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 July 31, 2010




OR





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




For the
transition period from ______________ to ______________




Commission
File Number 000-52815





CODA
OCTOPUS GROUP, INC.


(Exact
name of registrant as specified in its charter)





Delaware
            
            34-200-8348(State
      or other jurisdiction of Incorporation or organization)
            
            (I.R.S.
      Employer Identification Number)Newport Office Center 1, 111 Town Square Place, Jersey City,
              Suite
      1201, New Jersey 07310
            
            07310(Address
      of principal executive offices)
            
            (Zip
      Code)Registrant's
      telephone number, including area code:
            
            (201)
      420 9100




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





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





Large
      accelerated filer    ̈
            Accelerated
      filer    ̈         Non-accelerated
      filer 
       ̈
            Smaller
      reporting company  x





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


Yes 
  ̈ No  x





The
number of shares outstanding of issuer's common stock, $0.001 par value as of
September 20, 2010 is 49,325,244














INDEX





PagePART
      I - Financial Information
            1Item
      1: Financial Statements
            1Nine
      Months Ended  July 31, 2010 and  2009Condensed
      Consolidated Balance Sheet as of  July 31, 2010 (Unaudited) and
      October 31, 2009
            1Condensed
      Consolidated Statements of Operations and Comprehensive Income (Loss) for
      the Three and Nine Months Ended July 31,
      2010  and  2009 (Unaudited)
            2Condensed
      Consolidated Statement of  Stockholders’ Deficiency for the
      Nine Months Ended July 31, 2010 (Unaudited)
            3Condensed
      Consolidated Statements of Cash Flows for the Nine months ended July 31,
      2010 and 2009 (Unaudited)
            4Notes
      to Condensed Consolidated Financial Statements (Unaudited)
            5Item 2: Management's
      Discussion and Analysis or Plan of Operation
            18Item 4T:   Controls and
      Procedures
            30PART II - Other Information
            31Item 1: Legal Proceedings
            31Item 2: Unregistered Sales of Equity
      Securities and Use of Proceeds
            31Item 3: Defaults Upon Senior
      Securities
            31Item 4: Removed and
    Reserved
            31Item 5: Other Information
            31Item 6: Exhibits
            31Signatures
            32






- i
-




PART
I. FINANCIAL INFORMATION





Item
1. Financial Statements




CODA OCTOPUS GROUP, INC.








July
      31,
                  
                  
                  October
      31,ASSETS
                  
                  2010
                  
                  
                  2009Current
      assets:Cash
      and cash equivalents
                  
                  $
                  814,286
                  
                  
                  $
                  275,885Restricted
      cash, Note 2
                  
                  
                  613,792
                  
                  
                  
                  994,081Short-Term
      Investments, Note 4
                  
                  
                  12,750
                  
                  
                  
                  51,000Accounts
      receivable, net of allowance for doubtful accounts, Note 1
                  
                  
                  2,486,573
                  
                  
                  
                  2,033,879Inventory,
      Note 1
                  
                  
                  2,295,327
                  
                  
                  
                  2,798,425Unbilled
      receivables, Note 3
                  
                  
                  831,254
                  
                  
                  
                  690,344Other
      current assets, Note 5
                  
                  
                  182,715
                  
                  
                  
                  285,691Prepaid
      expenses
                  
                  
                  305,238
                  
                  
                  
                  247,134Total
      current assets
                  
                  
                  7,541,935
                  
                  
                  
                  7,376,439Property
      and equipment, net, Note 6
                  
                  
                  134,499
                  
                  
                  
                  267,964Deferred
      financing costs, net of accumulated amortizationof
      $605,319 in 2010 and $423,723 in 2009, Note 13
                  
                  
                  1,089,574
                  
                  
                  
                  1,271,170Goodwill
      and other intangible assets, net, Note 7
                  
                  
                  4,127,423
                  
                  
                  
                  4,221,807Total
      assets
                  
                  $
                  12,893,431
                  
                  
                  $
                  13,137,380LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable, trade
                  
                  $
                  2,584,382
                  
                  
                  $
                  2,390,039Accrued
      expenses and other current liabilities
                  
                  
                  5,103,318
                  
                  
                  
                  4,626,164Short
      tem loan payable, Note 14
                  
                  
                  1,170,000
                  
                  
                  
                  —Loans
      and notes payable, Note 13
                  
                  
                  13,934,686
                  
                  
                  
                  —Warrant
      liability, Note 10
                  
                  
                  4,152,026
                  
                  
                  
                  —Deferred
      revenues, Note 3
                  
                  
                  393,394
                  
                  
                  
                  398,482Deferred
      payment related to acquisitions
                  
                  
                  388,166
                  
                  
                  
                  404,274Total
      current liabilities
                  
                  
                  27,725,972
                  
                  
                  
                  7,818,959Loans
      and notes payable, long term, Note 13
                  
                  
                  —
                  
                  
                  
                  13,233,523Total
      liabilities
                  
                  
                  27,725,972
                  
                  
                  
                  21,052,482Contingencies
      and Commitments, Note 12Stockholders'
      deficiency:Preferred
      stock, $.001 par value; 5,000,000 shares authorized,6,287
      Series A issued and outstanding, as ofJuly
      31, 2010 and October 31, 2009, respectively
                  
                  
                  6
                  
                  
                  
                  6Nil
      shares Series B issued and outstanding as ofJuly
      31, 2010 and October 31, 2009, respectively
                  
                  
                  —
                  
                  
                  
                  —Common
      stock, $.001 par value; 150,000,000 sharesauthorized,
      49,325,244 and 49,000,244 shares issued and outstandingas
      of July 31, 2010 and October 31, 2009, respectively
                  
                  
                  49,325
                  
                  
                  
                  49,000Common
      Stock subscribed
                  
                  
                  96,350
                  
                  
                  
                  96,350Additional
      paid-in capital
                  
                  
                  46,888,319
                  
                  
                  
                  51,766,495Accumulated
      other comprehensive loss
                  
                  
                  (758,206
                  )
                  
                  
                  (696,617
                  )Accumulated
      deficit
                  
                  
                  (61,108,336
                  )
                  
                  
                  (59,130,336
                  )Total
      stockholders' deficiency
                  
                  
                  (14,832,542
                  )
                  
                  
                  (7,915,102
                  )Total
      liabilities and stockholders' deficit
                  
                  $
                  12,893,431
                  
                  
                  $
                  13,137,380






- 1
-












For
      the three months
              
              
              For
      the three months
              
              
              For
      the nine months
              
              
              For
      the nine monthsended
      July 31,
              
              
              ended
      July 31,
              
              
              ended
      July 31,
              
              
              ended
      July 31,2010
              
              
              2009
              
              
              2010
              
              
              2009Net
      revenue
              
              $
              2,468,415
              
              
              $
              3,425,030
              
              
              $
              9,250,210
              
              
              $
              10,931,583Cost
      of revenue
              
              
              1,259,477
              
              
              
              1,664,267
              
              
              
              3,988,340
              
              
              
              4,682,202Gross
      profit
              
              
              1,208,937
              
              
              
              1,760,763
              
              
              
              5,261,869
              
              
              
              6,249,381Research
      and development
              
              
              430,745
              
              
              
              256,929
              
              
              
              1,362,931
              
              
              
              1,317,087Selling,
      general and administrative expenses
              
              
              1,665,381
              
              
              
              1,864,880
              
              
              
              5,149,745
              
              
              
              7,154,059Operating
      income (loss)
              
              
              (887,189
              )
              
              
              (361,046
              )
              
              
              (1,250,807
              )
              
              
              (2,221,765
              )Other
      income (expense)Other
      income
              
              
              (4,259
              )
              
              
              21,839
              
              
              
              33,686
              
              
              
              53,026Interest
      expense
              
              
              (657,841
              )
              
              
              (432,018
              )
              
              
              (1,554,225
              )
              
              
              (1,256,256
              )Gain
      (loss) on change in fair value of derivative liability
              
              
              1,835,295
              
              
              
              —
              
              
              
              (1,798,131
              )
              
              
              —Gain
      on sale of investment in marketable securities
              
              
              —
              
              
              
              —
              
              
              
              15,750
              
              
              
              —Impairment
      of investment in marketable securities
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (782,000
              )Total
      other income (expense)
              
              
              1,173,195
              
              
              
              (410,179
              )
              
              
              (3,302,920
              )
              
              
              (1,985,230
              )Income
      (loss) before income taxes
              
              
              286,006
              
              
              
              (771,225
              )
              
              
              (4,553,727
              )
              
              
              (4,206,995
              )Provision
      for income taxes
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Net
      income (loss)
              
              
              286,006
              
              
              
              (771,225
              )
              
              
              (4,553,727
              )
              
              
              (4,206,995
              )Preferred
      Stock Dividends:Series
      A
              
              
              —
              
              
              
              (15,794
              )
              
              
              —
              
              
              
              (47,382
              )Series
      B
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Beneficial
      Conversion Feature
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Net
      income (loss) Applicable to Common Shares
              
              $
              286,006
              
              
              $
              (787,019
              )
              
              $
              (4,553,727
              )
              
              $
              (4,254,377
              )Income
      (loss) per share, basic and diluted
              
              
              0.01
              
              
              
              (0.02
              )
              
              
              (0.09
              )
              
              
              (0.09
              )Net
      loss per share, basic and diluted - See Note 1
              
              
              (0.04
              )
              
              
              —
              
              
              
              —
              
              
              
              —Weighted
      average shares outstanding
              
              
              49,325,244
              
              
              
              49,000,244
              
              
              
              49,029,133
              
              
              
              48,967,260Comprehensive
      loss:Net
      income (loss)
              
              $
              286,006
              
              
              $
              (771,225
              )
              
              $
              (4,553,727
              )
              
