Unassociated Document

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended January 31, 2010

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

For the transition period from ______________ to ______________

Commission File Number 000-52815

CODA OCTOPUS GROUP, INC.

(Exact name of registrant as specified in its charter)

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

164 West, 25 th Street, 6R, New York		10001
(Address of principal executive offices)		(Zip Code)

Registrant's telephone number, including area code:		(212) 924-3442

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

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

Large accelerated filer o

Accelerated filer o Non-accelerated filer o

Smaller reporting company x

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

Yes o No x

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

INDEX

		Page
PART I - Financial Information		1

Item 1: Financial Statements		1

Three Months Ended January 31, 2010 and 31 October, 2009

Condensed Consolidated Balance Sheet as of 31 January, 2010 (Unaudited) and 31 October, 2009		1

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended January 31, 2010 and 2009 (Unaudited)		2

Condensed Consolidated Statement of Deficiency in Stockholders’ Equity for the (Unaudited) Three Months Ended January 31, 2010		3

Condensed Consolidated Statements of Cash Flows for the Three months ended January 31, 2010 and 2009 (Unaudited)		4

Notes to Condensed Consolidated Financial Statements (Unaudited)		5

Item 2: Management's Discussion and Analysis or Plan of Operation		24

Item 4T: Controls and Procedures		35

PART II - Other Information		36

Item 1: Legal Proceedings		36

Item 2: Unregistered Sales of Equity Securities and Use of Proceeds		36

Item 3: Defaults Upon Senior Securities		36

Item 4: Submission of Matters to a Vote of Security Holders		36

Item 5: Other Information		36

Item 6: Exhibits		36

Signatures		37

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CODA OCTOPUS GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

JANUARY 31, 2010 (UNAUDITED) and OCTOBER 31, 2009

	January 31,			October 31,
	2010			2009
ASSETS

Current assets:
Cash and cash equivalents	$	195,661		$	275,885
Restricted cash, Note 2		966,525			994,081
Short-Term Investments, Note 4		25,500			51,000
Accounts receivable, net of allowance for doubtful accounts		1,739,314			2,033,879
Inventory		2,560,774			2,798,425
Unbilled receivables, Note 3		767,440			690,344
Other current assets, Note 5		212,720			285,691
Prepaid expenses		245,062			247,134

Total current assets		6,712,996			7,376,439

Property and equipment, net, Note 6		220,970			267,964
Deferred financing costs, net Note 13		1,210,638			1,271,170
Goodwill and other intangible assets, net, Note 7		4,189,298			4,221,807

Total assets	$	12,333,902		$	13,137,380

LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable, trade	$	2,311,029		$	2,390,039
Accrued expenses and other current liabilities		4,454,068			4,626,164
Warrant liability, Note 10		798,987			-
Deferred revenues, Note 3		333,381			398,482
Deferred payment related to acquisitions		396,971			404,274

Total current liabilities		8,294,436			7,818,959

Loans and notes payable, long term, Note 13		13,612,668			13,233,523

Total liabilities		21,907,104			21,052,482

Defiency in Stockholders' equity:
Preferred stock, $.001 par value; 5,000,000 shares authorized, 6,287 Series A issued and outstanding, as of January 31, 2010 and October 31, 2009 respectively		6			6
Nil shares Series B issued and outstanding as of January 31, 2010 and October 31, 2009 respectively		-			-
Common stock, $.001 par value; 150,000,000 shares authorized, 49,000,244 shares issued and outstanding as of January 31, 2010 and October 31, 2009 respectively		49,000			49,000
Common Stock subscribed		96,350			96,350
Additional paid-in capital		46,843,356			51,766,495
Accumulated other comprehensive loss		(780,408	)		(696,617	)
Accumulated deficit		(55,781,506	)		(59,130,336	)

Total Defiency in stockholders' equity		(9,573,202	)		(7,915,102	)

Total liabilities and Defiency in stockholders' equity	$	12,333,902		$	13,137,380

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

CODA OCTOPUS GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

FOR THE THREE MONTHS ENDED JANUARY 31, 2010 and 2009

(UNAUDITED)

	January 31,			January 31,
	2010			2009

Net revenue	$	3,068,210		$	3,199,106

Cost of revenue		1,305,979			1,442,147

Gross profit		1,762,231			1,756,959

Research and development		477,013			603,681
Selling, general and administrative expenses		1,635,426			2,902,719

