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 July 31, 2010

¨	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

	Page
PART I - Financial Information	1

Item 1: Financial Statements	1

Nine Months Ended July 31, 2010 and 2009

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

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

Condensed Consolidated Statement of Stockholders’ Deficiency for the Nine Months Ended July 31, 2010 (Unaudited)	3

Condensed Consolidated Statements of Cash Flows for the Nine months ended July 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	18

Item 4T: Controls and Procedures	30

PART II - Other Information	31

Item 1: Legal Proceedings	31

Item 2: Unregistered Sales of Equity Securities and Use of Proceeds	31

Item 3: Defaults Upon Senior Securities	31

Item 4: Removed and Reserved	31

Item 5: Other Information	31

Item 6: Exhibits	31

Signatures	32

- i - -

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CODA OCTOPUS GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

JULY 31, 2010 (UNAUDITED) AND OCTOBER 31, 2009

	July 31,			October 31,
ASSETS	2010			2009

Current assets:
Cash and cash equivalents	$	814,286		$	275,885
Restricted cash, Note 2		613,792			994,081
Short-Term Investments, Note 4		12,750			51,000
Accounts receivable, net of allowance for doubtful accounts, Note 1		2,486,573			2,033,879
Inventory, Note 1		2,295,327			2,798,425
Unbilled receivables, Note 3		831,254			690,344
Other current assets, Note 5		182,715			285,691
Prepaid expenses		305,238			247,134
Total current assets		7,541,935			7,376,439

Property and equipment, net, Note 6		134,499			267,964
Deferred financing costs, net of accumulated amortization
of $605,319 in 2010 and $423,723 in 2009, Note 13		1,089,574			1,271,170
Goodwill and other intangible assets, net, Note 7		4,127,423			4,221,807

Total assets	$	12,893,431		$	13,137,380

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable, trade	$	2,584,382		$	2,390,039
Accrued expenses and other current liabilities		5,103,318			4,626,164
Short 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			398,482
Deferred payment related to acquisitions		388,166			404,274

Total current liabilities		27,725,972			7,818,959

Loans and notes payable, long term, Note 13		—			13,233,523

Total liabilities		27,725,972			21,052,482

Contingencies and Commitments, Note 12

Stockholders' deficiency:
Preferred stock, $.001 par value; 5,000,000 shares authorized,
6,287 Series A issued and outstanding, as of
July 31, 2010 and October 31, 2009, respectively		6			6
Nil shares Series B issued and outstanding as of
July 31, 2010 and October 31, 2009, respectively		—			—
Common stock, $.001 par value; 150,000,000 shares
authorized, 49,325,244 and 49,000,244 shares issued and outstanding
as of July 31, 2010 and October 31, 2009, respectively		49,325			49,000
Common Stock subscribed		96,350			96,350
Additional paid-in capital		46,888,319			51,766,495
Accumulated 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

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

- 1 - -

CODA OCTOPUS GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

FOR THE THREE AND NINE MONTHS ENDED JULY 31, 2010 AND 2009

(UNAUDITED)

	For the three months			For the three months			For the nine months			For the nine months
	ended July 31,			ended July 31,			ended July 31,			ended July 31,
	2010			2009			2010			2009

Net revenue	$	2,468,415		$	3,425,030		$	9,250,210		$	10,931,583

Cost of revenue		1,259,477			1,664,267			3,988,340			4,682,202

Gross profit		1,208,937			1,760,763			5,261,869			6,249,381

Research and development		430,745			256,929			1,362,931			1,317,087
Selling, general and administrative expenses		1,665,381			1,864,880			5,149,745			7,154,059

Operating income (loss)		(887,189	)		(361,046	)		(1,250,807	)		(2,221,765	)

Other income (expense)

Other income		(4,259	)		21,839			33,686			53,026
Interest 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			48,967,260

Comprehensive 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	)

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

- 2 - -

CODA OCTOPUS GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY

FOR THE NINE MONTHS ENDED JULY 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	)

Shares issued for compensation										325,000		325		—		26,675									27,000

Fair value of options issued as compensation																24,771									24,771

Cumulative 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						12,750

Realized 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	)

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

- 3 - -

CODA OCTOPUS GROUP, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW

FOR THE NINE MONTHS ENDED JULY 31, 2010 AND 2009 (UNAUDITED)

	July 31,			July 31,
	2010			2009

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(4,553,727	)	$	(4,206,995	)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization		389,218			477,849
Stock based compensation		51,771			300,369
Change in fair value of warrant liability		1,798,131			—
Financing costs		710,705			1,150,714
Impairment of investment in marketable securities		—			782,000
Gain on sale of investment in marketable securities		(15,750	)		—
Changes in operating assets and liabilities:
(Increase) decrease in current assets:
Short-Term Investments		38,250
Accounts receivable		(452,694	)		916,998
Inventory		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			1,164,039
Due 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		—			877

Net 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			3,896,149

Cash and cash equivalents, end of period	$	814,286		$	574,905

Cash paid for:
Interest	$	1,554,225		$	1,125,542
Income taxes		—			—

Non-Cash Investing and Financing Activities
During 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		—			147,039
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