              $
              (4,206,995
              )Foreign
      currency translation adjustment
              
              
              (146,975
              )
              
              
              341,794
              
              
              
              (58,589
              )
              
              
              (66,337
              )Unrealized
      gain (loss) on investment
              
              
              —
              
              
              
              (34,000
              )
              
              
              12,750
              
              
              
              (34,000
              )Comprehensive
      loss
              
              $
              (139,031
              )
              
              $
              (463,431
              )
              
              $
              (4,599,566
              )
              
              $
              (4,307,332
              )


- 2
-














Additional
              
              
              AccumulatedPreferred
      Stock Series A
              
              
              Preferred
      Stock Series B
              
              
              Common
      Stock
              
              
              Stock
              
              
              Paid-in
              
              
              Other
              
              
              AccumulatedShares
              
              
              Amount
              
              
              Shares
              
              
              Amount
              
              
              Shares
              
              
              Amount
              
              
              Subscribed
              
              
              Capital
              
              
              Comprehensive
      loss
              
              
              Deficit
              
              
              TotalBalance,
      October 31, 2009
              
              
              6,287
              
              
              $
              6
              
              
              
              —
              
              
              $
              —
              
              
              
              49,000,244
              
              
              $
              49,000
              
              
              $
              96,350
              
              
              $
              51,766,495
              
              
              $
              (696,617
              )
              
              $
              (59,130,336
              )
              
              $
              (7,915,102
              )Shares
      issued for compensation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              325,000
              
              
              
              325
              
              
              
              —
              
              
              
              26,675
              
              
              
              
              
              
              
              
              
              
              
              27,000Fair
      value of options issued as compensation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              24,771
              
              
              
              
              
              
              
              
              
              
              
              24,771Cumulative
      effect of warrant liability
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (4,929,622
              )
              
              
              
              
              
              
              2,575,729
              
              
              
              (2,353,893
              )Foreign
      currency translation adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (58,589
              )
              
              
              
              
              
              
              (58,589
              )Unrealized
      gain (loss) on marketable securities
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              12,750
              
              
              
              
              
              
              
              12,750Realized
      gain reclassed on sale of marketable securities
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (15,750
              )
              
              
              
              
              
              
              (15,750
              )Net
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (4,553,727
              )
              
              
              (4,553,727
              )Balance,
      July 31, 2010
              
              
              6,287
              
              
              $
              6
              
              
              
              —
              
              
              $
              —
              
              
              
              49,325,244
              
              
              $
              49,325
              
              
              $
              96,350
              
              
              $
              46,888,319
              
              
              $
              (758,206
              )
              
              $
              (61,108,334
              )
              
              $
              (14,832,542
              )


- 3
-
      July
      31,
                
                
                July
      31,2010
                
                
                2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                
                $
                (4,553,727
                )
                
                $
                (4,206,995
                )Adjustments
      to reconcile net loss to net cashused
      in operating activities:Depreciation
      and amortization
                
                
                389,218
                
                
                
                477,849Stock
      based compensation
                
                
                51,771
                
                
                
                300,369Change
      in fair value of warrant liability
                
                
                1,798,131
                
                
                
                —Financing
      costs
                
                
                710,705
                
                
                
                1,150,714Impairment
      of investment in marketable securities
                
                
                —
                
                
                
                782,000Gain
      on sale of investment in marketable securities
                
                
                (15,750
                )
                
                
                —Changes
      in operating assets and liabilities:(Increase)
      decrease in current assets:Short-Term
      Investments
                
                
                38,250Accounts
      receivable
                
                
                (452,694
                )
                
                
                916,998Inventory
                
                
                503,098
                
                
                
                (816,599
                )Prepaid
      expenses
                
                
                (58,104
                )
                
                
                (226,180
                )Unbilled
      receivables and other current assets
                
                
                (37,934
                )
                
                
                (915,976
                )Increase
      (decrease) in current liabilities:Accounts
      payable
                
                
                897,318
                
                
                
                1,164,039Due
      to related parties
                
                
                —
                
                
                
                (41,904
                )Net
      cash used in operating activities
                
                
                (729,718
                )
                
                
                (1,415,685
                )CASH
      FLOWS FROM INVESTING ACTIVITIES:Sale/(Purchase)
      of property and equipment
                
                
                23,661
                
                
                
                (121,943
                )Purchases
      of intangible assets
                
                
                (18,171
                )
                
                
                (8,715
                )Cash
      subject to restriction
                
                
                613,792
                
                
                
                (377,840
                )Acquisitions
                
                
                —
                
                
                
                (214,317
                )Cash
      acquired from acquisitions
                
                
                —
                
                
                
                877Net
      cash provided by (used in) investing activities
                
                
                619,282
                
                
                
                (721,938
                )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from/(repayment of) loans
                
                
                700,000
                
                
                
                (1,019,822
                )Preferred
      stock dividend
                
                
                —
                
                
                
                (101,256
                )Net
      cash provided by, (used in) financing activities
                
                
                700,000
                
                
                
                (1,121,078
                )Effect
      of exchange rate changes on cash
                
                
                (51,162
                )
                
                
                (62,543
                )Net
      increase (decrease) in cash
                
                
                538,401
                
                
                
                (3,321,244
                )Cash
      and cash equivalents, beginning of period
                
                
                275,885
                
                
                
                3,896,149Cash
      and cash equivalents, end of period
                
                $
                814,286
                
                
                $
                574,905Cash
      paid for:Interest
                
                $
                1,554,225
                
                
                $
                1,125,542Income
      taxes
                
                
                —
                
                
                
                —Non-Cash
      Investing and Financing ActivitiesDuring
      the nine months ended July 31, 2010, 325,000 shares of common stock
                  were
      issued for services rendered
                
                
                27,000
                
                
                
                —Supplemental
      Disclosures:Acquisition of
      Dragon:Current
      assets acquired
                
                
                —
                
                
                
                147,039Cash
      acquired
                
                
                —
                
                
                
                877Equipment
      acquired
                
                
                —
                
                
                
                51,336Goodwill
      and other intangible assets
                
                
                —
                
                
                
                342,013Liabilities
      assumed
                
                
                —
                
                
                
                (201,166
                )Deferred
      payments
                
                
                —
                
                
                
                (250,782
                )Cash
      Paid for Acquisition
                
                
                —
                
                
                
                89,317Net
      cash invested
                
                
                —
                
                
                
                88,440Acquisition of
      Tactical:Current
      assets acquired
                
                
                —
                
                
                
                —Cash
      acquired
                
                
                —
                
                
                
                —Equipment
      acquired
                
                
                —
                
                
                
                5,000Goodwill
      and other intangible assets
                
                
                —
                
                
                
                245,000Liabilities
      assumed
                
                
                —
                
                
                
                —Deferred
      note payable
                
                
                —
                
                
                
                (125,000
                )Cash
      Paid for Acquisition
                
                
                —
                
                
                
                125,000




- 4
-




CODA OCTOPUS GROUP, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




NOTE
1 - SUMMARY OF ACCOUNTING POLICIES




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




General





The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and in accordance
with instructions to SEC form 10Q and Regulation S-X of the Securities Exchange
Act of 1934, as amended. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.





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





Business
and Basis of Presentation




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




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




Accounts
Receivable




We
periodically review our trade receivables in determining our allowance for
doubtful accounts. Allowance for doubtful accounts was $97,265 for the period
ended July 31, 2010 and $255,789 for the year ended October 31,
2009.




Inventory





Inventory
is stated at the lower of cost or market using the first-in first-out method.
Inventory is comprised of the following components at July 31, 2010 and October
31, 2009:




2010
            
            
            2009Raw
      materials
            
            $
            927,139
            
            
            $
            1,384,043Work
      in process
            
            
            296,526
            
            
            
            48,389Finished
      goods
            
            
            1,071,662
            
            
            
            1,365,993Total
      inventory
            
            $
            2,295,327
            
            
            $
            2,798,425




Loss Per Share
 
 Net
income (loss) per share
  Dilutive
common stock equivalents consist of shares issuable upon conversion of warrants
and the exercise of the Company’s stock options and warrants. In accordance with
ASC 260-45-20,  common stock equivalents derived from shares issuable in
conversion of the warrants are not considered in the calculation of the weighted
average number of common shares outstanding because the adjustments in computing
income available to common stockholders would result in a loss. 
Accordingly, the diluted EPS would be computed in the same manner as basic
earnings per share.
  The
following reconciliation of net income and share amounts used in the computation
of loss per share for the three months ended July 31, 2010
  Three
      Months Ended
                July
      31, 2010Net
      income used in computing basic net income per share
              
              $
              286,006Impact
      of assumed assumptions:Gain
      on warrant liability marked to fair value
              
              
              (1,835,295
              )Net
      loss in computing diluted net loss per share:
              
              $
              (2,121,301
              )
  Per share
basic and diluted net loss amounted to $0.09 for the period ended July 31,
2010.  Per share basic and diluted net loss amounted to $0.09 for the
period ended July 31, 2009. For the periods ended July 31, 2010 and 2009,
50,999,796 and 50,571,559 potential shares, respectively, were excluded from the
shares used to calculate diluted earnings per share as their inclusion would
reduce net loss per share.


- 5
-


CODA
OCTOPUS GROUP, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





Liquidity




As of
July 31, 2010, we had cash and cash equivalents of $ 814,286 and restricted cash
of $613,792 a working capital deficit of $20,184,037 and a deficiency in
stockholders’ equity of $14,832,542.  For the nine month period ended July
31, 2010, we had a net loss of $4,553,727 and negative cash flow from operations
of $729,718. We also have an accumulated deficit of $61,108,336 at July 31,
2010. The Company is dependent upon its ability to generate revenue from the
sale of its products and services and the discretion of the Noteholder to
release cash to cover operations (See Note 2).




