts
basis, with the aim of providing new working capital for the Company and
some potential debt repayment.


21


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




Forward-Looking
Statements


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





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





General
Overview


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





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





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





Management
believed that real-time 3D sonar could represent a truly disruptive technology
with the potential to change industry standard practices and procedures. It
envisioned significant applications for this technology in Defense, Underwater
Port Security, Oil and Gas Exploration and Security, Bridge Repair, and
large-scale Underwater Construction projects. Given these beliefs, the Company
decided that the best way to gain access to the capital and the visibility
needed to commercialize real time 3D sonar, and to successfully enter multiple
worldwide markets in the post 9/11 environment would be to move its headquarters
to New York City, 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 controlling shareholder
Fairwater Technology Group Ltd, were issued 20,050,000 common shares comprising
approximately 90.9% of the then issued and outstanding shares of Panda.
Subsequently, Panda was reincorporated in Delaware, and changed its name to Coda
Octopus Group, Inc. By mid 2005, the Company had completed the move of its
headquarters from the UK to New York City.





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





1.
            It
      has 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
      has 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
      has 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.




22





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





5.
            The
      Company has 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, the Company was funded to develop a particular application, and in
      other cases the Company has financed the development
      internally.





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





The
consolidated financial statements include the accounts of Coda Octopus and our
domestic and foreign subsidiaries that are more than 50% owned and controlled.
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. 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 around oil and gas,
      oceanographic research and exploration, where we market to survey
      companies, research institutions, 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. We believe that our marine geophysical survey markets are
      experiencing rapid growth due to: 1) successful new product introductions
      in recent periods; 2) market-proximity benefits derived from the 2004
      relocation to the United States; 3) initial market penetration into new
      sub-sectors of the marine geophysical survey markets; 4) the high price of
      oil and gas in the past few years, resulting in unprecedented exploration
      and production activity, which is still having some effect on the market
      even with lower current prices.





·
            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
      construction which is conducted subsea, a particularly challenging
      environment. We have also developed for one of our customers a tailored
      software application to allow the laying of concrete AccropodesTM 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.




23





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





·
            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 Colmek Systems Engineering,
based in Salt Lake City, Utah, US we provide engineering services to a wide
variety of clients in the subsea, defense, nuclear, government and
pharmaceutical industries. These engineering capabilities are increasingly being
combined with our product offerings, bringing opportunities to provide complete
systems, installation and support.





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





 ̈
            First
      mover advantage in 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 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 EchoscopeTM 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 the
suppliers into this market are as well as our market position and that of our
competitors. We believe the market opportunity in underwater security and
defense could grow at a rapid pace over the next several years.





Critical
Accounting Policies





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





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





Revenue
Recognition





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





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





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





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


24


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





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





Recoverability
of Deferred Costs





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





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




Stock
Based Compensation





SFAS
No. 123, “Accounting for Stock-Based Compensation”, established and
encouraged the use of the fair value based method of accounting for stock-based
compensation arrangements under which compensation cost is determined using the
fair value of stock-based compensation determined as of the date of the grant or
the date at which the performance of the services is completed and is recognized
over the periods in which the related services are rendered. The statement also
permitted companies to elect to continue using the current intrinsic value
accounting method specified in Accounting Principles Board (“APB”) Opinion
No. 25, “Accounting for Stock Issued to Employees”, to account for
stock-based compensation to employees. Prior to the adoption of SFAS 123(R) we
elected to use the intrinsic value based method for grants to our employees and
directors and have disclosed the pro forma effect of using the fair value based
method to account for our stock-based compensation to employees.





On
December 16, 2004, the Financial Accounting Standards Board (FASB) issued SFAS
No. 123R (revised 2004), “Share-Based Payment” (“Statement 123R”) which is a
revision of SFAS No. 123.





Statement
123R supersedes APB opinion No. 25 and amends SFAS No. 95, “Statement of Cash
Flows”. Generally, the approach in Statement 123R is similar to the approach
described in Statement 123. However, Statement 123R requires all share-based
payments to employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values. Pro-forma
disclosure is no longer an alternative. This statement does not change the
accounting guidance for share based payment transactions with parties other than
employees provided in SFAS No. 123(R). This statement does not address the
accounting for employee share ownership plans, which are subject to AICPA
Statement of Position 93-6, “Employers’ Accounting for Employee Stock Ownership
Plans”. On April 14, 2005, the SEC amended the effective date of the provisions
of this statement. The effect of this amendment by the SEC is that the Company
had to comply with Statement 123R and use the Fair Value based method of
accounting no later than the first quarter of 2006. We implemented SFAS
No. 123(R) on November 1, 2004 using the modified prospective method.
The fair value of each option grant issued after November 1, 2004 will be
determined as of grant date, utilizing the Black-Scholes option pricing model.
The amortization of each option grant will be over the remainder of the vesting
period of each option grant.  We use the fair value method for equity
instruments granted to non-employees and use the Black-Scholes model for
measuring the fair value. The stock based fair value compensation is determined
as of the date of the grant or the date at which the performance of the services
is completed (measurement date) and is recognized over the periods in which the
related services are rendered.