Total operating expenses		2,112,439			3,506,400

Operating loss		(350,208	)		(1,749,441	)

Other income (expenses)		9,983			27,640
Interest expense		(441,582	)		(397,424	)
Gain on change in fair value of warrant liability		1,554,908			-

Total other income (expense)		1,123,309			(369,784	)

Income (Loss) before income taxes		773,101			(2,119,225	)

Provision for income taxes		-			-

Net income (loss)		773,101			(2,119,225	)

Preferred Stock Dividends:
Series A		-			(31,149	)

Net Income (Loss) Applicable to Common Shares	$	773,101		$	(2,150,374	)

Net Income (Loss) per share, basic and diluted		0.02			(0.04	)

Net Loss per share, basic and diluted See Note 1		(0.02	)		-

Weighted average shares outstanding		49,000,244			48,902,367

Comprehensive income (loss):

Net income (loss)	$	773,101		$	(2,119,225	)

Foreign currency translation adjustment		(58,291	)		332,900
Unrealized (loss) on investment		(25,500	)		(722,500	)

Comprehensive income (loss)	$	689,310		$	(2,508,825	)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

CODA OCTOPUS GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN DEFICIENCY IN STOCKHOLDERS' EQUITY

FOR THE THREE MONTHS ENDED JANUARY 31, 2010

(UNAUDITED)

															Additional			Accumulated
	Preferred Stock Series A				Preferred Stock Series B				Common Stock				Stock		Paid-in			Other			Accumulated
	Shares		Amount		Shares		Amount		Shares		Amount		Subscribed		Capital			Comprehensive loss			Deficit			Total


Balance, October 31, 2009		6,287	$	6		-	$	-		49,000,244	$	49,000	$	96,350	$	51,766,495		$	(696,617	)	$	(59,130,336	)	$	(7,915,102	)

Fair value of options issued as compensation																6,483									6,483

Cumulative effect of warrant liability																(4,929,622	)					2,575,729			(2,353,893	)

Foreign currency translation adjustment																			(58,291	)					(58,291	)

Unrealized (loss) on marketable securities																			(25,500	)					(25,500	)

Net income																						773,101			773,101

Balance, January 31, 2010		6,287		6		-		-		49,000,244		49,000		96,350		46,843,356			(780,408	)		(55,781,506	)		(9,573,202	)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

CODA OCTOPUS GROUP, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE THREE MONTHS ENDED JANUARY 31, 2010 and 2009

(UNAUDITED)

	2010			2009


CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss)	$	773,103		$	(2,119,225	)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization		123,376			161,586
Stock based compensation		6,483			196,485
Change in fair value of warrant liability		(1,554,908	)		-
Financing costs		383,562			383,571
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable		216,390			520,222
Inventory		237,651			(281,987	)
Prepaid expenses		2,070			21,586
Other receivables		33,948			(251,692	)
Accounts payable and accrued expenses		(211,033	)		(446,350	)
Due to related parties		-			(40,283	)

Net cash provided by/(used in) operating activities		10,642			(1,856,087	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		-			(36,587	)
Purchases of intangible assets		(7,690	)		-
Cash subject to restriction		(27,556	)		1,017,007
Acquisitions		-			(208,495	)
Cash acquired in acquisitions		-			877

Net cash used by investing activities		(35,246	)		772,802

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayment of) loans		-			38,026
Preferred stock dividend		-			(47,354	)

Net cash provided by financing activities		-			(9,328	)

Effect of exchange rate changes on cash		(55,620	)		(384,059	)

Net (decrease) in cash		(80,224	)		(1,476,672	)

Cash and cash equivalents, beginning of period		275,885			3,896,149

Cash and cash equivalents, end of period	$	195,661		$	2,419,477

Cash paid for:
Interest	$	58,020		$	13,853
Income taxes		-			-

Supplemental Disclosures:

During the three months ended January 31, 2009, 146,580 shares of common stock were issued, 43,694 of which were subscribed for in the year ended October 31, 2008, and the other 102,886 shares were issued as payment of $18,520 compensation.	$	-		$	18,520.00


Acquisition of Dragon:
Current assets acquired		-			147,039
Cash acquired		-			877
Equipment acquired		-			51,336
Goodwill and other intangible assets		-			342,013
Liabilities assumed		-			(201,166	)
Deferred payments		-			(250,782	)