If
the Company’s financial resources from operations are
insufficient, the Company will require additional financing in order
to execute its operating plan and continue as a going concern.  The
Company may not be able to obtain the necessary additional capital on
a timely basis, on acceptable terms, or at
all.  In any of these events, the Company may be unable to
repay its debt obligations, implement its current plans for
reorganization (see Note 16),  or respond to competitive
pressures, any of which circumstances would have a material
adverse effect on its business, prospects, financial condition and results of
operations.




NOTE
2 – RESTRICTED CASH





Under
terms of the Company’s secured convertible debenture dated February 21, 2008, we
maintained a $1,000,000 interest-bearing deposit in a restricted bank account
until such time as advances under an accounts receivable factoring agreement
were repaid in full and the agreement and related liens were terminated. As of
October 31, 2008, the Company had $1,017,007 in the restricted cash account,
which was released to the Company in December 2008 after the factoring agreement
was terminated and settled in full in October 2008 and the debenture holders
perfected their security in December 2008.




On March
16, 2009, the Company and the holder of the secured convertible debenture (“The
Noteholder”) entered into a Cash Control Framework Agreement pursuant to which
it is assumed that, subject to the Company being fully compliant with the terms
of this agreement and those set out in the Transaction Documents entered into
between the Company and the Noteholder on February 21, 2008, no adverse actions
will be taken by the Noteholder. The agreement provides, among other things, for
the placement of approximately $2.15 million into a segregated cash account.
Under the terms of the agreement, we may request the release of funds from the
account from time to time for working capital purposes, subject to the
Noteholder’s consent and agreed upon terms and conditions. Under the terms of
the agreement, we must also adhere to a strict cost cutting program which
involves reducing our SG&A, R&D and capital expenditure by an annualized
$3.35 million. This agreement was extended for a further period of one year,
expiring on March 16, 2011. We have also received a waiver letter from the
Noteholder dated January 18, 2010, under which it has waived its right to demand
repayment of the loan as a result of the failure to observe certain specified
loan covenants. The waiver will expire on the first anniversary of the waiver
letter. We have been formally advised by the Noteholder’s agent that the waiver
will be extended through June 30, 2011 on the same terms and conditions.
Under the terms of the waiver letter, the Noteholder may revoke the waiver if
the Company commits further breaches.





The Company subsequently defaulted on
the terms of the secured convertible debenture as it has not paid the interest
payment which fell due on August 21, 2010 under the terms of the secured
convertible debenture. Consequently on August 23, 2010 the Noteholder has
accelerated its demand for the repayment of the $6 million (Repayment Demand)
which the Company is under obligation to redeem if the Approved Acquisition has
not occurred within the agreed time period or if an alternative investment plan
was not agreed between the Noteholder and the Company.   The
Company failed to make the Approved Acquisition and no alternative investment
was approved.  The Noteholder has the discretion to withdraw the Cash
Control Framework Agreement (under which it provides us with working capital) in
the event of a breach, which includes a default or to vary the terms upon which
it extends financing to us under the Cash Control Framework Agreement. We have
120 days from August 23, 2010 to satisfy the Repayment Demand of the Noteholder.
Failing to do so could result in enforcement actions against the Company and its
assets under the terms of the secured debenture in favor of the
Noteholder.  Currently we rely on the revenues we generate in the
ordinary course of our business operations and the financing available under the
Cash Control Framework Agreement as our source of working capital. The
withdrawal of the Cash Control Framework Agreement financing or adverse change
in the terms upon which we are currently financed would affect our operations
and could result in curtailment of our operations. We can give no assurance that
we will be successful in meeting the Repayment Demand when due or agree on a
satisfactory payment arrangement with the Noteholder.




At July
31, 2010 we have received net advances from this facility of $1,598,520.





NOTE
3 - CONTRACTS IN PROGRESS




Costs and
estimated earnings in excess of billings on uncompleted contracts represent
accumulated project expenses and fees which have not been invoiced to customers
as of the date of the balance sheet. These amounts are stated on the balance
sheet as Unbilled Receivables of $831,254 and $690,344 as of July 31, 2010 and
October 31, 2009 respectively.





Billings
in excess of cost and estimated earnings on uncompleted contracts represent
project invoices billed to customers that have not been earned as of the date of
the balance sheet. These amounts are stated on the balance sheet as Deferred
Revenue of $164,239 and $111,463 as of July 31, 2010 and October 31, 2009
respectively.




- 6
-




CODA
OCTOPUS GROUP, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




Revenue
received as part of sales of equipment includes a provision for warranty and is
treated as deferred revenue, along with extended warranty sales, with these
amounts amortized over 12 months from the date of sale. These amounts are stated
on the balance sheet as Deferred Revenue of $229,155 and $287,018 as of July 31,
2010 and October 31, 2009 respectively.





NOTE
4 - INVESTMENTS





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




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




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




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




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





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




Quoted Prices
      in
              Active
      Markets
              For
      Identical
              Instruments
            
            
            Significant
              Other
              Observable
              Inputs
            
            
            Significant
              Unobservable
              InputsTotal
            
            
            Level
      1
            
            
            Level
      2
            
            
            Level
      3Assets:Short
      term Investment
            
            $
            12,750
            
            
            $
            12,750
            
            
            $
            —
            
            
            $
            —Total
            
            $
            12,750
            
            
            $
            12,750
            
            
            $
            —
            
            
            $
            —Liabilities:Warrant
      liability
            
            $
            4,152,026
            
            
            $
            —
            
            
            $
            —
            
            
            $
            4,152,026Totals
            
            $
            4,152,026
            
            
            $
            —
            
            
            $
            —
            
            
            $
            4,152,026




The table
below sets forth a summary of changes in the fair value of the Company’s Level 3
financial liabilities for the nine months ended July 31, 2010.





2010Balance
      at beginning of year
            
            $
            —Warrant
      liability
            
            
            4,152,026Balance
      at end of period
            
            $
            4,152,026





With the
exception of assets and liabilities included within the scope of ASC 820-10-15,
the Company adopted the provisions of ASC 820 prospectively effective as of the
beginning of the year ended October 31, 2008. For financial assets and
liabilities included within the scope of ASC 820-10-15, the Company will be
required to adopt the provisions of ASC 820 prospectively as of the year
beginning October 31, 2009. The adoption of ASC 820 did not have a material
impact on our financial position or results of operations and the Company do not
believe that the adoption of ASC 820-10-15 will have a material impact on our
financial position or results of operations.




Warrant
liability is recorded at fair value as is determined by observable market price
and based on the Black-Scholes model.




- 7
-




CODA
OCTOPUS GROUP, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





During
the year ended October 31, 2007, the Company received marketable securities in
settlement of $533,147 loan and $316,853 of accounts receivable. As of October
31, 2008, the Company had an investment of $153,000 that was considered
available-for-sale for financial reporting purposes which included an unrealized
loss of $697,000 included in the determination of comprehensive loss. As of
April 30, 2009, this investment had a value of $68,000, with an unrealized loss
of $782,000. This unrealized loss had, until now been included in the
determination of comprehensive loss, but during the year ended October 31, 2009,
we have determined that this investment in marketable securities is impaired
because we believe that the fair market value of the investment has permanently
declined. Accordingly, we have written off the $782,000 during the year ended
October 31, 2009.  In April 2010, the company sold half of its
investment for $49,750, resulting in a realized gain (on the written down value)
of $15,750.  The remaining fair value of this investment is $12,750 as
of July 31,2010




NOTE
5 - OTHER CURRENT ASSETS




Other
current assets on the balance sheet total $652,715 and $285,691 at July 31,
2010  and October 31, 2009 respectively. These totals comprise the
following:




2010
            
            
            2009Deposits
            
            $
            101,008
            
            
            $
            96,277Value
      added tax (VAT)
            
            
            42,731
            
            
            
            113,636Other
      receivable
            
            
            38,976
            
            
            
            75,778Total
            
            $
            182,715
            
            
            $
            285,691





NOTE
6 - FIXED ASSETS





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




2010
            
            
            2009Machinery
      and equipment
            
            $
            847,999
            
            
            $
            1,001,384Accumulated
      depreciation
            
            
            (713,500
            )
            
            
            (733,420
            )Net
      property and equipment assets
            
            $
            134,499
            
            
            $
            267,964




Depreciation
expense recorded in the statement of operations for the period ended July 31,
2010 and year ended October 31, 2009 is $105,594 and $238,632,
respectively.





NOTE
7 - INTANGIBLE ASSETS AND GOODWILL




The
Company accounts for intangible assets and goodwill in accordance with ASC
350. Goodwill and Other Intangible Assets, are evaluated on an annual
basis, and when there is reason to believe that their values have been
diminished or impaired write-downs will be included in results from operations.
We have conducted a goodwill assessment in this period and based on the
methodology used by the Company we have concluded that goodwill was not impaired
as at July 31, 2010 and therefore remains unchanged.




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





2010
            
            
            2009Customer
      relationships (weighted average life of 10 years)
            
            $
            784,243
            
            
            $
            784,243Non-compete
      agreements (weighted average life of 3 years)
            
            
            278,651
            
            
            
            278,651Patents
      (weighted average life of 10 years)
            
            
            84,287
            
            
            
            67,837Licenses
      (weighted average life of 2 years)
            
            
            100,000
            
            
            
            100,000Total
      amortized identifiable intangible assets - gross carrying
      value
            
            
            1,247,181
            
            
            
            1,230,731Less
      accumulated amortization
            
            
            (668,498
            )
            
            
            (533,462
            )Net
            
            
            578,683
            
            
            
            697,269Residual
      value
            
            $
            578,683
            
            
            $
            697,269







- 8
-




CODA
OCTOPUS GROUP, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





Estimated
annual amortization expense as of July 31, 2010 is as
follows:


2011
            
            $
            32,9202012
            
            
            131,6762013
            
            
            76,8352014
            
            
            75,1832015
      and thereafter
            
            
            262,069Total
            
            $
            578,683




Amortization
of patents, customer relationships, non-compete agreements and licenses included
as a charge to income amounted to $118,586  and
$231,321  for the period ended July 31, 2010 and year ended October
31, 2009, respectively. Goodwill is not being amortized.






