SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED January 31, 2011

(  ) 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 0-8174Conolog Corporation
(Exact name of registrant as specified in its charter)

|                                              |                                       
|--------------------------------------------- | --------------------------------------
|Delaware                                      | 22-1847286                            
|(State or other jurisdiction of organization) | (I. R. S. Employer Identification No.)

5 Columbia RoadSomerville, NJ 08876
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (908) 722-8081

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [_] 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 by Rule 12b-2 of the Exchange Act) Yes [_] No [X]

The number of shares of common stock outstanding as of March 18, 2011 was 12,455,380.

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INDEX

|         |                                                                                     |      
|-------- | ----------------------------------------------------------------------------------- | -----
|PART I   | FINANCIAL INFORMATION                                                               |      
|         |                                                                                     |      
|Item 1.  | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)                             |      
|         |                                                                                     |      
|         | Condensed Consolidated Balance Sheets, as of January 31, 2011 and July 31, 2010     | 1    
|         |                                                                                     |      
|         | Condensed Consolidated Statements of Operations, for the three and six months ended |      
|         | January 31, 2011 and 2010 As Restated                                               | 2    
|         |                                                                                     |      
|         | Condensed Consolidated Statements of Cash Flows, for the six months ended           |      
|         | January 31, 2011 and 2010 As Restated                                               | 3    
|         |                                                                                     |      
|         | Notes to Condensed Consolidated Financial Statements                                | 4-19 
|         |                                                                                     |      
|Item 2.  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND                     |      
|         | RESULTS OF OPERATIONS                                                               | 20-32
|         |                                                                                     |      
|Item 3.  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                          | 32   
|         |                                                                                     |      
|Item 4T. | CONTROLS AND PROCEDURES                                                             | 32-33
|        
|PART II  | OTHER INFORMATION                                                                   |      
|         |                                                                                     |      
|Item 1.  | LEGAL PROCEEDINGS                                                                   | 34   
|         |                                                                                     |      
|Item 2.  | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                         | 34   
|         |                                                                                     |      
|Item 3.  | DEFAULTS UPON SENIOR SECURITIES                                                     | 34   
|         |                                                                                     |      
|Item 4.  | [REMOVED AND RESERVED]                                                              | 34   
|         |                                                                                     |      
|Item 5.  | OTHER INFORMATION                                                                   | 35   
|         |                                                                                     |      
|Item 6.  | EXHIBITS, SIGNATURES AND CERTIFICATIONS                                             | 35   

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Part 1 Financial Information

Item  Financial Statements

|CONOLOG CORPORATION AND SUBSIDIARIES             
|-------------------------------------------------
|Condensed Consolidated Balance Sheets (Unaudited)

|                                                                                                      |             |             |          |  |   |             |  
|----------------------------------------------------------------------------------------------------- | ----------- | ----------- | -------- |  | - | ----------- | -
|                                                                                                     
|ASSETS                                                                                                | January 31, |             | July 31,
|                                                                                                      | 2011        |             | 2010    
|Current Assets:                                                                                       |             |             |          |  |   |             |  
|Cash and equivalents                                                                                  | $           | 14,585      |          |  | $ | 713,005     |  
|Accounts receivable, net of allowance                                                                 |             | 179,527     |          |  |   | 67,603      |  
|Inventory, net of reserve for obsolescence                                                            |             | 803,554     |          |  |   | 826,079     |  
|Prepaid expenses                                                                                      |             | 19,000      |          |  |   | 248,297     |  
|Other current assets                                                                                  |             | 4,317       |          |  |   | 5,000       |  
|                                                                                                      |             |             |          |  |  
|Total Current Assets                                                                                  |             | 1,020,983   |          |  |   | 1,859,984   |  
|                                                                                                      |             |             |          |  |  
|Property and equipment:                                                                               |             |             |          |  |   |             |  
|Machinery and equipment                                                                               |             | 1,362,952   |          |  |   | 1,357,053   |  
|Furniture and fixtures                                                                                |             | 430,924     |          |  |   | 430,924     |  
|Automobiles                                                                                           |             | 34,097      |          |  |   | 34,097      |  
|Computer software                                                                                     |             | 231,002     |          |  |   | 231,002     |  
|Leasehold improvements                                                                                |             | 30,265      |          |  |   | 30,265      |  
|                                                                                                      |             |             |          |  |  
|Total property and equipment                                                                          |             | 2,089,240   |          |  |   | 2,083,341   |  
|Less: accumulated depreciation                                                                        |             | (1,997,784  | )        |  |   | (1,987,284  | )
|                                                                                                      |             |             |          |  |  
|Net Property and Equipment                                                                            |             | 91,455      |          |  |   | 96,057      |  
|Other Assets:                                                                                         |             |             |          |  |   |             |  
|Deferred financing fees, net of amortization                                                          |             | -           |          |  |   | 382,132     |  
|                                                                                                      |             |             |          |  |  
|Total Other Assets                                                                                    |             | -           |          |  |   | 382,132     |  
|                                                                                                      |             |             |          |  |  
|TOTAL ASSETS                                                                                          | $           | 1,112,439   |          |  | $ | 2,338,173   |  
|                                                                                                      |             |             |          |  |  
|                                                                                                     
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                  |             |             |          |  |   |             |  
|Current Liabilities:                                                                                  |             |             |          |  |   |             |  
|Accounts payable                                                                                      | $           | 283,710     |          |  | $ | 150,880     |  
|Accrued expenses                                                                                      |             | 562,517     |          |  |   | 201,000     |  
|Loans from Officers                                                                                   |             | 15,000      |          |  |   | -           |  
|Convertible debenture, net of discount of $552,741                                                    |             | -           |          |  |   | -           |  
|                                                                                                      |             |             |          |  |  
|Total Current Liabilities                                                                             |             | 861,227     |          |  |   | 351,880     |  
|                                                                                                      |             |             |          |  |  
|Non-Current Liabilities:                                                                              |             |             |          |  |   |             |  
|Convertible debenture, net of discount of $720,687                                                    |             | -           |          |  |   | 279,313     |  
|                                                                                                      |             |             |          |  |  
|Total Liabilities                                                                                     |             | 861,227     |          |  |   | 631,193     |  
|                                                                                                      |             |             |          |  |  
|                                                                                                     
|Stockholders' Equity:                                                                                 |             |             |          |  |   |             |  
|Preferred stock, par value $.50; Series A; 4% cumulative; 500,000 shares authorized                   |             |             |          |  |   |             |  
|155,000 shares issued and outstanding at January 31, 2011 and July 31, 2010, respectively             |             | 77,500      |          |  |   | 77,500      |  
|Preferred stock, par value $.50; Series B; $.90 cumulative; 500,000 shares authorized;                |             |             |          |  |   |             |  
|1,197 shares issued and outstanding at January 31, 2011 and July 31, 2010, respectively               |             | 597         |          |  |   | 597         |  
|Common stock, par value $0.01; 30,000,000 shares authorized; 12,030,591 shares issued and outstanding |             |             |          | 
|at January 31, 2011 and 6,967,881 shares issued and outstanding July 31, 2010, respectively           |             | 120,306     |          |  |   | 69,679      |  
|Contributed capital                                                                                   |             | 79,851,188  |          |  |   | 78,088,878  |  
|Accumulated deficit                                                                                   |             | (79,666,645 | )        |  |   | (76,397,940 | )
|Less: Treasury shares at cost - 2 shares                                                              |             | (131,734    | )        |  |   | (131,734    | )
|                                                                                                      |             |             |          |  |  
|Total Stockholders Equity                                                                            |             | 251,212     |          |  |   | 1,706,980   |  
|                                                                                                      |             |             |          |  |  
|TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                                            | $           | 1,112,439   |          |  | $ | 2,338,173   |  
|                                                                                                      |             |             |          |  |  