Cash Paid for Acquisition		-			89,317

Acquisition of Tactical:
Current assets acquired		-			-
Cash acquired		-			-
Equipment acquired		-			5,000
Goodwill and other intangible assets		-			252,400
Options issued		-			(7400	)
Deferred note payable		-			(125,000	)

Cash Paid for Acquisition		-			125,000

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

CODA OCTOPUS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1 - SUMMARY OF ACCOUNTING POLICIES

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

General

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

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

Business and Basis of Presentation

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

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

Use of Estimates

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

Revenue Recognition

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

For arrangements with multiple deliverables, we recognize product revenue by allocating the revenue to each deliverable based on the fair value of each deliverable in accordance with ASC 605, and recognize revenue for equipment upon delivery and for installation and other services as performed.

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

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

CODA OCTOPUS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Foreign Currency Translation

Coda translates the foreign currency financial statements of its foreign subsidiaries in accordance with the requirements of ASC 830 - Foreign Currency Matters. Assets and liabilities are translated at exchange rates existing at the balance sheet dates, related revenue and expenses are translated at average exchange rates in effect during the period and stockholders’ equity, fixed assets and long-term investments are recorded at historical exchange rates. Resulting translation adjustments are recorded as a separate component in stockholders' equity as part of accumulated other comprehensive income (loss). Foreign currency transaction gains and losses are included in the statement of income.

Income Taxes

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

Cash and Cash Equivalents

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

Concentrations of Credit Risk

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

Accounts Receivable

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

Fair Value of Financial Instruments

FASB ASC 825-10-50 - Financial Investments, requires disclosure of the fair value of certain financial instruments. The carrying value of cash and cash equivalents, accounts receivable, other receivables, accounts payable and short-term borrowings, as reflected in the balance sheets, approximate fair value because of the short-term maturity of these instruments. Our long-term debt has interest rates that approximate market and therefore the carrying amounts approximate their fair values.

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

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

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

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

CODA OCTOPUS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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

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

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

With the exception of assets and liabilities included within the scope of FASB ASC 820-10-55, the Company adopted the provisions of FASB ASC 820 prospectively effective as of the beginning of the year ended October 31, 2008. For financial assets and liabilities included within the scope of FASB ASC 820-10-55, the Company will be required to adopt the provisions of FASB ASC 820 prospectively as of the year beginning November 1, 2009. The adoption of FASB ASC 820 did not have a material impact on our financial position or results of operations, and the Company do not believe that the adoption of FASB ASC 820-10-55 will have a material impact on our financial position or results of operations.

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

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

Debt and Equity Securities

The Company follows the provisions of FASB ASC Topic 320, Accounting for Certain Investments in Debt and Equity Securities (ASC 320). The Company classifies debt and equity securities into one of three categories: held-to-maturity, available-for-sale or trading. These security classifications may be modified after acquisition only under certain specified conditions. Securities may be classified as held-to-maturity only if the Company has the positive intent and ability to hold them to maturity. Trading securities are defined as those bought and held principally for the purpose of selling them in the near term. All other securities must be classified as available-for-sale.

CODA OCTOPUS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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

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

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

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

Inventory

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

	2010		2009
Raw materials	$	1,213,400	$	1,384,043
Work in process		11,860		48,389
Finished goods		1,335,514		1,365,993

Total inventory	$	2,560,774	$	2,798,425

Property and Equipment

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

Long-Lived Assets

FASB ASC Topic 360 Property, Plant and Equipment (ASC 360), which established a "primary asset" approach to determine the cash flow estimation period for a group of assets and liabilities that represents the unit of accounting for a long-lived asset to be held and used. Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell. No impairment loss was recognized during the period ended January 31, 2010 or the year ended October 31, 2009.

CODA OCTOPUS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Research and Development

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

Marketing

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

Goodwill and other Intangible Assets

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

Intangible assets consist principally of the excess of cost over the fair value of net assets acquired (or goodwill), customer relationships, non-compete agreements and licenses. Goodwill was allocated to our reporting units based on the original purchase price allocation. Goodwill is not amortized and is evaluated for impairment annually or more often if circumstances indicate impairment may exist. Customer relationships, non-compete agreements, patents and licenses are being amortized on a straight-line basis over periods of 2 to 10 years. The Company amortizes its amortizable intangible assets using the straight-line method over their estimated period of benefit.