- 9
-


CODA
OCTOPUS GROUP, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





NOTE
8 - CAPITAL STOCK





During
the period ended July 31, 2010, the Board approved the issuance of 250,000
shares of our common stock for services rendered in connection with a short term
loan arranged for the Company during the period ended July 31,
2010.




The
service agreements of two outside directors of Coda Octopus Colmek provide for
remuneration of, amongst other things, $2,500 per board meeting
attended.  These service agreements were entered into in August
2007.   Pursuant to the terms of these agreements, each of these
directors is entitled to shares of Common Stock having a value of $35,000
each.  These were never issued. The Board of Directors at its meeting
held in June 2010 approved the issuance of a total of 437,500 shares of Common
Stock proportionately to each of these outside directors. Although approved for
issuance, the Company has not yet issued these to the individuals
concerned.


In June
2010 the Board of Directors ratified the approval of the old Board of Directors
to issue 26,765 shares of common stock to three (3) staff members under its
patent reward scheme for patent disclosures made to the Company. Although
ratified for issuance, the Company has not yet issued these shares.





In June
2010, the Board approved the issuance of 100,000 shares of common stock as part
of directors’ compensation. These shares will only be issued if the director
serves one year on the Board.





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





In April
2010, we undertook to issue 100,000 shares of common stock as part of directors’
compensation. These shares will only be issued if the director serves one year
on the Board.  Since the director resigned prior to serving one (1)
year per the condition for the issuance of these shares of common stock, this
obligation has lapsed.





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





Other
Equity Transactions




During
the period ended January 31, 2010, we did not issue any common share
purchase options. However, options issued in earlier periods vested resulting in
a charge of $24,771 for the nine months ended July 31, 2010.




During
the year ended October 31, 2009, we issued 50,000 common share purchase options
in relation to the Tactical acquisition. However, options issued in earlier
periods vested, resulting in a charge of $295,853 in this period. There were
also 210,000 options cancelled connected with staff departures, of which 95,000
were exercisable. During this period,
1,551,000 options lapsed under the terms of issue and were therefore
cancelled.





In April
2010, we undertook to grant 50,000 options as part of directors’ compensation.
25,000 of these vest on June 1, 2010 and the remainder after one
year.  These options have now lapsed under the terms of their
issue.





In June
2010, we undertook to grant 50,000 options to purchase our common stock as part
of directors’ compensation.





- 10
-


CODA
OCTOPUS GROUP, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




NOTE
9 - WARRANTS AND STOCK OPTIONS




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





Warrants
            
            Nine
      months ended
              July
      31, 2010
            
            
            Year ended
              October 31, 2009Number
            
            
            Weighted
              Average Exercise
              Price
            
            
            Number
            
            
            Weighted
              Average Exercise
              PriceOutstanding
      at beginning of the period
            
            
            32,583,418
            
            
            $
            1.42
            
            
            
            32,583,418
            
            
            $
            1.42Granted
      during the period
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Terminated
      during the period
            
            
            (500,000)
            
            
            
            0.50
            
            
            
            —
            
            
            
            —Outstanding
      at the end of the period
            
            
            32,083,418
            
            
            $
            1.49
            
            
            
            32,583,418
            
            
            $
            1.42Exercisable
      at the end of the period
            
            
            32,083,418
            
            
            $
            1.49
            
            
            
            32,583,418
            
            
            $
            1.42





The
number and weighted average exercise prices of warrants outstanding as of July
31, 2010 are as follows:





Range of
              Exercise Prices
            
            
            Number
              Outstanding
            
            
            Weighted Average
              Contractual Life
              (Yrs)
            
            
            Total Exercisable0.50
            
            
            
            250,000
            
            
            
            0.75
            
            
            
            250,0000.58
            
            
            
            400,000
            
            
            
            0.67
            
            
            
            400,0001.00
            
            
            
            2,750,000
            
            
            
            1.61
            
            
            
            2,750,0001.30
            
            
            
            14,341,709
            
            
            
            1.44
            
            
            
            14,341,7091.70
            
            
            
            14,341,709
            
            
            
            1.44
            
            
            
            14,341,709Totals
            
            
            
            32,083,418
            
            
            
            1.49
            
            
            
            32,083,418




Stock
      Options
            
            Nine
      months ended
              July
      31, 2010
            
            
            Year ended
              October 31, 2009Number
            
            
            Weighted
              Average Exercise
              Price
            
            
            Number
            
            
            Weighted
              Average Exercise
              PriceOutstanding
      at beginning of the period
            
            
            5,595,900
            
            
            $
            1.18
            
            
            
            5,755,900
            
            
            $
            1.18Granted
      during the period
            
            
            —
            
            
            
            —
            
            
            
            50,000
            
            
            
            1.30Terminated
      during the period
            
            
            (3,646,000
            )
            
            
            1.04
            
            
            
            (210,000
            )
            
            
            1.32Outstanding
      at the end of the period
            
            
            1,949,900
            
            
            $
            1.20
            
            
            
            5,595,900
            
            
            $
            1.18Exercisable
      at the end of the period
            
            
            1,738,199
            
            
            $
            1.19
            
            
            
            5,214,149
            
            
            $
            1.17







- 11
-




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





Range of
              Exercise Prices
            
            
            Number
              Outstanding
            
            
            Weighted Average
              Contractual Life
              (Yrs)
            
            
            Total Exercisable1.00
            
            
            
            999,900
            
            
            
            0.58
            
            
            
            999,9001.30
            
            
            
            600,000
            
            
            
            3.05
            
            
            
            388,3001.50
            
            
            
            140,000
            
            
            
            1.72
            
            
            
            140,0001.70
            
            
            
            210,000
            
            
            
            1.92
            
            
            
            210,000Totals
            
            
            
            1,949,900
            
            
            
            1.56
            
            
            
            1,738,199





NOTE
10 – DERIVATIVE LIABILITY




In June
2008, the FASB issued new accounting guidance (FASB ASC 815-40) which
requires entities to evaluate whether an equity-linked financial instrument (or
embedded feature) is indexed to its own stock by assessing the instrument’s
contingent exercise provisions and settlement provisions. Instruments not
indexed to their own stock fail to meet the scope exception of ASC 815 and
should be classified as a liability and marked-to-market. The statement is
effective for fiscal years beginning after December 15, 2008 and is to be
applied to outstanding instruments upon adoption with the cumulative effect of
the change in accounting principle recognized as an adjustment to the opening
balance of retained earnings. The Company has assessed its outstanding
equity-linked financial instruments and has concluded that, effective
November 1, 2009, the value of our warrants will need to be recorded as a
derivative liability due to the fact that the conversion price is subject to
adjustment based on subsequent sales of securities. The cumulative effect of the
change in accounting principle on November 1, 2009 includes an increase in
our derivative liability related to the fair value of the conversion feature of
$2,353,893. Fair value at November 1, 2009 was determined using the
Black-Scholes method based on the following
assumptions:  (1) risk free interest rate of 1.06%;
(2) dividend yield of 0%; (3) volatility factor of the expected market
price of our common stock of 302.22%; (4) an average expected life of
the warrants of 2.22 years and (5) estimated fair value of common
stock of $0.08 per share.




At July
31, 2010 we recalculated the fair value of the conversion feature subject to
derivative accounting and have determined that the fair value at July 31, 2010
is $4,152,026 The fair value of the conversion features was determined using the
Black-Scholes method based on the following
assumptions:  (1) risk free interest rate of 0.74%;
(2) dividend yield of 0%; (3) volatility factor of the expected market
price of our common stock of 304.68%; (4) an average expected life of
the conversion feature of 1.49 years and (5) estimated fair value of
common stock of $0.16 per share.




We have
recorded a positive charge of $1,798,131 during the nine months ended July 31,
2010 related to the change in fair value during the period.





NOTE
11 - INCOME TAXES





The
Company has adopted FASB ASC Topic 740 Income Taxes which requires the
recognition of deferred tax liabilities and assets for the expected future tax
consequences of events that have been included in the financial statement or tax
returns. Under this method, deferred tax liabilities and assets are determined
based on the difference between financial statements and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Temporary differences between taxable
income reported for financial reporting purposes and income tax purposes are
insignificant.




For
income tax reporting purposes, the Company's aggregate U.S. unused net operating
losses approximate $45,400,000 which expire through 2029, subject to limitations
of Section 382 of the Internal Revenue Code, as amended. The deferred tax asset
related to the carry forward is approximately $15,436,000. The Company has
provided a valuation reserve against the full amount of the net operating loss
benefit, because in the opinion of management which is based upon the earning
history of the Company it is more likely than not that the benefits will not be
realized.




For
income tax reporting purposes, the Company's aggregate UK unused net operating
losses approximate $4,368,141, with no expiration. The deferred tax asset
related to the carry-forward is approximately $2,670,000. The Company has
provided a valuation reserve against the full amount of the benefits, because in
the opinion of management based upon the earning history of the Company it is
more likely than not that the benefits will not be realized.




- 12
-




CODA
OCTOPUS GROUP, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




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




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




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




NOTE
12 - CONTINGENCIES AND COMMITMENTS




Litigation




We are
currently engaged in three lawsuits.