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

1

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|Conolog Corporation and Subsidiaries 
      Condensed Consolidated Statements of Operations (Unauditied )
|---------------------------------------------------------------------------------------------------------
|                                                                                                         

|                                                   |                                       |            |                                     |   |             |   |             |   |            |   |   |             |   | 
|-------------------------------------------------- | ------------------------------------- | ---------- | ----------------------------------- | - | ----------- | - | ----------- | - | ---------- | - | - | ----------- | - | 
|                                                   | For the Three MonthsEnded January 31, |            | For the Six MonthsEnded January 31,
|
|                                                   |                                       |            | 2010                                |   |             |   | 2010       
|                                                   | 2011                                  |            | As Restated                         |   | 2011        |   | As Restated
|                                                   |                                       |            |                                    
|OPERATING REVENUES                                 |                                       |            |                                     |   |             |   |             |   |            |   |   |             |  
|Product revenue                                    | $                                     | 150,831    |                                     | $ | 111,920     |   |             | $ | 677,742    |   | $ | 580,016     |  
|                                                   |                                       |            |                                    
|                                                  
|Cost of  product revenue                           |                                       |            |                                     |   |             |   |             |   |            |   |   |             |  
|Cost of goods sold                                 |                                       | 138,934    |                                     |   | 87,038      |   |             |   | 408,738    |   |   | 343,237     |  
|                                                   |                                       |            |                                    
|Total Cost of product revenue                      |                                       | 138,934    |                                     |   | 87,038      |   |             |   | 408,738    |   |   | 343,237     |  
|                                                   |                                       |            |                                    
|                                                  
|Gross Profit                                       |                                       | 11,897     |                                     |   | 24,882      |   |             |   | 269,004    |   |   | 236,779     |  
|                                                   |                                       |            |                                    
|Selling, general and administrative expenses       |                                       |            |                                     |   |             |   |             |   |            |   |   |             |  
|General and administrative                         |                                       | 844,769    |                                     |   | 417,547     |   |             |   | 1,552,351  |   |   | 2,505,400   |  
|Research and development                           |                                       | 14,016     |                                     |   | 30,915      |   |             |   | 62,273     |   |   | 61,763      |  
|Selling expenses                                   |                                       | 17,274     |                                     |   | 4,005       |   |             |   | 34,058     |   |   | 42,808      |  
|                                                   |                                       |            |                                    
|Total selling, general and administrative expenses |                                       | 876,059    |                                     |   | 452,467     |   |             |   | 1,648,682  |   |   | 2,609,971   |  
|                                                   |                                       |            |                                    
|Loss from Operations                               |                                       | (864,162   | )                                   |   | (427,585    | ) |             |   | (1,379,678 | ) |   | (2,373,192  | )
|                                                   |                                       |            |                                    
|OTHER INCOME (EXPENSES )                           |                                       |            |                                     |   |             |   |             |   |            |   |   |             |  
|Loss on derivative financial instruments           |                                       | -          |                                     |   | (9,178,209  | ) |             |   | -          |   |   | (33,728,508 | )
|Interest expense                                   |                                       | (68,790    | )                                   |   | (3,672      | ) |             |   | (125,269   | ) |   | (10,106     | )
|Interest income                                    |                                       | 251        |                                     |   | 556         |   |             |   | 251        |   |   | 1,416       |  
|Change in fair market value of derivatives         |                                       | -          |                                     |   | -           |   |             |   | -          |   |   | -           |  
|Induced conversion cost                            |                                       | (649,147   | )                                   |   | (118,993    | ) |             |   | (649,147   | ) |   | (150,201    | )
|Amortization of financing fees                     |                                       | (302,089   | )                                   |   | (148,748    | ) |             |   | (382,132   | ) |   | (265,209    | )
|Amortization of debt discount                      |                                       | (552,741   | )                                   |   | (450,636    | ) |             |   | (720,687   | ) |   | (755,733    | )
|                                                   |                                       |            |                                    
|Total Other Income (Expense)                       |                                       | (1,572,516 | )                                   |   | (9,899,702  | ) |             |   | (1,876,984 | ) |   | (34,908,341 | )
|                                                   |                                       |            |                                    
|Loss before provision for income taxes             |                                       | (2,436,678 | )                                   |   | (10,327,287 | ) |             |   | (3,256,662 | ) |   | (37,281,533 | )
|Income tax benefit (expense)                       |                                       | (442       | )                                   |   | (770        | ) |             |   | (12,043    | ) |   | (5,727      | )
|                                                   |                                       |            |                                    
|Net Loss                                           |                                       | (2,437,120 | )                                   |   | (10,328,057 | ) |             |   | (3,268,705 | ) |   | (37,287,260 | )
|                                                   |                                       | -          |                                     |   | -           |   |             |   | -          |   |   | -           |  
|                                                   |                                       |            |                                    
|NET LOSSAPPLICABLE TO COMMON SHARES                | $                                     | (2,437,120 | )                                   | $ | (10,328,057 | ) |             | $ | (3,268,705 | ) | $ | (37,287,260 | )
|                                                   |                                       |            |                                    
|                                                  
|NET LOSSPER BASIC COMMON SHARE                     | $                                     | (0.28      | )                                   | $ | (3.34       | ) |             | $ | (0.42      | ) | $ | (14.75      | )
|                                                   |                                       |            |                                    
|WEIGHTED AVERAGE NUMBER OF COMMON                  |                                       | 8,663,907  |                                     |   | 3,091,053   |   |             |   | 7,815,894  |   |   | 2,527,691   |  
|                                                   |                                       |            |                                    

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

2

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|CONOLOG CORPORATION AND SUBSIDIARIES 
      Condensed Consolidated Statements of Cash Flows (Unaudited)
 
      Six Months Ended January 31,
|--------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                            

|                                                                  |      |            |   |          |   |             |  
|----------------------------------------------------------------- | ---- | ---------- | - | -------- | - | ----------- | -
|                                                                  |      |            |   | 2010As   |  
|                                                                  | 2011 |            |   | Restated |  
|CASH FLOWS FROM OPERATING ACTIVITIES                              |      |            |   |          |  
|Net loss                                                          | $    | (3,268,705 | ) |          | $ | (37,287,260 | )
|Adjustments to reconcile net loss to net cash used in operations: |      |            |   |          |   |             |  
|Depreciation                                                      |      | 10,500     |   |          |   | 8,000       |  
|Amortization of deferred financing fees                           |      | 382,132    |   |          |   | 249,988     |  
|Common stock issued to officers, directors and employees          |      | -          |   |          |   | 1,411,200   |  
|Common stock issued to pay interest                               |      | -          |   |          |   | 26,327      |  
|Amortization of common stock issued for services                  |      | 80,000     |   |          |   | 144,745     |  
|Induced conversion cost associated with convertible debt          |      | 649,147    |   |          |   | 150,201     |  
|Amortization of discount of convertible debentures                |      | 720,687    |   |          |   | 755,733     |  
|Loss on Derivative Financial Instrument                           |      | -          |   |          |   | 33,728,508  |  
|Changes in assets and liabilities                                 |      |            |   |          |   |             |  
|(Increase) decrease in accounts receivable                        |      | (111,924   | ) |          |   | 182,720     |  
|Decrease in prepaid expenses                                      |      | 149,298    |   |          |   | (192,481    | )
|Decrease (increase) in inventories                                |      | 22,525     |   |          |   | (39,672     | )
|Decrease in other assets                                          |      | 683        |   |          |   | -           |  
|(Decrease) increase in accounts payable                           |      | 265,830    |   |          |   | (99,500     | )
|Increase in accrued expenses                                      |      | 292,306    |   |          |   | 6,965       |  
|                                                                  |      |            |   |          |  
|Net cash used in operations                                       |      | (807,521   | ) |          |   | (954,526    | )
|                                                                  |      |            |   |          |  
|CASH FLOWS FROM INVESTING ACTIVITIES                              |      |            |   |          |   |             |  
|Purchase of property and equipment                                |      | (5,899     | ) |          |   | (21,622     | )
|                                                                  |      |            |   |          |  
|Net cash used in investing activities                             |      | (5,899     | ) |          |   | (21,622     | )
|                                                                  |      |            |   |          |  
|CASH FLOWS FROM FINANCING ACTIVITIES                              |      |            |   |          |   |             |  
|Proceeds from issuance of convertible debentures                  |      | -          |   |          |   | 1,000,000   |  
|Proceeds from issuance of Common Stock                            |      | 100,000    |   |          |   | -           |  
|Proceeds from officers loan                                       |      | 15,000     |   |          |   | -           |  
|Proceeds from exercise of warrants                                |      | -          |   |          |   | 635,070     |  
|Proceeds from note receivable                                     |      | -          |   |          |   | 1,610       |  
|Payments for deferred loan costs                                  |      | -          |   |          |   | (140,000    | )
|                                                                  |      |            |   |          |  
|Net cash provided by financing activities                         |      | 115,000    |   |          |   | 1,496,680   |  
|                                                                  |      |            |   |          |  
|NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS                   |      | (698,420   | ) |          |   | 520,532     |  
|CASH AND EQUIVALENTS - BEGINNING OF PERIOD                        |      | 713,005    |   |          |   | 27,358      |  
|                                                                  |      |            |   |          |  
|CASH AND EQUIVALENTS - END OF PERIOD                              | $    | 14,585     |   |          | $ | 547,890     |  
|                                                                  |      |            |   |          |  

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

3

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CONOLOG CORPORATION AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)

NOTE 1  NATURE OF OPERATIONS AND BASIS OF PRESENTATION

Conolog Corporation (the Company) is in the business of design, manufacturing and distribution of small electronic and electromagnetic components and subassemblies for use in telephone, radio and microwave transmissions and reception and other communication areas. The Companys products are used for transceiving various quantities, data and protective relaying functions in industrial, utility and other markets. The Companys customers include primarily industrial customers, which include power companies located primarily throughout the United States, and various branches of the military.