Income
Taxes





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


25


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 SFAS No. 142, Goodwill
and Other Intangible Assets”. To apply SFAS 142, a company is divided into
separate “reporting units”, each representing groups of products that are
separately managed. For this purpose, we have one reporting unit. To determine
whether or not goodwill may be impaired, a test is required at least annually,
and more often when there is a change in circumstances that could result in an
impairment of goodwill. If the trading of our common stock is below book 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 SFAS 142.





Results
of Operations




Introduction





The
period ending April 30, 2009 contained two new operations, that of Coda Octopus
Tactical Intelligence, Inc and Dragon Design Ltd, both of which were acquired
during the period. This should be taken into account when comparing the quarter
with the period ending April 30, 2008.





Recent
Developments





Cash
Framework Agreement





On March
16, 2009 the Company entered a “Cash Framework Agreement” with RBS (the debt
holder) which created a 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. For the year, the Company
has targeted combined savings of at least $2.15m, of which $400,000 was expected
in the quarter to April 30, 2009. The actual savings for the quarter were
$469,000, $69,000 ahead of schedule and more than fulfilling the requirement of
the agreement. This is the beginning of a sustained reorganization program which
will enable the Company to continue to reduce costs and operate more
efficiently.





Reorganization





The
Company has undertaken a reorganization program which will separate the
operations into two geographic segments (Europe and the Americas), rather than
distinct operating companies. The goal is to centralize functions into the
engineering companies located in Weymouth, UK (currently Coda Octopus Martech)
and Salt Lake City, US (currently Coda Octopus Colmek). The new configuration
will operate in a hub and spoke structure with manufacturing, finance, sales and
marketing all centralized in the two engineering companies which will represent
the European and the US regions respectively. The ‘spokes’ will be small sales
offices located in strategic outposts geared completely to creating revenues and
performing sales and support functions. The R&D unit will become a more
horizontal unit working to make advances in our core technology (3D sonar) while
helping to spread these advances across the group, as well as promoting
technology advances from other parts of the Group. Our products company in
Edinburgh will be focused entirely on the EchoscopeTM rollout plan for the
various markets the Company has identified. The function of this office will be
to oversee productizing, developing, documenting, servicing and delivering the
core product to the defined markets. This change will enable manufacturing,
sales, marketing and service of all “mature” products to be concentrated in one
location, Weymouth, while allowing our strong sales team in Edinburgh to focus
on our core technology which represents our largest potential growth engine.
Manufacturing of the EchoscopeTM will move to Salt Lake City (Colmek) to comply
with the Defense Department’s preference to have technology products
manufactured domestically. The savings created by these efficiencies will enable
the Company to reduce significantly the break-even operating revenue
requirement. Although the environment has been challenging, the markets that the
Company addresses – engineering, defense, oil and gas, and security – are less
affected than many others. The strategy of exploiting our lead in 3D real-time
sonar, while tactically streamlining the business to be profitable at a much
lower revenue rate, is the operating plan for the foreseeable future. This way,
we have preserved and focused our upside potential, while greatly reducing the
downside risk by reducing our break-even revenue requirement
significantly.





Comparison
of Three Months Ended April 30, 2009 (“2009 Period”) to Three Months Ended April
30, 2008 (“2008 Period”)





Revenues. Total
revenues for the 2009 period and the 2008 period were $4,307,447 and $5,096,684
respectively. This represented a decrease of $789,237 or 15.5%. Of the 2009
period amount, $244,174, or 5.7%, was generated by the new operations. Our UK
revenues were strongly affected by the change in exchange rates between the two
periods, moving from $2.00 to £1 last year to $1.47 to £1 this year, reducing
our revenues in the 2009 period by $901,226 on a like for like basis. Given a
stable exchange rate, our revenues would have increased by $111,989, or 2.2%,
from the 2008 period to the 2009 period, a satisfactory performance given the
current economic climate. While our products division business has suffered from
the reduced oil price, though to a lesser extent more recently, product sales
were satisfactory for the time of year. Our engineering businesses, both under
new management in the past 12 months, performed significantly better than last
year, generating 38.7% of the 2009 period revenues. In addition to better
management, this continues to reflect an increased demand for outsourcing as
companies downsize their own in-house operations.