The first
one involves the former Chief Executive Officer of our subsidiary, Coda Octopus
Colmek, Inc. (Scott DeBo v Miller & Hilton, Inc. d/b/a Colmek Systems
Engineering and Coda Octopus Group, Inc. (File No. 080923661)).  Mr DeBo
claims breach of his employment contract, tortuous interference with his
contract, termination in violation of public policy and failure to pay wages
when due. He filed a complaint and an amended complaint on November 10, 2008 and
December 10, 2008, respectively. We answered the amended complaint denying Mr.
DeBo’s allegations, raising affirmative defenses on December 22,
2008.  The Parties have now completed the discovery process and we
expect the hearing to be scheduled. We filed a motion on June 8, 2010 for
Partial Summary Judgment and the Plaintiff has now brought a motion for our
motion to be dismissed.  We continue to defend ourselves
vigourously.




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





On April
28, 2010 we instituted legal action in the Supreme Court of the State of New
York against our ex- Chief Executive Officer, ex-Chief Financial Officer and two
other ex-officers of the Company for, among other things, breach of contract. We
have received each of the defendant’s response and we have now filed our
responses.  We intend to pursue our claims against these persons
vigorously in these proceedings.





Operating
Leases





We occupy
our various office and warehouse facilities pursuant to both term and
month-to-month leases. Our term leases expire at various times through September
2015. Future minimum lease obligations are approximately $1,037,408, with the
minimum future rentals due under these leases as of July 31, 2010 as
follows:


2011
            
            $
            118,6342012
            
            
            364,4112013
            
            
            219,4542014
            
            
            178,4332015
      and thereafter
            
            
            156,476Total
            
            $
            1,037,408





Concentrations




We had no
concentrations of purchases of over 5% during the period ended July 31, 2010. We
had sales concentrations of over 5% during the period ended July 31, 2010 due to
sales to a total of three separate customers for $2,650,894.






- 13
-


CODA
OCTOPUS GROUP, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




NOTE
13 - NOTES AND LOANS PAYABLE




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





July
      31,
              2010
            
            
            October 31,
              2009The
      Company has a secured convertible debenture for $12M with a life of 7
      years from February 26, 2008, maturing at 130% of face value, and with
      interest payable every six months, starting in February 2009, at a rate of
      8.5%; During the term, the debentures are convertible into our common
      stock at the option of the Noteholder at a conversion price of $1.05. We
      may also force the conversion of these Notes into our common stock after
      two years in the event that we obtain a listing on a national exchange and
      our stock price closes on 40 consecutive trading days at or above $2.50
      between the second and third anniversaries of this agreement; $2.90
      between the third and fourth anniversaries of this agreement; and $3.50
      after the fourth anniversary of this agreement or where the daily volume
      weighted average price of our stock as quoted on OTCBB or any other US
      National Exchange on which our securities are then listed has, for at
      least 40 consecutive trading days closed at the agreed price. The Company
      has failed to comply with certain covenants contained in the debenture
      agreement.
            
            $
            13,778,643
            
            
            $
            13,067,929The
      Company, through its UK subsidiary Coda Octopus Products Ltd has a 7 year
      unsecured loan note for £100,000; interest rate of 12% annually; repayable
      at borrower’s instigation or convertible into common stock when the share
      price reaches $3.
            
            
            156,043
            
            
            
            165,594Total
            
            $
            13,934,686
            
            
            $
            13,233,523Less:
      current portion
            
            
            13,934,686
            
            
            
            —Total
      long-term portion
            
            $
            —
            
            
            $
            13,233,523




In
connection with the secured convertible debenture noted above and the Cash
Control Framework Agreement (see below), we carry $1,089,574 deferred financing
costs as an asset on the consolidated balance sheet to July 31, 2010, which
represents $1,694,893 in financing closing costs we incurred, net of $ 605,319
in amortization expense at July 31, 2010 and $423,723 in amortization expense at
October 31, 2009. We amortize deferred financing costs over the life of the
financing facility using the straight line method.




On March
16, 2009, the Company and the holder of the secured convertible debenture (“the
Noteholder”) entered into a Cash Control Framework Agreement, pursuant to which
it is assumed that, subject to the Company being fully compliant with the terms
of this agreement and those set out in the Transaction Documents entered into
between the Company and the Noteholder on February 21, 2008, no adverse actions
will be taken by the Noteholder. The agreement provides, among other things, for
the placement of approximately $2.15 million into a segregated cash
account. Under the terms of the agreement, we may request the release of
funds from the account from time to time for working capital purposes, subject
to the Noteholder’s consent and agreed upon terms and conditions. Under the
terms of the agreement, we must also adhere to a strict cost cutting program
which involves reducing our SG&A, R&D and capital expenditure by an
annualized $3.35 million. We believe that the terms of this agreement may
provide us with sufficient liquidity to operate for fiscal 2010. We are in
default under the Transaction Documents and therefore the Noteholder has the
absolute discretion to withdraw funding under the Cash Control Framework
Agreement or the change the terms under which it makes funding available to the
Company.




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




Subsequent
to the year ended October 31, 2009, the Cash Control Framework Agreement
was extended to March 16, 2011. We have been formally advised by the
Noteholder’s agent that the waiver will be extended through June 30, 2011
on the same terms and conditions. We are in default under the Transaction
Documents and the terms of the waiver are subject to no further breaches
occurring.  The Noteholder has accelerated its demand for payment and
has given the Company 120 days from August 23, 2010 to redeem 60 Notes at par
value of $100,000 each.   The Noteholder has the right to enforce
its security over all our assets.





NOTE
14 – SHORT TERM NOTE PAYABLE





In July
2010 the Company secured limited project financing of $970,000 with $200,000 of
interest. This obligation is secured on the specific receivables of the invoices
which the Company will raise in respect of the specific projects financed under
the terms of the project financing agreement.  Under the terms of the
project financing agreement the Company is obligated to repay the capital amount
along with interest at the rate of 20% no later than February 28,
2011.






- 14
-


CODA
OCTOPUS GROUP, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




NOTE
15 - SEGMENT INFORMATION




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




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




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




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




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




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




There are
inter-segment sales between our engineering contracting businesses and our
products businesses, which have been removed from the information shown
below.




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




Nine
      months endedJuly
      31, 2010
            
            
            July
      31, 2009Net
      Sales to External Customers:Contracting
            
            $
            4,331,175
            
            
            $
            7,360,565Products
            
            
            4,919,034
            
            
            
            3,571,018Total
      Sales to External Customers
            
            $
            9,250,210
            
            
            $
            10,931,583Depreciation
      and Amortization:Contracting
            
            $
            143,100
            
            
            $
            223,149Products
            
            
            21,777
            
            
            
            48,179Corporate
            
            
            224,341
            
            
            
            206,520Total
      Depreciation and Amortization
            
            $
            389,218
            
            
            $
            477,848General
      and Administrative Expense:Contracting
            
            $
            2,183,876
            
            
            $
            2,192,744Products
            
            
            1,487,816
            
            
            
            1,448,184Corporate
            
            
            1,478,053
            
            
            
            3,513,131Total
      General and Administrative Expense
            
            $
            5,149,745
            
            
            $
            7,154,059Capital
      Expenditures:Contracting
            
            $
            —
            
            
            $
            1,668Products
            
            
            —
            
            
            
            27,540Corporate
            
            
            18,171
            
            
            
            101,450Total
      Capital Expenditures
            
            $
            18,171
            
            
            $
            130,658Operating
      (Losses):Contracting
            
            $
            (222,108
            )
            
            $
            224,599Products
            
            
            2,149,192
            
            
            
            827,964Corporate
            
            
            (3,177,891
            )
            
            
            (3,274,328
            )Total
      Segment Operating Losses
            
            $
            (1,250,807
            )
            
            $
            (2,221,765
            )






- 15
-


CODA
OCTOPUS GROUP, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)


July
      31, 2010
            
            
            October 31, 2009Segment
      Assets:Contracting
            
            $
            6,305,344
            
            
            $
            7,235,301Products
            
            
            2,103,544
            
            
            
            2,867,693Corporate
            
            
            4,484,541
            
            
            
            3,034,386Total
      Segment Assets
            
            $
            12,893,429
            
            
            $
            13,137,380




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




Those
geographic locations are:




* United
States




*
Europe




The
Company evaluates performance and allocates resources based upon operating
income. The accounting policies of the reportable segments are the same as those
described in the summary of accounting policies. There are inter-segment sales
which have been removed upon consolidation and for the purposes of the
information shown below.




Information
concerning principal geographic areas is presented below according to the area
where the activity is taking place for the period ended July 31, 2010 and the
year ended October 31, 2009:




Nine months endedJuly
      31, 2010
            
            
            July
      31, 2009NET
      SALES TO EXTERNAL CUSTOMERS:United
      States
            
            $
            4,459,713
            
            
            $
            5,187,374Europe
            
            
            4,790,497
            
            
            
            5,744,209TOTAL
      NET SALES TO EXTERNAL CUSTOMERS
            
            $
            9,250,210
            
            
            $
            10,931,583July
      31,   2010
            
            
            October
        31, 2009ASSETS:United
      States
            
            $
            7,370,721
            
            
            $
            7,919,830Europe
            
            
            5,522,708
            
            
            
            5,217,550TOTAL
      ASSETS
            
            $
            12,893,429
            
            
            $
            13,137,380






- 16
-


CODA
OCTOPUS GROUP, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




NOTE 16 – SUBSEQUENT EVENTS




In August
2010 the Company defaulted on the terms of the secured
debenture.  Consequently the Noteholder has served a notice of default
upon the Company on August 23, 2010 and, as part of this notice, accelerated its
demand for the repayment of the $6 million (Repayment Demand) which was
allocated for an Approved Acquisition (as the term is defined under the Loan
Note Instrument) and which the Company failed to make. The Noteholder has the
discretion to withdraw funding under the Cash Control Framework Agreement in the
event of a breach, which includes a default or to vary the terms upon which it
provides funding under the Cash Control Framework Agreement. We have 120 days
from August 23, 2010 to satisfy the Repayment Demand of the Noteholder. Failing
to do so could result in enforcement actions against the Company and its assets
under the terms of the secured debenture in favor of the Noteholder. Currently
we rely on the revenues we generate in the ordinary course of our business
operations and the financing available under the Cash Control Framework
Agreement with the Noteholder as our source of working capital. The withdrawal
of the Cash Control Framework Agreement financing or adverse change in the terms
upon which we are currently financed would affect our operations and could
result in, amongst other things, the curtailment of our operations.