The Company formed a wholly owned Subsidiary, Nologoc Corporation. In September 1998, Nologoc Corporation purchased the assets of Atlas Design, Incorporated. In January, 2001, Nologoc Corporation purchased the assets of Prime Time Staffing, Incorporated and Professional Temp Solutions Incorporated. Atlas Design, Prime Time Staffing and Professional Temp Solutions provide short-term and long-term qualified engineering and technical staff, as well as human resource consulting to various industries. In March 2004 the Company ceased operating its staffing business. The assets of the Company's wholly-owned subsidiary, Nologoc, Inc. trading as Atlas Design, were sold to the Company's vice-president of operations of Atlas Design.

The condensed consolidated balance sheet at January 31, 2011, is derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. The other information in these condensed consolidated financial statements is unaudited but in the opinion of management, reflects all adjustments necessary for a fair presentation of the results for the periods covered. All such adjustments are of a normal recurring nature unless disclosed otherwise. These condensed consolidated financial statements, including notes, have been prepared in accordance with the requirements of Form 10-Q and Article 8 of Regulation S-X and the Securities and Exchange Commission (SEC) and do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. Results for the interim period are not
necessarily indicative of results that may be expected for the entire year or for any other interim period. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and additional information as contained in our Annual Report on Form 10-K for the year ended July 31, 2010.

Restatement of Previously Issued Financial Statements

In a Form 8-K dated June 10, 2010, Conolog Corporation concluded that our consolidated financial statements for the period ended January 31, 2010 would be restated and should no longer be relied upon. Please see our Annual Report on Form 10-K for the year ended July 31, 2010 for a summary of the adjustments to our previously issued financial statements for the period ended January 31, 2010. The January 31, 2010 Cash Flow Statement was not restated in our July 31, 2010 filing. See Note 12 for the previously reported and as restated statements of cash flows.

Going Concern

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has had recurring losses from operations of $1,379,678 and $2,373,192 for the six months ended January 31, 2011 and 2010, respectively, and used cash from operations in the amounts of $807,521 and $954,526 for the six months ended January 31, 2011 and 2010, respectively. At January 31, 2011, the Company had cash and equivalents of $14,585. These factors raise substantial doubt as to the Companys ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments that might result from this uncertainty.

In order to sustain its operations, the Company needs to raise additional capital through debt and equity placements and increase revenue through new product development. In the event that the Company cannot generate sufficient cash flow from its operations or raise proceeds from offering debt or equity securities, the Company may be forced to curtail or cease its activities. The Company does not have any agreements to raise additional capital and there can be no assurance that the Company will be successful in achieving its goals.

NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of Conolog Corporation and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated.

4

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CONOLOG CORPORATION AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)

NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued)

Cash and Equivalents

For the purpose of the statements of cash flows, cash equivalents include time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less. The Company maintains cash and cash equivalents balances at financial institutions and are insured by the Federal Deposit Insurance Corporation up to $250,000. At times, balances in certain bank accounts may exceed the FDIC insured limits. Cash equivalents consist of highly liquid investments with an original maturity of three months or less when purchased. At January 31, 2011 the Company did not have any cash equivalents.

Receivables and Allowance for Doubtful Accounts

Trade Receivables are non-interest bearing, uncollateralized customer obligations and are stated at the amounts billed to customers. The preparation of financial statements requires our management to make estimates and assumptions relating to the collectivity of our accounts receivable. Management specifically analyzes historical bad debts, customer credit worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. The allowance for doubtful accounts at January 31, 2011 and July 31, 2010 was $1,000 and $1,000, respectively.

The Company has a concentration risk in trade accounts receivable with significant sales to the government and local agencies. One customer accounted for approximately 92% of accounts receivable as of January 31, 2011. Three customers accounted for approximately 48%, 30% and 14% of accounts receivable as of July 31, 2010. The credit evaluation process has mitigated the credit risk, such losses have been minimal, and within management expectations.

Inventories

Inventories are valued at lower of cost or market using the first-in, first-out (FIFO) method. Finished goods costs included raw materials, labor and manufacturing overhead costs. Excess and obsolete inventory costs are expensed and a reserve for slow-moving inventory is made on managements estimates.

Finished goods are products that have been completed in connection with specific orders and are awaiting shipment. Work-in-Process represents raw material components that have been requisitioned from the warehouse and are being assembled in the manufacturing area. Raw Materials consist of components parts purchased from various suppliers and are used to build our finished products. Various raw material parts are also maintained to support warranty claims for commercial and military products. Typical raw material products include PC boards, digital screen assemblies, guide rails, capacitors, terminals, power supplies, process chips, resistors, keypads, relays and face plates.

The Company provides a twelve-year warranty on all commercial products and is required by government regulation to design and produce military products with a minimum 25-year operating life in addition to shelf life.

The Company maintains a significant amount of raw material component parts and some of this raw material inventory is not expected to be realized within a twelve month operating cycle from the balance sheet date. For any raw material part which has not been purchased within the last twelve months from the balance sheet date, it is evaluated as part of the slow moving inventory and is part of our inventory reserve review. The Company estimated a usage rate for its raw material component parts for what it expects to use over a 36 month period. Any excess inventory based on this projected usage rate is written off as excess and obsolete. The Company then reserves 100% of the estimated usage that is over 12 months and less than 36 months. Certain raw material parts which have been written down to a zero value, may still be maintained in inventory to satisfy possible requirements under the warranty programs but are valued a zero. Ongoing the Company evaluates the inventory
parts based on their age and usage over a 36 month period to determine inventory obsolescence and reserve adjustments.

5

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CONOLOG CORPORATION AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)

NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Inventories (continued)

Inventory consisted of the following as of January 31, 2011 and July 31, 2010,

|                        |                  |         |               |   |        
|----------------------- | ---------------- | ------- | ------------- | - | -------
|                        | January 31, 2011 |         | July 31, 2010
|Finished Goods          | $                | 543,593 |               | $ | 587,835
|Work-in-process         |                  | 80,000  |               |   | 83,441 
|Raw materials           |                  | 253,961 |               |   | 228,803
|                        |                  |         |              
|                        |                  | 877,554 |               |   | 900,079
|Less: Inventory reserve |                  | 74,000  |               |   | 74,000 
|                        |                  |         |              
|Inventory, net          | $                | 803,554 |               | $ | 826,079
|                        |                  |         |              

The Company reviews finished goods and raw material inventory on hand and provides a reserve for obsolete product based on the results of the review.

Fair Value Measurements

The authoritative guidance for fair value measurements defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or the most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact. The guidance describes a fair value hierarchy based on the levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:

|                    |                                                                                                                                                                                                                                                                                                                                                                                                     
|------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Level 1 
Level 2  | Quoted prices in active markets for identical assets or liabilities.
Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or corroborated by observable market data or substantially the full term of the assets or liabilities.
|                   
|Level 3            | Unobservable inputs that are supported by little or no market activity and that are significant to the value of the assets or liabilities.                                                                                                                                                                                                                                                          

The Companys financial instruments include cash and cash equivalents, accounts receivable, other current assets, accounts payable, accrued expenses, and convertible debentures. All of these items were determined to be Level 1 fair value measurements.