Net cash invested		—			88,440

Acquisition of Tactical:
Current assets acquired		—			—
Cash acquired		—			—
Equipment acquired		—			5,000
Goodwill and other intangible assets		—			245,000
Liabilities assumed		—			—
Deferred note payable		—			(125,000	)

Cash Paid for Acquisition		—			125,000

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

- 4 - -

CODA OCTOPUS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1 - SUMMARY OF ACCOUNTING POLICIES

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

General

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

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Accordingly, the results from operations for the 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		2009
Raw materials	$	927,139	$	1,384,043
Work in process		296,526		48,389
Finished goods		1,071,662		1,365,993
Total 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, 2010
Net income used in computing basic net income per share	$	286,006
Impact 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 Inputs
	Total		Level 1		Level 2		Level 3
Assets:
Short term Investment	$	12,750	$	12,750	$	—	$	—
Total	$	12,750	$	12,750	$	—	$	—
Liabilities:
Warrant liability	$	4,152,026	$	—	$	—	$	4,152,026
Totals	$	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.

	2010
Balance at beginning of year	$	—
Warrant liability		4,152,026
Balance 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		2009
Deposits	$	101,008	$	96,277
Value added tax (VAT)		42,731		113,636
Other receivable		38,976		75,778
Total	$	182,715	$	285,691

NOTE 6 - FIXED ASSETS

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

	2010			2009
Machinery and equipment	$	847,999		$	1,001,384
Accumulated 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			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)		84,287			67,837
Licenses (weighted average life of 2 years)		100,000			100,000

Total amortized identifiable intangible assets - gross carrying value		1,247,181			1,230,731
Less accumulated amortization		(668,498	)		(533,462	)

Net		578,683			697,269

Residual 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	$	32,920
2012		131,676
2013		76,835
2014		75,183
2015 and thereafter		262,069
Total	$	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, 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		(500,000)		0.50		—		—

Outstanding at the end of the period		32,083,418	$	1.49		32,583,418	$	1.42

Exercisable 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 Exercisable
	0.50		250,000		0.75		250,000
	0.58		400,000		0.67		400,000
	1.00		2,750,000		1.61		2,750,000
	1.30		14,341,709		1.44		14,341,709
	1.70		14,341,709		1.44		14,341,709
Totals			32,083,418		1.49		32,083,418

Stock Options	Nine months ended July 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		(3,646,000	)		1.04		(210,000	)		1.32

Outstanding at the end of the period		1,949,900		$	1.20		5,595,900		$	1.18

Exercisable 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 Exercisable
	1.00		999,900		0.58		999,900
	1.30		600,000		3.05		388,300
	1.50		140,000		1.72		140,000
	1.70		210,000		1.92		210,000
Totals			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			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 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	$	118,634
2012		364,411
2013		219,454
2014		178,433
2015 and thereafter		156,476
Total	$	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, 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 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	$	13,067,929

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.		156,043		165,594

Total	$	13,934,686	$	13,233,523

Less: 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.

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 ended
	July 31, 2010			July 31, 2009
Net Sales to External Customers:
Contracting	$	4,331,175		$	7,360,565
Products		4,919,034			3,571,018

Total Sales to External Customers	$	9,250,210		$	10,931,583

Depreciation and Amortization:
Contracting	$	143,100		$	223,149
Products		21,777			48,179
Corporate		224,341			206,520
Total Depreciation and Amortization	$	389,218		$	477,848

General and Administrative Expense:
Contracting	$	2,183,876		$	2,192,744
Products		1,487,816			1,448,184
Corporate		1,478,053			3,513,131
Total General and Administrative Expense	$	5,149,745		$	7,154,059
Capital Expenditures:
Contracting	$	—		$	1,668
Products		—			27,540
Corporate		18,171			101,450
Total Capital Expenditures	$	18,171		$	130,658
Operating (Losses):
Contracting	$	(222,108	)	$	224,599
Products		2,149,192			827,964
Corporate		(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, 2009
Segment Assets:
Contracting	$	6,305,344	$	7,235,301
Products		2,103,544		2,867,693
Corporate		4,484,541		3,034,386
Total 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 ended
	July 31, 2010		July 31, 2009
NET SALES TO EXTERNAL CUSTOMERS:
United States	$	4,459,713	$	5,187,374
Europe		4,790,497		5,744,209
TOTAL NET SALES TO EXTERNAL CUSTOMERS	$	9,250,210	$	10,931,583

	July 31, 2010		October 31, 2009
ASSETS:
United States	$	7,370,721	$	7,919,830
Europe		5,522,708		5,217,550
TOTAL 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.

In August 2010, two (2) non-executive directors resigned and one executive director (the Chief Financial Officer) resigned. Although these directors and officers continue to believe in the business, they are unable to dedicate the time required for the restructuring of the business. The Chief Financial Officer has resigned and is continuing to work for the Company until the expiration of the notice period up to and including October 10, 2010.

- 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:

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.

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.

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 - -

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 Systems™ (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.

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.