The
Company’s sole source of funding besides the revenues it generates in the
ordinary course of its business is the Cash Control Framework Agreement operated
by the Noteholder.  Given that the Company has defaulted on the terms
of the secured debenture, the Noteholder may withdraw this facility or change
the terms upon which it makes it available to the Company.





The
Company is currently restructuring its business and is negotiating the
appointment of a Chief Restructuring Officer.  The Company intends to
establish a Restructuring Board with the primary goal of (i) addressing the cash
position of the Company; (ii) restructuring the capital structure of the
Company; (iii) reduce costs further; and (iv) re-focus the activities of the
business on its marine products and services business and concentrate its
activities geographically.








- 17
-


ITEM 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OP ERATIONS




Forward-Looking
Statements




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




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




General
Overview




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




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




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




Management
believed that real-time 3D sonar could represent a truly disruptive technology
with the potential to change industry standard practices and procedures. It
envisioned significant applications for this technology in defense, oil and gas
exploration and security, underwater port security, bridge repair, and
large-scale underwater construction projects. Given these beliefs, the Company
decided that the best way to gain access to the capital and the visibility
needed to commercialize real time 3D sonar, and to successfully enter multiple
worldwide markets in the post 9/11 environment would be to move its headquarters
to the USA, and to become a publicly traded company in the United
States.




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




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




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





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





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






- 18
-





4.
            Beginning
      in July 2007, the US Department of Defense (DoD) Technical Support Working
      Group (TSWG) funded Coda Octopus to build and deliver next-generation
      Underwater Inspection SystemsTM (UIS) for the US Coast Guard and other
      potential users. The program has included money to build and deliver
      current systems, as well as a roadmap for their future development. During
      the year ended October 31, 2007, the Company delivered three UIS systems
      to the US Coast Guard against a purchase order totaling $2.59 million. In
      FY 2008 the Company was funded for an additional $1.53 million to develop
      certain mutually agreed technical enhancements to the system. The
      Company’s latest contract with TSWG covers the funding of an additional
      $1.4 million for additional enhancements and the delivery of additional
      systems. The Company believes it has successfully completed the key
      second-stage enhancements sought by the DoD and the Coast Guard. As a
      result, management believes that the Company is positioned to build and
      deploy fully integrated systems that meet the highest standards in the
      world.
              
              These
      will enable users to “see” objects that are smaller than a baseball from a
      distance of more than 100 meters, and to do so in all kinds of ocean or
      water conditions at virtually any depth. In addition, the Company through
      its Colmek subsidiary, has more than 20 years of successful experience as
      contractor with the Department of Defense, and as a subcontractor with
      various large prime contractors including defense
    contractors.





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




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




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




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




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




Products
and Services




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




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






- 19
-





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





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





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





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




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




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




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





 ̈
            Early
      recognition of the need for 3D real-time sonar in defense/security
      applications. ̈
            Expansion
      into new commercial markets like commercial marine survey with innovative
      products.





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




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




Critical
Accounting Policies




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




Below is
a discussion of accounting policies that we consider critical to an
understanding of our financial condition and operating results and that may
require complex judgment in their application or require estimates about matters
which are inherently uncertain. A discussion of our significant accounting
policies, including further discussion of the accounting policies described
below, can be found in Note 1, "Summary of Significant Accounting Policies" of
our Annual Consolidated Financial Statements on Form 10-K.







- 20
-




Revenue
Recognition




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




Revenue
is derived from our products sold by our subsidiaries, Coda Octopus Products
Inc. and  Coda Octopus Products Ltd., from sales of underwater
technologies and equipment for imaging, mapping, defense and survey
applications. Revenue is also derived through service contracts gained by our
Martech and Colmek businesses.




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




For
arrangements with multiple deliverables, we recognize product revenue by
allocating the revenue to each deliverable based on the fair value of each
deliverable in accordance with ASC 605, and recognize revenue for equipment upon
delivery and for installation and other services as performed. ASC 605 was
effective for revenue arrangements entered into in fiscal periods beginning
after June 15, 2003.




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




Revenues
derived from our software license sales are recognized in accordance with FASB
ASC Topic 985 - Software. For software license sales for which any services
rendered are not considered essential to the functionality of the software, we
recognize revenue upon delivery of the software, provided (1) there is evidence
of an arrangement, (2) collection of our fee is considered probable and (3) the
fee is fixed and determinable.




Recoverability
of Deferred Costs




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




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




Stock
Based Compensation




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






- 21
-


Income
Taxes




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




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




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




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




Results
of Operations




Recent
Developments




Cash
Framework Agreement




On March
16, 2009 the Company entered into a “Cash Control Framework Agreement” with the
Royal Bank of Scotland (the debenture holder) pursuant to which it is assumed
that, subject to the Company being compliant with the terms of the transaction
documents entered into on February 21, 2008, no adverse actions will be taken by
the debt holder. This Agreement has been extended until March 16, 2011 and it
creates debtor book financing package to allow the Company to obtain up to
$2.15M in working capital in exchange for receivables or project financing. As
part of the terms of that agreement, the Company committed to a cost reduction
program (including management pay cuts) to reduce significantly our SG&A,
R&D and Capital Expenditure costs.





In
addition, on January 18, 2010, the debenture holder waived for one year the
right to demand repayment of the loan as a result of our failure to observe
certain specified loan covenants. The waiver will expire on the first
anniversary of the waiver letter.  We have been formally advised by the
Noteholder’s agent that the waiver will be extended through June 30, 2011
on the same terms and conditions.  The waiver is subject to the
Company not committing any further breaches.  In August 2010 the
Company defaulted under the terms of the secured debenture. Consequently the
Noteholder has served a notice of default upon the Company and, as part of this,
accelerated its demand for the repayment of the $6 million (Repayment Demand)
which was under the terms of the debenture allocated for an Approved Acquisition
(as the term is defined under the Loan Note Instrument) and which the Company
failed to make. The Noteholder has the discretion to withdraw the Cash Control
facility in the event of a breach, which includes a default. We have 120 days
from August 23, 2010 to satisfy the Repayment Demand of the Noteholder. Failing
to do so could result in enforcement actions against the Company and its assets
under the terms of the secured debenture in favor of the Noteholder. Currently
we rely on the revenues we generate in the ordinary course of our business
operations and the financing available under the Cash Control Framework
Agreement with the Noteholder as our source of working capital. The withdrawal
of the Cash Control Framework Agreement financing or adverse change in the terms
upon which we are currently financed would affect our operations and could
result in, amongst other things, the curtailment of our operations.






- 22
-


Cost
Cutting Program




In
February 2009, we embarked on a cost reduction program. This resulted in
annualized savings of at least $3.35 million for the year ended October 31,
2009. Actual savings for the year ended October 31, 2009 amounted to $2.1
million against budget. These cost savings against budget were achieved in the
following areas:




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




The
following table shows actual quarterly savings against budget for the year ended
October 31, 2009:




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




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




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




We
believe that the cost cutting program has achieved its objectives and we expect
to maintain our SG&A at around $8.5 million during the current fiscal year
(down from approximately $11.238 million for the 2009 Period).




Reorganization




The
Company commenced a reorganization program in which the R&D unit has become
a more horizontal unit working to make advances in our core technology (3D
sonar) while helping to spread these advances across the Group, as well as
promoting technology advances from other parts of the Group.





Within
our products company in Edinburgh, we formed a dedicated unit which is focused
entirely on the Echoscope® rollout plan for the various markets the Company has
identified. The function of this unit is to oversee production, development,
documenting and delivering the core product to the defined markets.




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




On or
around September 2009, we also reorganized our executive and management
structure by eliminating the Senior Vice President (SVP) tier which comprised
eight SVPs and replacing the Group CEO who had been the founder and Group CEO
since inception.





Since the
beginning of the current financial year, a number of vacancies on the Board of
Directors have been filled and the Board now consists of two executive directors
and two non-executive directors. In August 2010, two of our non-executive
directors resigned and one executive director (our Chief Financial Officer) as a
result of the necessitation to restructure our business and the time allocation
that will be required to be dedicated for the restructuring of the
business.






- 23
-


Comparison
of three months ended July 31, 2010, compared to three months ended July 31,
2009.




Revenue: Total revenues for
the quarter ended July 31, 2010 (the “2010 Period”) and the quarter ended July
31, 2009 (the “2009 Period”) were $2,468,415 and $3,425,030 respectively,
representing a decrease of 27.9%. Contributing factors to this decline were the
more conservative redefinition our policy on work in progress (which can be
recognized as revenues) and which significantly affected the account for
business in this quarter, adverse exchange rate movements combined with the
global economic downturn, the limitations on working capital and the redefining
of the Company’s policy on work in progress (which can be recognizd as revenues)
affected the business in this quarter.




Gross Margins: Margins were
weaker in the 2010 Period at 48.9% (gross profit of $1,208,937) compared to
51.4% ($1,760,763) in the 2009 Period caused by the drop in revenues resulting
from the adoption of a more conservative accounting of work in
progress.