Margins. Gross
margins were 63.4% in the 2009 period compared with 74.4% for the 2008 period,
though the performance in 2008 was extraordinary and weighted by sales of our
high-margin Echoscope product. This reflects a healthy mix of sales, generating
the sort of margins expected in our best two quarters of the year, which are the
second and third quarters in the year. We continue to feel that overall margins
for this year will be over 60%.




Research and Development
(R&D). R&D costs decreased 40.3% to $456,477 in the 2009 period
from $764,308 in 2008. Of this reduction, $166,576 can be attributed to the
change in exchange rates, with the other $141,255 attributable to planned cost
reductions. Our R&D in the quarter was focused largely on further
development of the EchoscopeTM and UISTM tied to the TSWG (US Coast Guard)
contract, the third stage of which started in February 2009. Additionally, work
continued on productizing different EchoscopeTM products, including applications
for dredging, underwater construction and security.


26





Selling, General and
Administrative Expenses (SG&A). SG&A expenses for the 2009 period
decreased to $2,223,628 from $2,802,193 in 2008, or by 20.6%. Removing non-cash
charges attributable to stock and option compensation, depreciation and
amortization, and exchange rate movements of $300,928 for 2009 and $181,807 for
2008 brings these totals to $1,922,700 and $2,620,386 respectively, or a drop of
26.6% year on year. This is partly due to the drop in exchange rate and also
attributable to cost reduction measures the Company has introduced, which will
have a larger impact as the year continues.




Key areas
of expenditure across R&D and SG&A include wages and salaries, where the
Company spent $1,775,417 in 2009 while the 2008 period was $1,794,319; legal and
professional fees, including accounting, audit and investment banking services,
increased to $208,946 in 2009 from $190,337 in 2008; travel decreased to $54,368
in 2009 from $94,369 in 2008; rent increased to $153,523 in 2009, from $130,913;
and marketing decreased to $186,647 from $396,168 in 2008.





Debt Modification
Costs. During the 2009 period, we incurred non-recurring costs connected
with putting the new Cash Framework Agreement in place with the holder of the
convertible bond. These costs amounted to $162,832 against no similar
expenditure in 2008.




Operating
Income/Loss. Earnings before Interest, Tax, Depreciation and Amortization
(EBITDA) for the period, without non-recurring and non-cash charges for stock
and options and exchange rate movements, were $293,550 in 2009 against $449,582
for the 2008 Period, a decline of 34.7%. The Company produced an operating loss
for the period of $111,278 (which, when adjusted for non-cash and non-recurring
charges, becomes a profit of $159,637) against a profit of $223,407 in
2008.




Interest Expense.
Interest expense for the 2009 period was $426,814, of which $128,571 was a
non-cash charge relating to the terminal conversion of the debenture, and
$255,000 was accrued interest, due for payment in August 2009. Cash interest
charges were $43,243, in addition to the first year’s interest on the debenture
of $1,020,000, which was paid during the period, against costs for 2008 of
$455,334, of which $195,150 was accrued interest and $91,350 was a non-cash
charge relating to the terminal conversion of the debenture, leaving cash
charges of $168,835 for the period.




Preferred Dividends.
During the 2009 period there was a $439 dividend paid on the remaining Series A
preferred stock versus $28,931 in 2008.


27





Comparison
of Six Months Ended April 30, 2009 (“2009 Period”) to Six Months Ended April 30,
2008 (“2008 Period”)





Revenues. Total
revenues for the 2009 period and the 2008 period were $7,506,553 and $8,223,915
respectively. This represented a decrease of $717,362 or 8.7%. Of the 2009
period amount, $525,219, or 7.0%, was generated by the new operations. Our UK
revenues were strongly affected by the change in exchange rates between the two
periods, moving from $2.00 to £1 last year to $1.47 to £1 this year, reducing
our revenues in the 2009 period by $1,502,327 on a like for like basis. Given
this, our growth, without acquisitions, would have been around 1.9% from the
2008 period to the 2009 period, a satisfactory performance given the current
economic climate. While our products division business has suffered from the
reduced oil price, though to a lesser extent more recently, product sales have
been satisfactory for the time of year. Our engineering businesses, both under
new management in the past 12 months, performed significantly better than last
year generating 50.7% of the 2009 period revenues in total, against 36.9% for
the 2008 period. In addition to better management, this reflects an increased
demand for outsourcing as companies downsize their own in-house
operations.