We test for impairment at the reporting unit level as defined in FASB ASC Topic 350 - Intangibles - Goodwill and Other (ASC 350). This test is a two-step process. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value, which is based on future cash flows, exceeds the carrying amount, goodwill is not considered impaired. If the carrying amount exceeds the fair value, the second step must be performed to measure the amount of the impairment loss, if any. The second step compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. In the fourth quarter of each year, we evaluate goodwill on a separate reporting unit basis to assess recoverability, and impairments, if any, are recognized in earnings. An impairment loss would be recognized in an amount equal to the excess of the carrying amount of the goodwill over the implied fair value of the goodwill. ASC 350 also requires that intangible assets with determinable useful lives be amortized over their respective estimated useful lives.

Stock Based Compensation

Effective January 1, 2006, the Company adopted FASB ASC Topic 718 - Compensation - Stock Compensation, (ASC 718) which requires the recognition of the expense related to the fair value of stock-based compensation awards within the statement of income. The Company elected the modified prospective transition method as permitted by (ASC 718). Under this transition method, stock-based compensation expense for the years ended October 31, 2009 and 2008 includes compensation expense for unvested stock-based compensation awards that were outstanding as of January 1, 2006, respectively, for which the requisite service was rendered during the year. The stock-based compensation costs for these awards granted prior to January 1, 2006 were based on the grant date fair value estimated in accordance with the original provisions of ASC 718. Compensation expense for all stock-based compensation awards granted subsequent to January 1, 2006 is based on the grant date fair value estimated in accordance with the provisions of ASC 718 recorded over the requisite service period.

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

CODA OCTOPUS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Comprehensive Income

FASB ASC Topic 220 - Comprehensive Income, (ASC 220) establishes standards for reporting and displaying of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, ASC 220 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Comprehensive income includes gains and losses on foreign currency translation adjustments and is included as a component of stockholders' equity.

Deferred Financing Costs

Deferred financing costs primarily include debt issuance costs incurred by the Company in connection with the issuance of convertible debt in February 2008 (see Note 13). Amortization is provided on a straight-line basis over the terms of the respective debt instruments to which the costs relate and is included in interest expense. Deferred financing cost expense was $60,532 and $ 242,128 in the period ended January 31,2010 and the year ended October 31, 2009, respectively.

Loss Per Share

Net income (loss) per share

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 January 31, 2010

	Three Months Ended January 31, 2010
Net income used in computing basic net income per share	$	773,101
Impact of assumed assumptions:
Gain on warrant liability marked to fair value		(1,554,908	)
Net loss in computing diluted net loss per share:	$	(781,807	)

Per share basic and diluted net income amounted to $0.02 for the period ended January 31, 2010. Per share basic and diluted net loss amounted to $0.04 for the period ended January 31, 2009. For the periods ended January 31, 2010 and 2009, 50,999,796 and 46,203,559 potential shares, respectively, were excluded from the shares used to calculate diluted earnings per share as their inclusion would reduce net loss per share.

New Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) issued guidance now codified under Accounting Standards Codification (“ASC”) Topic 105-10, which establishes the FASB Accounting Standards Codification (the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied in the preparation of financial statements in conformity with GAAP. ASC Topic 105-10 explicitly recognizes rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under federal securities laws as authoritative GAAP for SEC registrants. Upon adoption of this guidance under ASC Topic 105-10, the Codification superseded all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification became non-authoritative. The guidance under ASC Topic 105-10 became effective for the Company as of September 30, 2009. References made to authoritative FASB guidance throughout this document have been updated to the applicable Codification section.

In February 2007, the FASB issued FASB ASC Topic 825, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of ASC 320” (ASC 825) which permits entities to choose to measure many financial instruments and certain other items at fair value. Most of the provisions of (ASC 825) apply only to entities that elect the fair value option. However, the amendment to ASC 320 “Accounting for Certain Investments in Debt and Equity Securities” applies to all entities with available-for-sale and trading securities. ASC 825 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provision of ASC 820, “Fair Value Measurements”. The adoption of ASC 825 is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

CODA OCTOPUS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In December 2007, the FASB issued FASB ASC Topic 805, “Business Combinations” (ASC 805), which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in an acquiree, including the recognition and measurement of goodwill acquired in a business combination. ASC 805 is effective as of the beginning of the first fiscal year beginning on or after December 15, 2008. Earlier adoption is prohibited.The adoption of ASC 805 did not have a material impact on the Company’s consolidated financial position, results of operations or cash flow.