Research and Development
(R&D). R&D increased from $256,929 in the 2009 Period to $430,745
in the 2010 Period. In line with our cost cutting plan . The difference being
the timing of receipt of our R&D tax credit which was worth £205,000 and was
recorded against this quarter in 2009. This level of spending still allows us to
devote considerable R&D resources to introduce product variants of our core
technology to the market over the next months.




Selling, General and Administrative
Expenses (SG&A). SG&A expenses for the 2010 Period decreased to
$1,665,381 from $1,864,880 in 2009, a reduction of 10.7% which reflects activity
under the cost reduction plan that was executed during the fiscal year ended
October 31, 2009 and up to second quarter of 2010.





Across
the Group, key areas of the 2010 Period expenditure include wages and salaries,
where we spent $1,200,772 or 71.1% during the 2010 Period against $1,635,990 or
78.9% of our SG&A cost during the 2009 Period; legal and professional fees,
including accounting, audit and investment banking services, where we spent
$256,359 or 15.2% in 2010 against $99,579 or 8% of our SG&A costs in the
2009 Period, the increase being due to a the servicing of a number of queries
from the SEC; travel costs decreased to $61,836 or 3.6% in the 2010 Period from
$152,025 or 7.3% of SG&A in the 2009 Period, rent for our various locations
decreased in the 2010 Period to $148,462 or 8.8% against $183,530 or 8.9% of
SG&A in 2009; marketing increased in the 2010 Period to $22,188 or 1.3% of
SG&A against $- or 0% of SG&A in 2009.





Operating Income/Loss. We had
an operating loss of $887,189 in the 2010 Period against an operating loss of
$361,046 in the 2009 Period. This increase in operating loss is due to the
change in our accounting of work in progress.




Derivative
Liability





In June
2008, the FASB issued new accounting guidance (FASB ASC 815-40) which requires
entities to evaluate whether an equity-linked financial instrument (or embedded
feature) is indexed to its own stock by assessing the instrument’s contingent
exercise provisions and settlement provisions. The Company has assessed its
outstanding equity-linked financial instruments and has concluded that the value
of our warrants will need to be recorded as a derivative liability





Fair
value at November 1, 2009 was determined using the Black-Scholes method based
and produced an estimated fair value of common stock of $0.08 per share. At July
31, 2010 we recalculated the fair value of the conversion feature subject to
derivative accounting and have determined that the fair value at July 31, 2010
is $4,152,026. Accordingly, we have recorded a positive charge of $1,835,295
during the three months ended July 31, 2010 related to the change in fair value
during the quarter.


.


Interest Expense. Interest
expense increased in the 2010 Period to $657,841 from the 2009 Period interest
costs which were $432,018. In both periods we have included amortization of the
30% redemption premium for our convertible note, at a cost of $128,571. We have
accrued interests on the convertible note of $701,163.




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





Segment
Analysis





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




Examining
HQ SG&A, which is where we have concentrated our cost cutting exercise, we
find that overall HQ SG&A (defined as Group Headquarters, and the UK and US
Holding Companies) was reduced from $1,906,411 in the 2009
Period to $603,262 in the 2010 Period. Components of this are Rent and
Utilities reduced from $54,016 to $51,146, Office Expenses from $56,106 in 2009
to $9,737in Q3 2010, Payroll from $437,976 to $ 78,448, Insurances from $78,226
to $46,542, Professional Services from $356,696 to $310,916, Forex from $971 to
$21, Marketing from $107,425 to negative $1,703, and Travel from $32,218 to
$14,336.






- 24
-




We
operate in two business segments, Contracting Sales, and Product Sales. Our
contracting business consists of Coda Octopus Colmek, Coda Octopus Martech
(including the acquired Dragon Design) and Coda Octopus Tactical Intelligence.
Our Products business consists of Coda Octopus Products Limited and Coda Octopus
Products Inc.




Revenues
from Contracting Sales during the quarter ended July 31, 2010 were $1,304,618 or
52.8% of the Group revenues versus $2,461,070 in the quarter ended July 31,
2009, whereas revenues from Products were $1,163,797 or 47.2% of the Group
revenues, versus $963,960 in 2009.




SG&A
costs incurred in our contracting businesses were $744,614 in the quarter ended
July 31, 2010 versus $674,726 in the quarter ended July 31, 2009. SG&A costs
in our Products business in the quarter ended July 31, 2010 were $328,007 versus
$481,781 in the quarter ended July 31, 2009.




Operating
profit in our contracting business was $919,058 in the quarter ended July 31,
2010 compared to an operating profit of $979,059 in the quarter ended July 31,
2009. In the quarter ended July 31, 2010 we made an operating profit of $419,266
in our Products business versus an operating loss of $186,319 in the
quarter ended July 31, 2009.





Comparison
of nine month period ended July 31, 2010, compared to nine months period ended
July 31, 2009.




Revenue:
Total revenues for the nine month period ended July 31, 2010 (the “2010 Period”)
and the nine month ended July 31, 2009 (the “2009 Period”) were $9,250,210 and
$10,931,583 respectively, representing a decrease of 15.4%. Contributing factors
to this lack of growth were adverse exchange rate movements combined with the
global economic downturn and particularly in the oil and gas industry at the
start of the year, which still affected the business in this period. In the
current period we have also revised our revenue policy around work in
progress.




Gross Margins: Margins for
the 2010 Period were 56.9% compared to 57.2% in the 2009 Period, reflecting a
slightly different mix of sales in our businesses (products versus project work)
combined with lower revenues.





Research and Development
(R&D). R&D spending increased from $1,317,089 in the 2009 Period
to $1,362,931 in the 2010 Period. This level of spending still allows us to
devote considerable R&D resources to introduce product variants of our core
technology to the market over the next months.





Selling, General and Administrative
Expenses (SG&A). SG&A expenses for the 2010 Period decreased to
$5,149,745 from $7,154,059 in 2009, a reduction of 28.2% which reflects activity
under the cost reduction plan that was executed during the fiscal year ended
October 31, 2009 and in quarter one of 2010.





Across
the Group, key areas of 2010 Period expenditure include wages and salaries,
where we spent $3,646,881 during the 2010 Period against
$5,331,368  during the 2009 Period a decrease of 31.6%; legal and
professional fees, including accounting, audit and investment banking services,
where we spent $618,036 in 2010 against $906,375 in 2009 a decrease of 31.8% ;
travel costs decreased to $282,312 in 2010 from $334,144 in the 2009 Period a
decrease of 15.5%; rent for our various locations decreased to $446,386 in 2010
against $492,192 in 2009 a decrease of 9.3%; marketing reduced in the 2010
Period to $186,106 against $459,713 in 2009 a decrease of 59.5%.





Operating Loss. We made a
loss from operations of $1,250,807 in the 2010 Period against an operating loss
of $2,221,765 in the 2009 Period. This change is due to variances in valuation
of the warrant liability.




Liquidity
and Capital Resources




For the
period ended July 31, 2010, the Company has an accumulated deficit of
$61,108,336 negative working capital of $20,184,037 a capital deficit of
$14,832,542 and generated a negative cash flow from operations of $729,718 in
the 2010 Period against a deficit of $1,415,685 in the 2009 Period. The Company
is completely dependent upon its ability to generate revenue from the sale of
its products and services and the discretion of the Noteholder to release cash
to cover operations. In this financial year we have so far received over $18m
million dollars of additional contracts and purchase orders, compared with total
revenues of $13.2m in the last financial year. The limitation of the Company’s
working capital has hampered these being realized as timely
revenues.





Our
ability to survive current financial difficulties resulting from our cash flow
deficit is dependent on our capacity to generate revenues from the sale of our
products and services or to secure additional working capital finance. In
addition, we are highly dependent on the discretion of the Noteholder to release
cash to us to cover our operating expenses.  Given our default under
the terms of the debenture, the Noteholder has the discretion to withdraw the
facility or to vary the terms on which it provides us with working
capital.






- 25
-




Derivative
Liability





This was
a new requirement under GAAP accounting rules for fiscal years 2010 and onwards.
The fair value at July 31, 2010 is $4,152,026.





Interest Expense . Interest
expense increased in the 2010 Period to $1,554,225 from the 2009 Period interest
costs which were $1,256,256. In both periods we have included amortization of
the 30% redemption premium for our convertible note, at a cost of
$128,571.




Dividends and Other Stock
Charges . In the 2010 Period, no dividends were due to be paid on the
Series A Preferred stock, versus $47,382 in 2009. This was due to the fact that
we had no surplus or net profits in 2010 from which to declare and pay such
dividends.




Segment
Analysis




We
operate in two business segments, Contracting Sales, and Product Sales. Our
contracting business consists of Coda Octopus Colmek, Coda Octopus Martech
(including the acquired Dragon Design) and Coda Octopus Tactical Intelligence.
Our Products business consists of Coda Octopus Products Limited and Coda Octopus
Products Inc.




Revenues
from Contracting Sales during the nine month period ended July 31, 2010 were
$4,331,175 or 46.8% of the Group revenues versus $7,360,565 in the period ended
July 31, 2009, whereas revenues from Products were $4,919,034 or 53.2% of the
Group revenues, versus $3,571,018 in 2009.




SG&A
costs incurred in our contracting businesses were $2,183,876 for the nine months
ended July 31, 2010 versus $1,969,596 in the corresponding period ended July 31,
2009. SG&A costs in our Products business in the nine months ended July 31,
2010 were $1,487,816 versus $1,400,005 in the corresponding period ended July
31, 2009.




Operating
loss in our contracting business was $222,108 for the nine months ended July 31,
2010 versus an operating profit of  $224,599  in the same
period ended July 31, 2009. In the nine months ended July 31, 2010 we made an
operating profit of $2,149,192 in our Products business versus an operating
profit of $827,964 in the same period ended July 31, 2009.