Margins. Gross
margins were 59.8% in the 2009 period compared with 64.1% for the 2008 period.
The drop is due to the higher proportion of revenues derived from our
engineering businesses and a lower rate of sale of our flagship Echoscope
product for the 2009 period. The lack of EchoscopeTM sales results in our margins
being below our targeted 60%. We continue to feel that overall margins for this
year will be over 60%.




Research and Development
(R&D). R&D costs decreased 27.1% to $1,060,158 in the 2009 period
from $1,453,501 in 2008. This partly reflects the drop in exchange rates between
the 2009 and 2008 periods, which, while reducing revenues also reduces costs. It
also reflects active cost reduction by the Company. Our R&D in the period
was focused on further development of the EchoscopeTM and UISTM tied to the TSWG
(US Coast Guard) contract, the second stage of which finished in January 2009
and the third stage of which started in February 2009. Additionally, work
continued on productizing different EchoscopeTM products, including applications
for dredging, underwater construction and security.


28





Selling, General and
Administrative Expenses (SG&A). SG&A expenses for the 2009 period
decreased to $5,126,347 from $5,859,122 in 2008, or by 12.50%. Removing non-cash
charges attributable to stock and option compensation, depreciation and
amortization, and exchange rate movements of $659,579 for 2009 and $484,890 for
2008 bring these totals to $4,466,768 and $5,374,232 respectively, or a drop of
16.90% year on year. This is partly due to the drop in exchange rate and also
attributable to cost reduction measures the Company has introduced, which will
have a larger impact as the year continues.




Key areas
of expenditure across R&D and SG&A include wages and salaries where the
Company spent $3,675,378 in 2009 while the 2008 period was $3,770,879, a
decrease of 2.5%; legal and professional fees, including accounting, audit and
investment banking services, decreased to $481,132 in 2009 from $658,893 in
2008; travel decreased to $182,119 from $248,972; rent increased to $308,662 in
2009, from $257,362 and marketing decreased to $460,779 from $611,062 in
2008.





Debt Modification
Cost. During the 2009 period, we incurred non-recurring costs connected
with putting the new Cash Framework Agreement in place with the holder of the
convertible bond. These costs amounted to $162,832 against no similar
expenditure in 2008.




Operating
Income/Loss. Earnings before Interest, Tax, Depreciation and Amortization
(EBITDA) for the period, without non-recurring and non-cash charges for stock
and options and exchange rate movements, were a loss of $1,069,599 in 2009
against $1,504,145 for the 2008 Period, an improvement of 28.9%. The Company
produced an operating loss for the period of $1,860,719 (which, when adjusted
for non-cash charges, becomes $1,392,739) against a loss of $2,038,260 in
2008.




Interest Expense.
Interest expense for the 2009 period was $824,238, of which $257,142 was a
non-cash charge relating to the terminal conversion of the debenture, and
$510,000 was accrued interest, due for payment in August 2009 – note that a cash
payment of interest $1,020,000 covering bond interest was made in the period.
This left cash interest charges of $57,096. Costs for 2008 were $569,305, of
which $195,050 was accrued bond interest, $91,350 was a non-cash charge relating
to the terminal conversion of the debenture and $282,905 were cash
charges.




Preferred Dividends.
During the 2009 period there was a $31,588 dividend paid on the remaining Series
A preferred stock versus $75,024 in 2008.





Liquidity
and Capital Resources





As of
April 30, 2009 the Company had negative working capital of $8,179,593 and cash
totaling $179,383.





The net
loss for the period of $3,435,770 generated a cash flow deficit from operations
of $1,307,726 in the 2009 Period, compared to a deficit of $2,426,336 in 2008.
During the 2009 Period, we also invested around $423,000 in assets for use
within our various businesses and the completion of two small acquisitions (see
note 14 to the financial statements). In the 2009 period, we made our first
interest payment on the Secured Convertible Debenture (see Note 12) which we
closed in February 2008, for a total of $1,020,000. There was also a hit to our
cash through exchange rate movements which contributed a cash outflow of
$587,478, and a net increase in cash subject to restriction of around $489,000,
giving a total cash decrease of around $3,717,000 for the period.




Under the
terms of the $12M convertible debenture issued in February 2008 (see Note 12) ,
the Company agreed to allocate a minimum of $6M of the proceeds for purposes of
capital expenditures and acquisitions, with the balance of the proceeds,
approximately $6M to be utilized for working capital purposes. If the Company
fails to comply with these covenants, the debenture holders would be able to
demand payment within a specified period of time.




As of
October 31, 2008, the Company exceeded the $6M limit for working capital
purposes, and therefore was not in compliance under the terms of the
debenture. On March 16, 2009, the Company and the Noteholder have 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.