In December 2007, the FASB FASB ASC Topic 810, “Noncontrolling Interest in Consolidated Financial Statements, an amendment of ASC 810-12-15” (ASC 810), which will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity within the consolidated balance sheets. ASC 810 is effective as of the beginning of the first fiscal year beginning on or after December 15, 2008. Earlier adoption is prohibited and the Company is currently evaluating the effect, if any that the adoption will have on its consolidated financial position, results of operations or cash flows.

In June 2007, the FASB issued FASB ASC Topic 730-20, “Accounting for Nonrefundable Advance Payments for Goods or Services to be Used in Future Research and Development Activities” ASC 730-20, which requires that nonrefundable advance payments for goods or services that will be used or rendered for future research and development (R&D) activities be deferred and amortized over the period that the goods are delivered or the related services are performed, subject to an assessment of recoverability. ASC 730-20 will be effective for fiscal years beginning after December 15, 2007. The Company does not expect that the adoption of ASC 730-20 will have a material impact on its consolidated financial position, results of operations or cash flows.

In December 2007, the FASB issued FASB ASC Topic 808-10-15, “Accounting for Collaborative Arrangements” (ASC 808-10-15) which defines collaborative arrangements and requires collaborators to present the result of activities for which they act as the principal on a gross basis and report any payments received from (made to) the other collaborators based on other applicable authoritative accounting literature, and in the absence of other applicable authoritative literature, on a reasonable, rational and consistent accounting policy is to be elected. ASC 808-10-15 also provides for disclosures regarding the nature and purpose of the arrangement, the entity’s rights and obligations, the accounting policy for the arrangement and the income statement classification and amounts arising from the agreement. ASC 808-10-15 will be effective for fiscal years beginning after December 15, 2008, which will be the Company’s fiscal year 2009, and will be applied as a change in accounting principle retrospectively for all collaborative arrangements existing as of the effective date. The Company has not yet evaluated the potential impact of adopting ASC 808-10-15 on its consolidated financial position, results of operations or cash flows.

In March 2008, the FASB” issued FASB ASC Topic 815-10-65, “Disclosures about Derivative Instruments and Hedging Activities – an amendment to 815-10-05 (ASC 815-10-65) which is intended to improve financial standards for derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. Entities are required to provide enhanced disclosures about: (a) how and why an entity uses derivative instruments; (b) how derivative instruments and related hedged items are accounted for under 815-10-05 and its related interpretations; and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years beginning after November 15, 2008, with early adoption encouraged.

In 2008, the FASB issued FASB ASC 815-40 (Previously known as: EITF 07-05, Determining whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock). FASB ASC 815-40 provides guidance on determining what types of instruments or embedded features in an instrument held by a reporting entity can be considered indexed to its own stock for the purpose of evaluating the first criteria of the scope exception in FASB ASC 810-10-15 (Prior authoritative literature: paragraph 11(a) of SFAS 133).

CODA OCTOPUS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In May 2008, the FASB FASB ASC Topic 470-20-15, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (ASC 470-20-15) which requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. ASC 470-20-15 is effective for fiscal years beginning after December 15, 2008 on a retroactive basis. The Company is currently evaluating the potential impact, if any, of the adoption of ASC 470-20-15 on its consolidated financial position, results of operations or cash flows.

In June 2008, the FASB issued FASB ASC Topic 260-10-45, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” FASB ASC Topic 260-10-45, unvested share-based payment awards that contain rights to receive nonforfeitable dividends (whether paid or unpaid) are participating securities, and should be included in the two-class method of computing EPS. The FSP is effective for fiscal years beginning after December 15, 2008, and interim periods within those years. The Company does not expect the adoption of ASC 260-10-45 to have a material effect on its consolidated financial position, results of operations or cash flows.

In May 2009, the FASB issued FASB ASC 855-10 (Previously known as: SFAS No. 165, “Subsequent Events”) FASB ASC 855-10 establishes general standards for accounting for and disclosure of events that occur after the balance sheet date but before financial statements are available to be issued (“subsequent events”). More specifically, FASB ASC 855-10 sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition in the financial statements, identifies the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that should be made about events or transactions that occur after the balance sheet date. FASB ASC 855-10 provides largely the same guidance on subsequent events which previously existed only in auditing literature. The guidance under ASC Topic 855-10 became effective for the Company as of June 30, 2009.