- 26
-




Financing
Activities




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




Secured
Convertible Debentures




On
February 21, 2008 we entered into and completed the transactions contemplated
under a series of agreements providing for the issuance to a London based
institutional investor, The Royal Bank of Scotland plc of senior secured
convertible notes in the principal amount of $12,000,000 (the “Notes”). The
Notes are secured by all of the assets of the Company and its subsidiaries and
mature 84 months after the date of issuance at which time they are redeemable at
130% of the face amount of the Notes. The Notes accrue interest at the annual
rate of 8.5% which is payable in semi-annually in arrears. The Notes also
stipulate additional interest payments of 2% per annum above the base rate
quoted by The Royal Bank of Scotland plc from time to time, in the event that
the semi-annual interest payments are not paid by us on the due dates. All of
these amounts are payable by us in cash. Of the proceeds, $6,000,000 constituted
a specific purpose loan and in the event that we failed to use the proceeds as
agreed within 12 months from the closing, then, unless alternative investments
were approved by the holders of the Notes, this $6,000,000 was repayable in
February 2009. In such case there will be a partial redemption of 60 of the
notes (having an aggregate nominal value of $6 million). During the term, the
Notes are convertible into our common stock at the option of the Noteholder 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
January 2009, we notified the Noteholder that the balance of the $6,000,000 had
fallen below $4 million.






- 27
-




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




On
January 18, 2010, the Noteholder notified us in writing that it had waived its
right to demand repayment of the loan as a result of our failure to observe
certain specified loan covenants. The waiver will expire on the first
anniversary of the waiver letter. We have been advised by the Noteholder, that
the waiver will be extended until June 30, 2011 on the same terms and
conditions.  The waiver is subject to the Company not committing any
further breaches.  In August we defaulted under the terms of the
secured debenture.  Consequently the Noteholder has served a notice of
default upon the Company and, as part of this, accelerated its demand for the
repayment of the $6 million (Repayment Demand) which was allocated for an
Approved Acquisition (as the term is defined under the Loan Note Instrument) and
which the Company failed to make. The Noteholder has the discretion to withdraw
the Cash Control facility in the event of a breach, which includes a default. We
have 120 days from August 23, 2010 to satisfy the Repayment Demand of the
Noteholder. Failing to do so could result in enforcement actions against the
Company and its assets under the terms of the secured debenture in favor of the
Noteholder. Currently we rely on the revenues we generate in the ordinary course
of our business operations and the financing available under the Cash Control
Framework Agreement with the Noteholder as our source of working capital. The
withdraw of the Cash Control Framework Agreement financing or adverse change in
the terms upon which we are currently financed would affect our operations and
could result in, amongst other things, the curtailment of our
operations.





In July
2010 the Company secured limited project financing of $970,000 which is secured
on the specific receivables of the invoices which the Company will raise in
respect of the specific projects agreed under the terms of the project
financing.  Under the terms of the project financing the Company is
obligated to repay the capital amount along with interest at the rate of 20% no
later than February 28, 2011.





Our
ability to survive current financial difficulties resulting from our cash flow
deficit is dependent on our capacity to generate revenues from the sale of our
products and services. In addition, we are highly dependent on the discretion of
the Noteholder to release cash to us to cover our operating
expenses.  Given our default under the terms of the debenture, the
Noteholder has the discretion to withdraw the facility or to release funds to us
on such terms as it thinks fit. .





If we are
not successful in generating sufficient liquidity from operations or in raising
sufficient capital resources in the short term, on terms acceptable to us, this
could have a material adverse effect on our business, results of operations
liquidity and financial condition. In order to fund our operations during the
current fiscal year, we estimate that we need to generate additional cash beyond
that which is available to us Cash Control Framework Agreement to be able to
continue our operations at their current levels. However, there can be no
assurance that we will be successful in generating sufficient revenues from
operations.




Other
than disclosed herein, we presently do not have any available credit, bank
financing or other external sources of liquidity. Due to our brief history and
historical operating losses, our operations have not generated sufficient
liquidity. We will need to continue to raise additional capital in order to
maintain our 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 or divest ourselves of assets. There can be no assurance that we
will be successful in obtaining additional funding.




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




On
January 18, 2010 the Noteholder notified us in writing that it had waived its
right to demand repayment of the loan as a result of the failure to observe
certain specified loan covenants.  The waiver is subject to the
Company not committing any further breaches.  However, in August 2010
we defaulted under the terms of the secured debenture. Consequently the
Noteholder has served a notice of default upon the Company and accelerated its
demand for the repayment of the $6 million (Repayment Demand) which was
allocated for an Approved Acquisition (as the term is defined under the Loan
Note Instrument) and which the Company failed to make. The Noteholder has the
discretion to withdraw the Cash Control facility in the event of a breach, which
includes a default. We can give no assurance that we will be successful in
meeting the Repayment Demand when due or agree on a satisfactory payment
arrangement with the Noteholder.. If we are unable to raise additional capital
in the near future, the Company may have to curtail its business operations
significantly.




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







- 28
-




Inflation
and Foreign Currency




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




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




The
translation of the Company’s UK operations’ pound Sterling denominated balance
sheets into US dollars has been affected by the weakening of the average value
of the US dollar against the British pound sterling in the relevant time periods
from $1.47 in 2009, to $1.56 in 2010, an approximate 7% depreciation in value.
These are the values that have been used in the calculations below.




The
translation of the Company’s Norwegian operation’s Kroner denominated balance
sheets into US dollars, as of October 31, 2009, has also been affected by the
currency fluctuations of the US dollar against the Kroner from and average rate
of $0.146 during 2009, to $0.164 during 2010, an approximate 11% change in
value. These are the values that have been used in the calculations
below.




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




Pound Sterling
            
            
            Norwegian KronerActual
              Results
            
            
            Constant
              Rates
            
            
            Actual
              Results
            
            
            Constant
              Rates
            
            
            Total EffectRevenues
            
            $
            5,200,482
            
            
            $
            5,106,993
            
            
            $
            
            
            
            $
            
            
            
            $
            (93,489
            )Costs
            
            
            5,164,116
            
            
            
            5,071,281
            
            
            
            455,797
            
            
            
            396,985
            
            
            
            (151,647
            )Net
      Income/(Losses)
            
            
            36,367
            
            
            
            35,713
            
            
            
            (455,797
            )
            
            
            (396,985
            )
            
            
            58,158Assets
            
            
            18,883,581
            
            
            
            19,638,412
            
            
            
            780,446
            
            
            
            725,231
            
            
            
            699,595Liabilities
            
            
            15,567,558
            
            
            
            14,437,304
            
            
            
            980,756
            
            
            
            909,550
            
            
            
            (1,201,460
            )Net
      Assets
            
            
            3,316,023
            
            
            
            5,201,107
            
            
            
            (200290
            )
            
            
            (184,319
            )
            
            
            1,901,055





This
table shows that the effect of constant exchange rates, versus the actual
exchange rate fluctuations, increased profits for the year by $58,158 and
increased net assets by $1,901,055. In addition, the Company booked
transactional exchange rate losses of $38,494 during 2010. All of these amounts
are material to our overall financial results.






- 29
-


Off-Balance
Sheet Arrangements




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




Item
4T. Controls and Procedures





a)
Evaluation of Disclosure Controls and Procedures





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




The
Company’s management, under the supervision and with the participation of the
Company's Chief Executive Officer and the Chief Financial (and principal
accounting) Officer, carried out an evaluation of the effectiveness of the
design and operation of the Company's disclosure controls and procedures (as
defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act) as of July 31,
2010. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company’s disclosure controls and
procedures were ineffective as of the end of the period covered by this report.
During the period ended July 31, 2010 Management commissioned an independent
evaluation designed to provide recommendations to address control and procedure
issues identified in the prior report and the current evaluation. Management has
commenced the process of implementing these recommendations designed to
remediate the material weakness previously identified.





The
Company continues to investigate ways to improve its disclosure controls and
procedures.





(b)
Changes in Internal Controls.




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






- 30
-


PART
II - OTHER INFORMATION





Item
1. Legal Proceedings





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




We are
currently engaged in three lawsuits.





The first
one involves the former Chief Executive Officer of our subsidiary, Coda Octopus
Colmek, Inc. (Scott DeBo v Miller & Hilton, Inc. d/b/a Colmek Systems
Engineering and Coda Octopus Group, Inc. (File No. 080923661)).  Mr DeBo
claims breach of his employment contract, tortuous interference with his
contract, termination in violation of public policy and failure to pay wages
when due. He filed a complaint and an amended complaint on November 10, 2008 and
December 10, 2008, respectively. We answered the amended complaint denying Mr.
DeBo’s allegations, raising affirmative defenses on December 22,
2008.  The Parties have now completed the discovery process and we
expect the hearing to be scheduled. We filed a motion on June 8, 2010 for
Partial Summary Judgment and the Plaintiff has now brought a motion for our
motion to be dismissed.  We continue to defend ourselves
vigorously.




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





On April
28, 2010 we instituted legal action in the Supreme Court of the State of New
York against our ex- Chief Executive Officer, ex-Chief Financial Officer and two
other ex-officers of the Company for, among other things, breach of contract. We
have received each of the defendant’s response and we have now filed our
responses.  We intend to pursue our claims against these persons
vigorously in these proceedings.




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




Not
Applicable.





Item
3. Defaults Upon Senior Securities




We have
defaulted upon the senior secured debenture and have been served with Notice of
Default by the Noteholder (See Note 2 and Item 2 for fuller
discussion).





Item
4. Removed and Reserved




None.





Item
5. Other Information




None.





Item
6. Exhibits




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






- 31
-


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:September
      20, 2010
            
            /s/ Geoff
      TurnerGeoff
      TurnerChief
      Executive Officer