The carrying amounts of cash and equivalents, accounts receivable, other current assets, accounts payable, accrued expenses and short term convertible debentures approximates fair value because of the short maturity of these instruments. The recorded value of long-term debt approximates its fair value as the terms and rates approximate market rates.

Deferred Financing Costs

The Company follows authoritative guidance for accounting for financing costs as it relates to convertible debt issuance cost. These costs are deferred and amortized over the term of the debt period or until redemption of the convertible debentures. As of January 31, 2011 and July 31, 2010, $0 and $382,132, respectively of deferred financing costs remained to be amortized. Amortization of deferred financing costs amounted to $382,132 and $249,988 for six months ended January 31, 2011 and 2010, respectively.

6

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CONOLOG CORPORATION AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)

NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued)

Derivative Liability

Derivative liabilities consist of certain common stock warrants, and conversion features embedded in our convertible debenture notes. These financial instruments are recorded in the balance sheet at fair value, determined using the Black Scholes option pricing model, as liabilities. Changes in fair value are recognized in the statement of operations in the period of change.

Effective August 1, 2009, the Company adopted the provisions of the Financial Accounting Standards Board Accounting Codification Topic 815-40-15-5, Evaluating Whether an Instrument Involving a Contingency is Considered Indexed to an Entitys Own Stock (FASB ASC 815-40-15-5). FASB ASC 815-40-15-5 provides guidance in assessing whether an equity-linked financial instrument (or embedded feature) is indexed to an entitys own stock for purposes of determining whether the equity-linked instrument (or embedded feature) qualifies as a derivative instrument. We have determined that our convertible debentures and certain of our warrants issued after the adoption of FASB ASC 815-40-15-5 contain features that are not indexed to our own stock and therefore, were classified as derivative instruments. Upon adoption of FASB ASC 815-40-15-5 we did not record a cumulative effect of a change in accounting principle as it did not apply to any outstanding
convertible debentures or warrants at that time.

On June 18, 2010, the Companys common stock warrants and convertible notes were amended. As a result of these amendments we determined that the equity-linked instruments (or embedded features) are indexed to our Companys stock within the meaning of FASB ASC 815-40-15-5 and no longer qualify as a derivative instrument.

Debt Discount

The Company follows the authoritative guidance for accounting for debt discount and valuation of detachable warrants the Company recognized the value of detachable warrants issued in conjunction with issuance of the secured convertible debenture notes. The Company valued the warrants using the Black-Scholes pricing model. The Company recorded the warrant relative fair value as an increase to additional paid-in capital and discount against the related debt. The discount attributed to the value of the warrants is amortized over the term of the underlying debt using the effective interest method.

Advertising / Public Relations Costs

Advertising/Public Relations costs are charged to operations when incurred. These expenses were $23,850 and $1,500 for the six months ended January 31, 2011 and 2010, respectively.

Impairment of Long-Lived Assets

We review our long-lived assets for impairment whenever events and circumstances indicate that the carrying value of an asset might not be recoverable. An impairment loss, measured as the amount by which the carrying value exceeds the fair value, is recognized if the carrying amount exceeds estimated undiscounted future cash flows.

Revenue Recognition

Revenue is recorded in accordance with the guidance of the SECs Staff Accounting Bulletin (SAB) No. 104, which supersedes SAB No. 101. Revenue from product sales are recognized at the time of shipment (when title and risks and rewards of ownership have passed) upon fulfillment of acceptance terms; products are not sold on a conditional basis. Therefore, when delivery has occurred the sale is complete as long as the collection of the resulting receivable is probable.

Warranty

The Company provides a twelve-year warranty on its commercial products and 25 years on its military products; the warranty covers parts and labor. The Company, at its option, repairs or replaces products that are found defective during the warranty period providing proper preventive maintenance procedures have been followed by customers. Repairs necessitated by misuse of such products are not covered by our warranty. In cases of defective products, the customer typically returns them to the Companys facility in Somerville, New Jersey. The Companys service personnel will replace or repair the defective items and ship them back to the customer. All servicing is completed at the Companys main facility and customers are charged a fee for those service items that are not covered by the warranty. We do not offer our customers any formal written service contracts. Our warranty costs have historically been insignificant and therefore a provision was not
warranted. Management continues to monitor the costs and will provide a warranty provision if circumstances change.

7

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CONOLOG CORPORATION AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)

Stock Based Compensation

The Company follows the authoritative guidance for accounting for stock-based compensation. This guidance requires that new, modified and unvested share-based payment transactions with employees, such as grants of stock options and stock, be recognized in the financial statements based upon their fair value at the grant date and recognized as compensation expense over their vesting periods. The Company also follows the guidance for equity instruments issued to consultants.

Loss Per Share of Common Stock

Basic loss per share of common stock is computed by dividing the Companys net loss by the weighted average number of shares of Common Stock outstanding during the period. The preferred dividends are not reflected in arriving at the net loss as they are not material and would have no effect on loss per share available to common shareholders. Diluted loss per shares is based on the treasury stock method and includes the effect from potential issuance of common stock such as shares issuable pursuant to the exercise of warrants and conversions of debentures. The Company did not have any dilutive securities for the six month periods ended January 31, 2011 and 2010. Potentially dilutive securities at January 31, 2011 consist of 1,582,837 common shares from outstanding warrants and 155,006 common shares from preferred stock.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The estimates and assumptions made by management are based upon available current information, historical experience and other factors that are believed to be reasonable under the circumstances. The estimates and assumptions made by management involve risks and uncertainties which could cause reported amounts to differ materially from actual future results. If managements estimates and assumptions are inaccurate, the Companys reported amounts and disclosures of contingent assets and liabilities could be materially and adversely affected.
Management considers its reserve for inventory and accounting for derivative liabilities to be significant estimates.

Future Impact of Recently Issued Accounting Standards

In December 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-29, Business Combinations (ASC Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations. The amendments in this ASU affect any public entity as defined by ASC Topic 805 that enters into business combinations that are material on an individual or aggregate basis. The amendments in this ASU specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the
reported pro forma revenue and earnings. The amendments are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The Company does not expect adoption of ASU 2010-29 to have a material impact on the Companys results of operations or financial condition.

In December 2010, the FASB issued ASU 2010-28, Intangibles - Goodwill and Other (ASC Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. The amendments in this ASU modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with the existing guidance and examples, which require that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the
fair value of a reporting unit below its carrying amount. For public entities, the amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The Company does not expect the adoption of ASU 2010-28 to have a material impact on the Companys results of operations or financial condition.

8

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Future Impact of Recently Issued Accounting Standards (continued)

In April 2010, the FASB issued ASU 2010-17, Revenue Recognition  Milestone Method(ASU 2010-17). ASU 2010-17 provides guidance on the criteria that should be met for determining whether the milestone method of revenue recognition is appropriate. A vendor can recognize consideration that is contingent upon achievement of a milestone in its entirety as revenue in the period in which the milestone is achieved only if the milestone meets all criteria to be considered substantive. The following criteria must be met for a milestone to be considered substantive. The consideration earned by achieving the milestone should (i) be commensurate with either the level of effort required to achieve the milestone or the enhancement of the value of the item delivered as a result of a specific outcome resulting from the vendors performance to achieve the milestone; (ii) be related solely to past performance; and (iii) be reasonable relative to all
deliverables and payment terms in the arrangement. No bifurcation of an individual milestone is allowed and there can be more than one milestone in an arrangement. Accordingly, an arrangement may contain both substantive and non-substantive milestones. ASU 2010-17 is effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Management evaluated the potential impact of ASU 2010-17 and does not expect its adoption to have a material effect on the Companys results of operations or financial condition.

In January 2010, the FASB issued ASU 2010-06, Improving Disclosures about Fair Value Measurements. ASU 2010-06 amends ASC 820 to require a number of additional disclosures regarding fair value measurements. The amended guidance requires entities to disclose the amounts of significant transfers between Level 1 and Level 2 of the fair value hierarchy and the reasons for these transfers, the reasons for any transfers in or out of Level 3, and information in the reconciliation of recurring Level 3 measurements about purchases, sales, issuances and settlements on a gross basis. The ASU also clarifies the requirements for entities to disclose information about both the valuation techniques and inputs used in estimating Level 2 and Level 3 fair value measurements. The amended guidance is effective for interim and annual financial periods beginning after December 15, 2009. The adoption of ASU 2010-06 did not have a significant effect on the Companys financial
statements.