Liquidity

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

NOTE 2 – RESTRICTED CASH

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

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

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

CODA OCTOPUS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 3 - CONTRACTS IN PROGRESS

Costs and estimated earnings in excess of billings on uncompleted contracts represent accumulated project expenses and fees which have not been invoiced to customers as of the date of the balance sheet. These amounts are stated on the balance sheet as Unbilled Receivables of $767,440 and $690,344 as of January 31, 2010 and October 31, 2009 respectively.

Billings in excess of cost and estimated earnings on uncompleted contracts represent project invoices billed to customers that have not been earned as of the date of the balance sheet. These amounts are stated on the balance sheet as Deferred Revenue of $32,349 and $111,463 as of January 31, 2010 and October 31, 2009 respectively.

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

NOTE 4 - INVESTMENTS

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

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

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

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

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

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

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

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

During the year ended October 31, 2007, the Company received marketable securities in settlement of $533,147 loan and $316,853 of accounts receivable. As of October 31, 2008, the Company had an investment of $153,000 that was considered available-for-sale for financial reporting purposes which included an unrealized loss of $697,000 included in the determination of comprehensive loss. As of April 30, 2009, this investment had a value of $68,000, with an unrealized loss of $782,000. This unrealized loss had, until now been included in the determination of comprehensive loss, but during the year ended October 31, 2009 , we have determined that this investment in marketable securities is impaired because we believe that the fair market value of the investment has permanently declined. Accordingly, we have written off the $782,000 during the year ended October 31,2009. The remaining fair value of this investment is $25,500 as of January 31, 2010.

CODA OCTOPUS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 5 - OTHER CURRENT ASSETS

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

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

Total	$	212,720	$	285,690

NOTE 6 - FIXED ASSETS

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

	2010			2009
Machinery and equipment	$	928,326		$	1,001,385
Accumulated depreciation		(707,356	)		(733,420	)

Net property and equipment assets	$	220,970		$	267,964

Depreciation expense recorded in the statement of operations for the period ended January 31, 2010 and year ended October 31, 2009 is $30,076 and $238,632, respectively.

NOTE 7 - INTANGIBLE ASSETS AND GOODWILL

The Company accounts for intangible assets and goodwill in accordance with ASC 350. Goodwill and Other Intangible Assets, are evaluated on an annual basis, and when there is reason to believe that their values have been diminished or impaired write-downs will be included in results from operations.

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

	2010			2009
Customer relationships (weighted average life of 10 years)	$	784,243		$	784,243
Non-compete agreements (weighted average life of 3 years)		278,651			278,651
Patents (weighted average life of 10 years)		73,805			67,837
Licenses (weighted average life of 2 years)		100,000			100,000

Total amortized identifiable intangible assets - gross carrying value		1,236,699			1,230,731
Less accumulated amortization		(571,939	)		(533,462	)

Net		664,760			697,269

Residual value	$	664,760		$	697,269

CODA OCTOPUS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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

Our acquisition of the assets of Tactical Intelligence, LLC (“Tactical”) In November 2008 resulted in the valuation of Tactical’s customer relationships and covenants not to compete as intangible assets (see Note 14), which have an estimated useful life of 3 years each, and as such are being amortized monthly over that period. In addition, we recognized goodwill of $142,500 that represents the excess of the purchase price we paid over the fair value of Tactical’s net tangible and intangible assets acquired.

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


2010	$	99,703
2011		151,364
2012		77,685
2013 and thereafter		336,008

Total	$	664,760

Amortization of patents, customer relationships, non-compete agreements and licenses included as a charge to income amounted to $ 38,477 and $231,321 for the period ended January 31, 2010 and year ended October 31, 2009, respectively. Goodwill is not being amortized.

As a result of the acquisitions of Martech, Colmek, Dragon and Tactical, the Company has goodwill in the amount of $ 3,524,538 as of January 31, 2010.The carrying amount of goodwill for the period ended January 31, 2010 and October 31, 2009 is recorded below.

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

Balance at January 31, 2010 and October 31, 2009	$	3,524,538	$	3,524,538

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

NOTE 8 - CAPITAL STOCK

The Company is authorized to issue 150,000,000 shares of common stock with a par value of $.001 per share. As of January 31, 2010 and October 31, 2009, the Company has issued and outstanding 49,000,244 shares and 49,000,244 shares of common stock respectively. The Company is also authorized to issue 5,000,000 shares of preferred stock with a par value of $.001 per share. We have designated 50,000 preferred shares as Series A preferred stock and have designated 50,000 preferred shares as Series B preferred stock. The remaining 4,900,000 shares of preferred stock is undesignated. There were 6,287 Series A preferred shares outstanding at January 31, 2010 and October 31, 2009 respectively, and nil Series B preferred shares outstanding at the same dates.