Our plan
to move from loss to profit is based upon intensifying our focus on EchoscopeTM
applications generally, as well as reducing costs considerably from last year’s
total. In the short term, our plan involves, specifically:




·
            Continuing to sell our current
      range of products into a mixture of commercial, defense and security
      markets, increasing sales of these products over the course of this
      financial year - we have seen strong growth
    recently.





·
            Continuing to develop and sell
      complete turnkey systems based around our leading EchoscopeTM 3D
      technology, to open markets in law enforcement and inspection - a great
      deal of our R&D expenditure has been directed towards refining our
      product with a view to completing sales this year that are currently in
      our pipeline.





·
            Continuing to deliver to the
      Coast Guard on the next stage contract, which we were awarded in February.
      Work on stage 3 has already begun in the second quarter of this year and
      continues until at least the end of the financial
    year.





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





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





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





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


29





Inflation
and Foreign Currency





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





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





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




Financing
Activities





Equity
Offerings




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





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





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





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





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




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




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




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


30





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 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). Pursuant to the terms of the
agreement, a further $1 million of the proceeds has been retained by RBS to
secure the performance of certain contractual obligations of the Company. Upon
performance of these by us, this will be released. We expect such release to
occur no later than February 2009. During the period from February 2008 to
December 2008 in which this $1million was retained we earned approximately
$17,000 interest on this restricted cash balance based on RBS’s internal
overnight funds rate. During the term, the Notes are convertible into our common
stock at the option of the Noteholders at a conversion price of $1.05. We may
also force the conversion of these Notes into our common stock after two years
in the event that we obtain a listing on a national exchange and our stock price
closes on 40 consecutive trading days at or above $2.50 between the second and
third anniversaries of this agreement; $2.90 between the third and fourth
anniversaries of this agreement; and $3.50 after the fourth anniversary of this
agreement or where the daily volume weighted average price of our stock as
quoted on OTCBB or any other US National Exchange on which our securities are
then listed has, for at least 40 consecutive trading days closed at the agreed
price.





In August
2008, we notified the Noteholder that we believed that we would be unable to use
the $6,000,000 in the manner agreed to under the terms of the Notes. In
response, the Noteholder orally consented to the use of an additional $2 million
of the $6,000,000 for general working capital purposes. In January 2009, we
notified the Noteholder that the balance of the $6,000,000 had fallen below
$4 million. On March 16, 2009, the Company and the Noteholder entered into a
Cash Control Framework Agreement, pursuant to which it is assumed that, subject
to the Company being fully compliant with the terms of this agreement and those
set out in the Transaction Documents entered into between the Company and the
Noteholder on February 21, 2008, no adverse actions will be taken by the
Noteholder. The agreement provides, among other things, for the placement of
approximately $2.15 million into a segregated cash account.  Under the
terms of the agreement, we may request the release of funds from the account
from time to time for working capital purposes, subject to the Noteholder’s
consent and agreed upon terms and conditions. Under the terms of the agreement,
we 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 will provide us with sufficient
liquidity to operate for fiscal 2009.




By
adjusting our operations and development to the level of capitalization, we
believe we have sufficient capital resources to meet projected cash flow
deficits. However, if during fiscal 2009 or thereafter, 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.




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




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. 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.





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.


31





Item
4T. Controls and Procedures




(a)
Evaluation of Disclosure Controls and Procedures





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




The
Company’s management, under the supervision and with the participation of the
Company's Chief Executive Officer and Chief Financial (and principal accounting)
Officer, carried out an evaluation of the effectiveness of the design and
operation of the Company's disclosure controls and procedures (as defined in
Rule 13a-15(e) and 15d-15(e) of the Exchange Act) as of April 30,
2009.  Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the Company’s disclosure controls and
procedures were ineffective as of the end of the period covered by this
report.





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





(b)
Changes in Internal Controls.




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


32




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 a lawsuit involving 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.




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





10.27
            Cash Control Framework Agreement
      dated March 16, 2009 by and between the Company, The Royal Bank of
      Scotland and Greenhouse Investment
  Limited*





31
            Certifications of the Chief
      Executive Officer and Chief Financial Officer pursuant to Rule
      13a-14(a)





32
            Certifications of Chief Executive
      Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002







·
            Incorporated
      by reference to the Company’s Annual Report on Form 10-K for the year
      ended October 31, 2008, filed March 18,
2009.


33





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 19, 2009
              
              /s/ Jason ReidJason
      ReidPresident
      and Chief Executive OfficerDate:
      June 19, 2009
              
              /s/ Jody E. FrankJody
      FrankChief
      Financial Officer


34