In October 2009, the FASB issued guidance on multiple deliverable revenue arrangements which eliminates the residual method of allocation and requires the relative selling price method when allocating deliverables of a multiple-deliverable revenue arrangement. The determination of the selling price for each deliverable requires the use of a hierarchy designed to maximize the use of available objective evidence including, vendor specific objective evidence, third party evidence of selling price, or estimated selling price. This guidance is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, and must be adopted in the same period using the same transition method. If adoption is elected in a period other than the beginning of a fiscal year, the amendments in these standards must be applied retrospectively to the beginning of the fiscal year. Full retrospective application of these
amendments to prior fiscal years is optional. Early adoption of these standards may be elected. The adoption of this guidance did not have a significant impact on the Companys consolidated financial statements.

Management does not believe that any other recently issued, but not currently effective, accounting standards if currently adopted would have a material effect on the accompanying consolidated financial statements.

NOTE 3 - INCOME TAXES

The tax provision for the six months ended January 31, 2011 and 2010 was $12,043 and $5,727, respectively. The Company has no open tax years prior to 2005 for the State of New Jersey and 2003 for the federal income tax purposes which are subject to examination.

At July 31, 2010 and 2009, the Company has net loss carryforwards for federal income tax purpose of $26,890,000 and $25,430,000, respectively, which is available to offset future federal taxable income through 2030. At July 31, 2010 and 2009, the Company has net operating loss carryforwards for state income tax purposes of approximately $6,900,000 and $5,302,000 respectively to offset future state taxable income through 2030.

Deferred taxes are recognized for temporary differences between the bases of assets and liabilities for financial statement and income tax purposes, and net operating losses. The temporary differences causing deferred tax benefits are primarily due to net operating loss carry forwards.

The Company periodically assesses the likelihood that it will be able to recover its deferred tax assets and determines if a valuation allowance is necessary. As a result of this analysis the Company concluded that it is more likely than not that its deferred tax assets will not be recovered and, accordingly, recorded a 100% of the deferred tax asset to a valuation allowance as of January 31, 2011 and July 31, 2010.

The Company accounts for the recognition, measurement, presentation and disclosure of uncertain tax positions in accordance with the provisions of ASC 740-10, Accounting for Uncertainty in Income Taxes. The Company evaluates these unrecognized tax benefits each reporting period. As of January 31, 2011, the total amount of unrecognized tax benefits that, if recognized,

9

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CONOLOG CORPORATION AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)

NOTE 3 - INCOME TAXES (Continued)

would affect the effective tax rate is $135,000. The unrecognized tax benefit is the result of the Companys position to deduct the write off of the obsolete inventory for income tax purposes. The Company maintains some of its obsolete inventory utilization in repairing its products previously sold in accordance with the Companys warranty program. The Company, over the years, has discarded obsolete inventory; however, the company did not keep a detailed log of the inventory that was discarded. These inventory items were written down to zero in the Companys inventory system as they were deemed to have no value and therefore the Company deducted the amounts on its income tax returns.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

|                                                         |                  |        
|-------------------------------------------------------- | ---------------- | -------
|                                                         | January 31, 2011
|                                                         |                 
|Balance at beginning of period                           | $                | 135,000
|Additions based on tax positions related to current year |                  | -      
|                                                         |                 
|Balance at end of period                                 | $                | 135,000
|                                                         |                 

The Company and its subsidiaries are subject to United States federal income tax as well as income tax of multiple state jurisdictions. These uncertain tax positions are related to the Sale of the Companys NJ NOLs and are within the tax years that remain subject to examination by the relevant taxing authorities.

It is reasonably possible that the amount of unrecognized tax benefits will increase or decrease in the next twelve months. These changes may be the result of new state audits. It is also expected that the statute of limitations for certain unrecognized tax benefits will expire in the next 12 months resulting in a reduction of the liability for unrecognized tax benefits of approximately $22,000. The balance of the unrecognized tax benefits is primarily related to uncertain tax positions for which there are no current ongoing federal or state audits and therefore, an estimate of the range of the reasonably possible outcomes cannot be made.

The Company has recorded accrued interest of $11,000 as of January 31, 2011 which has been included in accrued expenses in the Balance Sheet. During the six month period ended January 31, 2011, the Company has included $6,000 of interest expense in the statement of operations.

NOTE 4  STOCKHOLDERS EQUITY

On January 6, 2011, Conolog Corporation (the Company) entered into a Securities Purchase Agreement (the Securities Purchase Agreement) with Robert Benou, the Companys Chief Executive Officer and Chairman of the Companys Board of Directors, pursuant to which the Company sold to Robert Benou a total of 277,777 shares of its Common Stock at a price per share of $0.36 (which is the average of the closing bid prices for the Companys Common Stock for the last thirty days (rounded to the whole penny) that such Common Stock traded) for an aggregate purchase price of $99,999.72.

On January 14, 2011, at the a Special Meeting of Shareholders of Conolog Corporation (the Company), the Companys shareholders approved an amendment to the Certificate of Incorporation of the Company to effect a reverse stock split of the companys common stock, par value $.001 per share, at a ratio not less than two-for-one and not greater than five-for-one, with the exact ratio to be set within such range in the discretion of the Board of Directors, without further approval or authorization of the Companys shareholders, provided that the Board of Directors determines to effect the reverse stock split and such amendment is filed with the Delaware Secretary of State no later than August 1, 2011.

At various times during the six month period ended January 31, 2011, $1,000,000 of convertible debt and $63,790 of accrued interest was converted into 3,562,999 shares of common stock.

At various times during the six month period ended January 31, 2011, an aggregate 1,355,782 Class C Warrants were converted in cashless exercises into 1,221,934 shares of common stock.

On January 31, 2011, the Company received notice from the Listing Qualifications Staff of the NASDAQ Stock Market (NASDAQ) indicating that the Company had failed to regain compliance with NASDAQ Listing Rule 5550(b), which requires the Company to have a minimum of $2,500,000 in stockholders equity (the Rule), and that, accordingly, its common stock will be delisted from The NASDAQ Capital Market and that trading of its common stock will be suspended,

10

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effective with the open of business on February 2, 2011. The Company securities have traded on the OTCQB under the symbol CNLG since the suspension of trading on NASDAQ. The Company intends to continue to file periodic reports with the SEC pursuant to the requirements of the Securities Exchange Act of 1934, as amended.

A summary of the Companys warrant activity is as follows:

Outstanding Warrants as of 7/31/2010:

|                                        |                           |                     |                        |       |  |         | 
|--------------------------------------- | ------------------------- | ------------------- | ---------------------- | ----- |  | ------- | 
|                                        | Number of 
      Warrants | Strike 
      Price | Expiration 
      Date
|1/19/06 Warrants                        | 417                       |                     | $                      | 25.00 |  | 1/19/11 | 
|3/12/07 Warrants                        | 84,750                    |                     | $                      | 21.00 |  | 3/12/12 | 
|11/2/07 Warrants                        | 33,355                    |                     | $                      | 33.20 |  | 11/2/12 | 
|Selling Agent Warrants                  | 256,410                   |                     | $                      | 0.10  |  | 2/26/15 | 
|Class C Warrants                        | 2,564,104                 |                     | $                      | 0.10  |  | 2/26/15 | 
|Total                                   | 2,939,036                 |                     |                        |       |  |         | 
|                                       
|Issued                                  | -                         |                     |                        | -     |  | -       | 
|Cancelled:                              |                           |                     |                        |       |  |         | 
|1/19/06 Warrants                        |                           |                     | $                      | 25.00 |  | 1/19/11 | 
|                                        | (417                      | )                   |                        |       |  |         | 
|Exercised:                              |                           |                     |                        |       |  |         | 
|Class C Warrants                        | (1,355,782                | )                   | $                      | 0.10  |  | 2/26/15 | 
|                                       
|Outstanding Balance at January 31, 2011 | 1,582,837                 |                     |                        |       |  |         | 

NOTE 5  CONVERTIBLE DEBENTURES

August 2009 Debentures

On August 3, 2009, the Company entered into a Subscription Agreement pursuant to which it sold a $500,000 convertible debenture on August 3, 2009, and a $500,000 debenture on September 24, 2009, (collectively, the August 2009 Debentures). The initial interest rate of the August 2009 debentures is 4% per annum and upon the shareholder Approval the interest rate will be 8% per annum. The August 2009 Debentures have maturity dates of 15 months from their closing dates. Interest shall accrue from the closing date and shall be payable quarterly, in arrears, commencing six months after the closing date. The August 2009 Debentures are convertible into shares of the Companys common stock at a conversion price of $0.78 per share. Commencing six months after the closing date, the Conversion Price shall be adjusted to the lesser of the $0.78 or 75% of the lowest three closing bid prices for the Companys common stock for the ten days prior to when the August
2009 Debentures are converted. Additionally, the conversion price of the debenture is adjustable upon the occurrence of certain events. Accordingly, the conversion feature of the debenture was accounted for as a discount to the August 2009 debentures in the amount of $1,000,000 at their commitment dates.