CODA OCTOPUS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Series A Preferred Stock

We designated 50,000 shares of our preferred stock, par value $.001, as Series A Preferred Stock. The Series A Preferred Stock ranks senior to all classes of common and preferred stock and has no liquidation preference above par. The Series A Preferred Stock is sold as units of $100 (or £100 where stock has been sold to investors in British Pounds) and has a dividend rate of 12% per year, ie. $12 per $100 unit, paid every six months, in May and November each year. The Series A Preferred Stock and accrued dividends is convertible at the option of the holder into shares of our common stock at a conversion price of $1.00 per share, and at the option of the Company when the stock price reaches or exceeds $3.00.

During the year ended October 31, 2008, we issued 200 shares of Series A Preferred Stock, which were subscribed for in March 2007 and converted 320 shares of Series A Preferred Stock into 32,000 shares of common stock. The original transaction was concluded in GBP at a price of £32,000. The fixed exchange rate at which the Preferred Stock was issued is $1.77 to GPB 1.00. This is equivalent to 320 Series A Preferred Stock (GBP 100 each). 320 units of Series A Preferred Stock were issued in exchange for consultancy services provided by a consultant to the Company. The total of Series A preferred stock outstanding is 6,287 shares at October 31, 2009, convertible into 1,013,670 shares of common stock.

Series B Preferred Stock

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

Common Stock

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

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

Other Equity Transactions

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

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

CODA OCTOPUS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 9 - WARRANTS AND STOCK OPTIONS

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

Warrants	Three months ended January 31, 2010				Year ended October 31, 2009
	Number		Weighted Average Exercise Price		Number		Weighted Average Exercise Price

Outstanding at beginning of the period		32,583,418	$	1.42		32,583,418	$	1.42
Granted during the period		-		-		-		-
Terminated during the period		-		-		-		-

Outstanding at the end of the period		32,583,418	$	1.42		32,583,418	$	1.42

Exercisable at the end of the period		32,583,418	$	1.42		32,583,418	$	1.42

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

Range of Exercise Prices	Number Outstanding		Weighted Average Contractual Life (Yrs)		Total Exercisable
0.50		750,000		1.24		750,000
0.58		400,000		1.16		400,000
1.00		2,750,000		2.10		2,750,000
1.30		14,341,709		1.92		14,341,709
1.50		-		-		-
1.70		14,341,709		1.92		14,341,709
1.80		-		-		-
Totals		32,583,418		1.97		32,583,418

Stock Options	Three months ended January 31, 2010					Year ended October 31, 2009
	Number			Weighted Average Exercise Price		Number			Weighted Average Exercise Price

Outstanding at beginning of the period		5,595,900		$	1.18		5,755,900		$	1.18
Granted during the period		-			-		50,000			1.30
Terminated during the period		(1,170,000	)		1.29		(210,000	)		1.32

Outstanding at the end of the period		4,425,900		$	1.15		5,595,900		$	1.18

Exercisable at the end of the period		4,174,499		$	1.14		5,214,149		$	1.17

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

Range of Exercise Prices	Number Outstanding		Weighted Average Contractual Life (Yrs)		Total Exercisable
0.50		-		-		-
0.58		-		-		-
1.00		2,650,900		0.57		2,650,900
1.30		1,325,000		3.00		1,073,600
1.50		190,000		2.09		190,000
1.70		260,000		2.41		260,000
1.80		-		-		-
Totals		4,425,900		1.47		4,174,499

NOTE 10 – DERIVATIVE LIABILITY

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

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

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

NOTE 11 - INCOME TAXES

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

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

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

CODA OCTOPUS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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

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

Non-Current	2010			2009

Net Operating Loss Carry Forward	$	18,106,000		$	17,736,000
Valuation Allowance		(18,106,000	)		(17,736,000	)

Net Deferred Tax Asset	$	-		$	-

NOTE 12 - CONTINGENCIES AND COMMITMENTS

Litigation

We are currently engaged in two lawsuits.