In connection with the August 2009 Debentures, the Company issued Class A and Class B warrants. The Class A warrants provide the holder with the option to purchase 2,564,102 shares of the Companys common stock at an exercise price $1.12 per share. The Class A warrants are exercisable for a period beginning on August 3, 2009 and terminate on August 3, 2014. Additionally, the 40,000 Class B Warrants issued entitles the holder until July 3, 2012, to purchase up to $4,000,000 of principal amount of the Companys 8% notes on the same terms as the August 2009 Debentures. Upon the exercise of the Class B Warrants, the holder of the Class B Warrant will be issued two Class C Warrants for each share of the Companys common stock that would be issued on the exercise date of the Class B Warrant assuming the full conversion of the notes issued on such date. The Class C warrants entitle the warrant holder to purchase 10,256,416 shares of the Companys Common
Stock with an exercise price equal to the lesser of 105 % of the closing bid price of the Companys common stock or the exercise price of the Class A Warrants. For each $100,000 principal of notes purchased pursuant to the Class B Warrants, the holder will surrender 1,000 Class B Warrants. The Class A and Class B Warrants were accounted for as derivative liabilities resulting in a charge to derivative liability with a corresponding charge to the statement of operations at the commitment date of the August 2009 Debenture in the amount of $16,975,954.

The August 2009 Debentures cannot be converted to the extent such conversion would cause the debenture holder, together with such holders affiliates, to beneficially own in excess of 4.99% of the Companys outstanding common stock immediately following such conversion. The Company also entered into a Security Agreement pursuant to which it granted the Subscribers a security interest in its assets. The Security Agreement will terminate when the August 2009 debentures, including outstanding interest due thereon are repaid.

11

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CONOLOG CORPORATION AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)

NOTE 5  CONVERTIBLE DEBENTURES (continued)

In accordance with the terms of the August 2009 Debentures, the occurrence of any of the following events shall, at the option of the note holder, make all sums of principal and interest then remaining unpaid immediately due and payable, upon demand:

- Failure to pay principal or interest when due and such failure continues for a period of five (5) business days after the due date.
- The Company breaches any material covenant or other term or condition of the subscription agreement and convertible debenture in any material respect and such breach, if subject to cure, continues for a period of ten (10) business days after written notice to the Company from the note holder.
- Breach of any material representation or warranty of the Company made in the subscription agreement or convertible debenture or in any agreement, statement or certificate given in writing shall be false or misleading in any material respect as of the date made and the closing Date.
- The Company or any Subsidiary of Company shall make an assignment for the benefit of creditors, or apply for or consent to the appointment of a receiver or trustee for them or for a substantial part of their property or business; or such a receiver or trustee shall otherwise be appointed.
- Any money judgment, writ or similar final process shall be entered or filed against the Company or any subsidiary of the Company or any of their property or other assets for more than $100,000, and shall remain unvacated, unbonded or unstayed for a period of forty-five (45) days.
- The Company shall have received a notice of default, which remains uncured for a period of more than twenty (20) business days, on the payment of any one or more debts or obligations aggregating in excess of One Hundred Thousand Dollars (US $100,000.00) beyond any applicable grace period;
- Bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings or relief under any bankruptcy law or any law, or the issuance of any notice in relation to such event, for the relief of debtors shall be instituted by or against the Company or any subsidiary of the Company and if instituted against them are not dismissed within sixty (60) days of initiation.
- Failure of the Common Stock to be quoted or listed on the NASDAQ National Market System; failure to comply with the requirements for continued listing on the Bulletin Board for a period of seven consecutive trading days; or notification from the Bulletin Board or the NASDAQ National Market System that the Company is not in compliance with the conditions for such continued listing on the NASDAQ National Market System.
- An SEC or judicial stop trade order or a NASDAQ National Market System trading suspension with respect to Borrowers Common Stock that lasts for five or more consecutive trading days.
- The Companys failure to timely deliver Common Stock to the note holder pursuant to and in the form required by this convertible note or subscription agreement, and, if requested by Company, a replacement convertible note, and such failure continues for a period of five (5) business days after the due date.
- The Company effectuates a reverse split of its Common Stock without twenty days prior written notice to the note holder.
- A default by the Company of a material term, covenant, warranty or undertaking of any agreement to which the Company and note holder are parties, or the occurrence of a material event of default under any such other agreement which is not cured after any required notice and/or cure period.

In connection with the August 2009 Debentures entered into on August 3, 2009, the Company paid Garden State Securities, Inc., the selling agent, a cash fee of $100,000 and issued warrants to purchase 256,410 shares of the Companys common stock. The Company calculated the fair value of the warrants on August 3, 2009 at $231,025 using the Black-Scholes option pricing model. The assumptions used in computing the fair value are a closing stock price of $1.14, expected volatility of 108% over the remaining contractual life of five years and a risk free rate of 2.66%. The Company recorded the cash fee and the fair value of the warrants issued to Garden State Securities, Inc. plus $40,000 fee paid to an attorney totaling $371,025 as deferred financing costs. The deferred financing costs are being amortized over the term of the August 2009 Debenture agreement. As of January 31, 2011, the remaining balance was $0.

At various times during the fiscal year ended July 31, 2010, an aggregate $1,000,000 of the August 2009 debentures and $36,968 of accrued interest were converted into 1,329,447 shares of the Companys common stock. As of January 31, 2011 and July 31, 2010 the remaining balance of the August 2009 debentures were $0.

12

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CONOLOG CORPORATION AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)

NOTE 5  CONVERTIBLE DEBENTURES (continued) 
  February 2010 Debentures

On February 24, 2010, holders of the Class B warrants exercised 10,000 Class B Warrants to purchase $1,000,000 in convertible notes (February 2010 Debentures). The February 2010 Debentures were issued under the same terms as the August 2009 Debentures. Accordingly, the conversion feature of the debenture was accounted for as a liability resulting in a discount to the February 2010 debentures in the amount of $1,000,000 at their commitment dates. With the exercise of the 10,000 Class B warrants, the Company also issued Class C Warrants to purchase 2,564,104 shares of the Companys common stock at an exercise price of $1.12.

In connection with the exercise of the Class B warrants and pursuant to a Selling Agent Agreement the Company paid Garden State Securities, Inc., a cash fee of $100,000 and issued Garden State additional warrants to purchase 256,410 shares of the Companys common stock. The Company calculated the fair value of the warrants on March 3, 2010 to be $380,256 using the Black-Scholes option pricing model. The assumptions used in computing the fair value are a closing stock price of $1.12, expected volatility of 108% over the remaining contractual life of five years and a risk free rate of 2.27%. The Company recorded the cash fee and the fair value of the warrants totaling $480,256 issued to Garden State as deferred financing costs. The deferred financing costs are being amortized over the term of the February 2010 Debenture agreement. As of January 31, 2011 the remaining balance was $0.

The August 2009 debentures, February 2010 debentures, Class A warrants, Class B warrants, Class C warrants and the warrants granted to the selling agent contain provisions whereby if the Company shall offer, issue or agree to issue any common stock or securities into or exercisable for shares of common stock to any person or entity at a price per share or conversion or exercise price per share which shall be less than the conversion price of the August 2009 debentures and February 2010 debentures or less than the exercise price of the Class A warrants, Class B warrants, Class C warrants or the warrants granted to the selling agent, then the conversion price and the warrant exercise price shall automatically be reduced to such other lower issue price. Due to this provision, the embedded conversion features of the debentures and the warrants are not considered indexed to the Companys stock. Accordingly, these financial instruments have been recorded as a derivative
liability.

On June 18, 2010, the Company entered into an amendment with the holders of its outstanding convertible debentures and warrants. Pursuant to the amendments, the parties agreed to the following: (i) remove the above provision which allowed for an adjustment to the conversion price of the debentures or exercise price of the debentures, (ii) the conversion feature of the February 2010 debentures were adjusted to a fixed conversion price $0.60, (iii) all future Class C Common Stock Purchase Warrants issued upon exercise of the Class B Common warrants shall have an exercise price of $0.50 per share, (iv) the exercise price of the outstanding Class C warrants shall be adjusted to $0.50 per share, (v) the exercise price of the outstanding selling agent warrants shall be adjusted to $0.60 per share.

As a result of the June 18, 2010 amendments the embedded conversion features of the debentures and the warrants were considered indexed to the Companys stock. Accordingly, the outstanding derivative liabilities were reclassified to additional paid in capital at their fair value on June 18, 2010 with the change in fair value being recorded in the statement of operations.

The February 2010 Debentures cannot be converted to the extent such conversion would cause the debenture holder, together with such holders affiliates, to beneficially own in excess of 4.99% of the Companys outstanding common stock immediately following such conversion. The Company also entered into a Security Agreement pursuant to which it granted the Subscribers a security interest in its assets. The Security Agreement will terminate when the February 2010 Debentures, including outstanding interest due thereon are repaid.

In accordance with the terms of the February 2010 Debentures, the occurrence of any of the following events shall, at the option of the note holder, make all sums of principal and interest then remaining unpaid immediately due and payable, upon demand:

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NOTE 5  CONVERTIBLE DEBENTURES(continued)

- Failure to pay principal or interest when due and such failure continues for a period of five (5) business days after the due date.
- The Company breaches any material covenant or other term or condition of the subscription agreement and convertible debenture in any material respect and such breach, if subject to cure, continues for a period of ten (10) business days after written notice to the Company from the note holder.
- Breach of any material representation or warranty of the Company made in the subscription agreement or convertible debenture or in any agreement, statement or certificate given in writing shall be false or misleading in any material respect as of the date made and the closing Date.
- The Company or any Subsidiary of Company shall make an assignment for the benefit of creditors, or apply for or consent to the appointment of a receiver or trustee for them or for a substantial part of their property or business; or such a receiver or trustee shall otherwise be appointed.
- Any money judgment, writ or similar final process shall be entered or filed against the Company or any subsidiary of the Company or any of their property or other assets for more than $100,000, and shall remain unvacated, unbonded or unstayed for a period of forty-five (45) days.
- The Company shall have received a notice of default, which remains uncured for a period of more than twenty (20) business days, on the payment of any one or more debts or obligations aggregating in excess of One Hundred Thousand Dollars (US $100,000.00) beyond any applicable grace period;
- Bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings or relief under any bankruptcy law or any law, or the issuance of any notice in relation to such event, for the relief of debtors shall be instituted by or against the Company or any subsidiary of the Company and if instituted against them are not dismissed within sixty (60) days of initiation.
- Failure of the Common Stock to be quoted or listed on The NASDAQ Stock Market; failure to comply with the requirements for continued listing on the Bulletin Board for a period of seven consecutive trading days; or notification from the Bulletin Board or NASDAQ that the Company is not in compliance with the conditions for such continued listing on The NASDAQ Capital Market.
- An SEC or judicial stop trade order or a NASDAQ National Market System trading suspension with respect to Borrowers Common Stock that lasts for five or more consecutive trading days.
- The Companys failure to timely deliver Common Stock to the note holder pursuant to and in the form required by this convertible note or subscription agreement, and, if requested by Company, a replacement convertible note, and such failure continues for a period of five (5) business days after the due date.
- The Company effectuates a reverse split of its Common Stock without twenty days prior written notice to the note holder.
- A default by the Company of a material term, covenant, warranty or undertaking of any agreement to which the Company and note holder are parties, or the occurrence of a material event of default under any such other agreement which is not cured after any required notice and/or cure period.

On December 1, 2010, the Company reduced the conversion price on its February 2010 debentures from $0.60 to $0.30. As a result of the reduction in the conversion price, an aggregate $1,000,000 of the February 2010 Debentures and $63,790 of accrued interest were converted in shares of common stock. The Company recognized an induced conversion cost of $649,147 related to these conversions.

As of January 31, 2011 the remaining balance of the February 2010 Debentures were $0.

Event of Default

On June 23, 2010, the Company received a NASDAQ Staff Deficiency Letter. As a result of the NASDAQ Staff Deficiency Letters, an event of default under the February 2010 Debenture occurred. The note holders did not exercise their rights upon an event of default and in December 2010 the Company received a waiver from note holders.

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CONOLOG CORPORATION AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)

NOTE 6  LOSS ON DERIVATIVE FINANCIAL INSTRUMENTS

For the six months period ended January 31, 2010, there was no activity for derivative financial instruments

Embedded Conversion Feature of August 2009 Debentures

The August 2009 Debentures contained a provision whereby we have the obligation to reduce the conversion price if we offer, issue or agree to issue any common stock or securities into or exercisable for shares of common stock to any person or entity at a price per share or conversion or exercise price per share which is less than the conversion price of the August 2009 Debentures. Accordingly the embedded conversion feature was accounted for as a derivative liability. The Company calculated the fair value of the embedded conversion feature on August 3, 2009 and September 24, 2009 (commitment dates) to be $1,466,538 ($1,000,000 of which was recorded as debt discount and $466,538 was recorded as a loss on derivative financial instruments) using the Black-Scholes option pricing model. The weighted average assumptions used in computing the fair values are a closing stock price of $1.83, expected volatility of 117.4% over the remaining contractual life of one year and five
months and a risk free rate of 2.46%. At various times throughout the three months ended October 31, 2009, the holders of the August 2009 Debentures converted $221,256 of the debentures into common shares of the Companys stock. At each conversion date the Company marked to market the fair value of the derivative and reclassified it to additional paid in capital. The amounts reclassified to additional paid in capital aggregated $328,395 and were calculated using the Black-Scholes option pricing. The weighted average assumptions used in computing the fair value are a closing stock price of $1.99, expected volatility of 117.4% over the remaining contractual life of 1 year and a risk free rate of 2.37%. The fair value of the derivative decreased by $0 and $101,436 during the six months ended January 31, 2011 and 2010, respectively, which has been recorded in the statements of operations.

August 2009 Selling Agent Warrants

In connection with the August 2009 debentures, the Company issued to the selling agent, warrants to purchase 256,410 shares of common stock at an exercise price of $1.12. Under the original terms of the August 2009 Selling Agent Warrants we had the obligation to reduce the exercise price if we offer, issue or agree to issue any common stock or securities into or exercisable for shares of common stock to any person or entity at a price per share or conversion or exercise price per share which is less than the exercise price of the August 2009 Selling Agent Warrants. Accordingly the warrants were accounted for as a derivative liability. The Company calculated the fair value of the warrants on August 3, 2009 at $231,025 using the Black-Scholes option pricing model. The assumptions used in computing the fair value are a closing stock price of $1.14, expected volatility of 108% over the remaining contractual life of five years and a risk free rate of 2.66%. The fair value of
the derivative increased by $0 and $92,820 during the six months ended January 31, 2011 and 2010, respectively, which has been recorded in the statements of operations.

Class A Warrants

In connection with the August 2009 debentures, the Company issued Class A Warrants to purchase 2,564,102 shares of common stock. The warrants were issued with an exercise price of $1.12. Under the terms of the Class A Warrants we have the obligation to reduce the exercise price if we offer, issue or agree to issue any common stock or securities into or exercisable for shares of common stock to any person or entity at a price per share or conversion or exercise price per share which is less than the exercise price of the Class A Warrants. Accordingly the warrants were accounted for as a derivative liability. The Company calculated the fair value of the warrants on August 3, 2009 at $2,310,256 using the Black-Scholes option pricing model. The assumptions used in computing the fair value are a closing stock price of $1.14, expected volatility of 108% over the remaining contractual life of five years and a risk free rate of 2.66%. The fair value of the derivative increased
by $0 and $926,923 during the six months ended January 31, 2011 and 2010, respectively, which has been recorded in the statements of operations.