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

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

Operating Leases

We occupy our various office and warehouse facilities pursuant to both term and month-to-month leases. Our term leases expire at various times through September 2015. Future minimum lease obligations are approximately $1,219,963, with the minimum future rentals due under these leases as of Jannuary 31,2010 as follows:

	$
2010		277,705
2011		370,234
2012		231,339
2013 and thereafter		340,685

Total	$	1,219,963

Concentrations

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

CODA OCTOPUS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 13 - NOTES AND LOANS PAYABLE

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

	January 31, 2010		October 31, 2009
The Company has a secured convertible debenture for $12M with a life of 7 years from February 26, 2008, maturing at 130% of face value, and with interest payable every six months, starting in February 2009, at a rate of 8.5%; During the term, the debentures are convertible into our common stock at the option of the Noteholders at a conversion price of $1.05. We may also force the conversion of these Notes into our common stock after two years in the event that we obtain a listing on a national exchange and our stock price closes on 40 consecutive trading days at or above $2.50 between the second and third anniversaries of this agreement; $2.90 between the third and fourth anniversaries of this agreement; and $3.50 after the fourth anniversary of this agreement or where the daily volume weighted average price of our stock as quoted on OTCBB or any other US National Exchange on which our securities are then listed has, for at least 40 consecutive trading days closed at the agreed price. The Company has failed to comply with certain covenants contained in the debenture agreement.	$	13,451,500	$	13,067,929

The Company, through its UK subsidiary Coda Octopus Products Ltd has a 7 year unsecured loan note for £100,000; interest rate of 12% annually; repayable at borrower’s instigation or convertible into common stock when the share price reaches $3.		161,168		165,594

The Company through its US subsidiary Coda Octopus Colmek, Inc., has an unsecured loan note payable to a director and former officer of the Company, which is being repaid in the short term.		-		-



Total	$	13,612,668	$	13,233,523

Less: current portion				-

Total long-term portion	$	13,612,668	$	13,233,523

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

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

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

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

CODA OCTOPUS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 14 - SEGMENT INFORMATION

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

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

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

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

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

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

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

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

	Three months ended
	January 31, 2010			January 31, 2009
Net Sales to External Customers:
Contracting	$	1,449,165		$	2,306,889
Products		1,619,045			892,217


Total Sales to External Customers	$	3,068,210		$	3,199,106

Depreciation and Amortization:
Contracting	$	40,383		$	74,868
Products		9,580			15,337
Corporate		73,413			71,380
Total Depreciation and Amortization	$	123,376		$	161,585

General and Administrative Expense:
Contracting	$	745,369		$	894,454
Products		409,622			504,399
Corporate		349,636			1,503,866
Total General and Administrative Expense	$	1,504,627		$	2,902,719

Capital Expenditures:
Contracting	$	-		$	18,952
Products		7,690			14,275
Corporate					3,360
Total Capital Expenditures	$	7,690		$	36,587

Operating Income (Losses):
Contracting	$	(773,464	)	$	376,786
Products		846,306			(160,739	)
Corporate		(423,049	)		(1,965,488
Total Segment Operating Losses	$	(350,207	)	$	(1,749,441

	For the period ended
	January 31, 2010		October 31, 2009
Segment Assets:
Contracting	$	7,464,714	$	7,235,301
Products		2,032,276		2,867,693
Corporate		2,836,912		3,034,386
Total Segment Assets	$	12,333,902	$	13,137,380

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

Those geographic locations are:

* United States

* Europe

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

	Three months ended
	January 31, 2010		January 31, 2009
NET SALES TO EXTERNAL CUSTOMERS:
United States	$	980,934		$	1,550,570
Europe		2,087,276			1,648,536
TOTAL SALES TO EXTERNAL CUSTOMERS	$	3,068,210		$	3,199,106

	For the period ended
	January 31, 2010			October 31, 2009
ASSETS:
United States	$	7,367,788		$	7,919,830
Europe		4,966,114			5,217,550
TOTAL ASSETS	$	12,333,902		$	13,137,380

CODA OCTOPUS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 15 – SUBSEQUENT EVENTS

The Company evaluated subsequent events through March 17, 2010 which is the date the financials were filed.

The Cash Control Framework Agreement with the Noteholder was extended for a further period of 12 months and now expires on March 16, 2011. On January 18, 2010, the Noteholder notified us in writing that it had waived its right to demand repayment of the loan as a result of our failure to observe certain specified loan covenants. The waiver will expire on the first anniversary of the waiver letter, January 18, 2011.

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

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

Forward-Looking Statements

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

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

General Overview

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

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

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

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

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

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