Class B Warrants

In connection with the August 2009 debentures, the Company issued Class B Warrants to purchase up to $4,000,000 of principal amount of the Companys 8% convertible notes on the same terms as the August 2009 debentures, upon the exercise of the Class B Warrants, the holder of the Class B Warrant will be issued two Class C Warrants for each share of the Companys common stock that would be issued on the exercise date of the Class B Warrant assuming the full conversion of the notes issued on such date, and Class C warrants which entitle the warrant holder to purchase 10,256,408 shares of the Companys Common Stock with and exercise price equal to the lesser of 105 % of the closing bid price of the Companys common stock or the exercise price of the Class A Warrants. The financial instruments underlying the Class B Warrants contain provisions whereby we will have the obligation to reduce the exercise price if we offer, issue or agree to issue any

15

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CONOLOG CORPORATION AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)

NOTE 6  LOSS ON DERIVATIVE FINANCIAL INSTRUMENTS (continued)
  common stock or securities into or exercisable for shares of common stock to any person or entity at a price per share or conversion or exercise price per share which is less than the exercise price of the Class C Warrants or conversion price of the 8% convertible notes. Accordingly the Class B Warrants were accounted for as a derivative liability. The Company calculated the fair value of the Class B Warrants on August 3, 2009 at $14,665,698 consisting of a fair value for the underlying Class C Warrants of $10,369,894 and a fair value for the underlying embedded conversion feature of the 8% convertible notes of $4,295,804. The Company used the Black-Scholes option pricing model. The assumptions used in computing the fair value of the Class C Warrants are a closing stock price of $1.14, expected volatility of 138.26% over the remaining contractual life of five years and a risk free rate of
2.66%. The assumptions used in computing the fair value of the embedded conversion feature of the 8% convertible notes are a closing stock price of $1.14, expected volatility 159.87% over the remaining contractual life of one year and six months and a risk free rate of 1.18%. The fair value of the derivative increased by $0 and $6,189,500 during the six months ended January 31, 2011 and 2010, respectively, which has been recorded in the statements of operations.

On December 8, 2010, the Company reduced the exercise price of its outstanding Class C Warrants from $0.50 to $0.10.

NOTE 7  STOCK-BASED COMPENSATION

2002 Stock Option Plan

On April 23, 2002, the Board of Directors of the Company adopted the 2002 Stock Option Plan (the 2002 Plan). Under the 2002 Plan, the Company may grant up to 158 shares of common stock as either incentive stock options under Section 422A of the Internal Revenue Code or nonqualified stock options. Subject to the terms of the 2002 Plan, options may be granted to eligible persons at any time and under such terms and conditions as determined by the 2002 Stock Option Committee (the Committee). Unless otherwise determined by the Committee, each stock option shall terminate no later than ten years (or such shorter time as may be fixed by the Committee) after the date in which it was granted. The exercise price for incentive stock options must be at least one hundred percent (100%) of the fair market value of common stock as determined on the date of the grant. The exercise price for nonqualified stock options may not be granted at less than eighty-five
percent (85%) of the fair market value of the shares on the date of grant.

As of January 31, 2011 and July 31, 2010, there had been no shares granted under the 2002 Plan.

Stock Incentive Plans

The Company has Stock Incentive Plans pursuant to which the Company may grant a number of shares of the Companys Common Stock to the Companys officers, directors, employees and consultants. The Companys 2008 and 2009 Stock Incentive Plan was approved by its shareholders, authorizing the Board to, from time-to-time, issue up to 800,000 shares of the Companys Common Stock to the Companys officers, directors, employees and consultants under each plan.

The specific number of shares of the Companys Common Stock granted to any officer, director employee or consultant will be determined by the Board.

Pursuant to the Corporations 2009 Stock Incentive Plan, 800,000 common shares of Company stock were issued to current officers, directors, employees and consultants. These shares were recorded at a value of $1,536,000 for the three months ended October 31, 2009. The shares are fully vested and non-cancelable when granted therefore, the entire amount of stock grant compensation expense was recognized at the date the shares were authorized by the board of directors to be granted.

Securities Issued for Services

During the three months ended October 31, 2009, the Company issued a total of 200,000 shares of common stock to non-employees for services rendered during the period or to be rendered in future periods. These services were valued at $384,000. Services to be performed beyond fiscal year 2010, will be amortized and expensed to general and administrative expenses. The unamortized amount of prepaid services at January 31, 2011 is $0.

16

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CONOLOG CORPORATION AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)

NOTE 8 - MAJOR CUSTOMERS

The following summarizes sales to major customers (each 10% or more of net sales) by the Company:

|                 |              |                         |                    |                   
|---------------- | ------------ | ----------------------- | ------------------ | ------------------
|Six Months Ended | TotalRevenue | Sales to MajorCustomers | Number ofCustomers | Percentage ofTotal
|2011             | $677,742     | $607,725                | 3                  | 89.7%             
|2010             | $580,016     | $426,184                | 4                  | 85.6%             

NOTE 9  COMMITMENTS

Total rental expense for all operating leases of the Company amounted to approximately $27,840 and $25,700 during the six months ended January 31, 2011 and 2010, respectively. The Company currently leases its facilities on a month-to-month basis.

The Companys Chief Executive Officer is serving under an employment agreement commencing June 1, 1997 and ending May 31, 2002, which pursuant to its terms, renews for one-year terms until cancelled by either the Company or the Chief Executive Officer. His annual base salary as of January 31, 2011 was $450,000 and increases by $20,000 annually on January 1stof each year. In addition, the Chief Executive Officer is entitled to an annual bonus equal to 6% of the Companys annual income before income tax provision as stated in its annual Form 10-K. The employment agreement also entitles Chief Executive Officer to the use of an automobile and to employee benefit plans, such as; life, health, pension, profit sharing and other plans. Under the employment agreement, employment terminates upon death or disability of the employee and the employee may be terminated by the Company for cause. During the three months period from August 1. 2010 to
October 31, 2010, the Companys CEO forgave $105,000 of his salary. For the three months period from November 1, 2010 to January 31, 2011 the CEO did not forgive any portion of his salary, the Company has accrued and expensed $109,167 for the unpaid portion of his salary.

The Companys President and Chief Operating Officer is serving under an employment agreement commencing June 1, 1997 and ending May 31, 2002, which pursuant to its terms, renews for one-year terms until cancelled by either the Company or employee. His annual base salary as of January 31, 2011 was $260,200 and he receives annual increases of $12,000 on January 1stof each year. The Companys President and Chief Operating Officer is entitled to an annual bonus equal to 3% of the Companys annual income before income tax provision as stated in its annual Form 10-K. The employment agreement also entitles him to the use of an automobile and to employee benefit plans, such as life, health, pension, profit sharing and other plans. Under the employment agreement, employment is terminated upon death or disability of the employee and employee may be terminated by the Company for cause. During the three months period from August 1. 2010 to
October 31, 2010, the Companys President and Chief Operating Officer forgave $19,208 of his salary. For the three months period from November 1, 2010 to January 31, 2011 the President and Chief Operation Officer did not forgive any portion of his salary, the Company has accrued and expensed $63,050 for the unpaid portion of his salary.

The Company has an outstanding balance with its former auditors Withum, Smith & Brown (WS+B) and has agreed to pay the balance of $129,500 as follows:

- Monthly installment payments of $1,000 commencing March 25, 2011.
- Pay WS+B 8% of all additional net financing received by the Company over the next 18 months beginning February 25, 2011.
- If WS+B has not received any additional payments because of a lack of any financing by August 1, 2011, an additional payment of $15,000 needs to be paid prior to WS+B issuing their consent to their opinion dated November 30, 2010 as of and for the year ended July 31, 2010 financial statements.
- If there is still a remaining balance after July 23, 2012, the balance will be paid in Conolog common stock at the fair market value of the stock on July 23, 2012.

NOTE 10 - SUBSEQUENT EVENTS

The Company has evaluated subsequent events through the date the financial statements were issued and up to the time of filing of the financial statements with the Securities and Exchange Commission.

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On February 8, 2011, February 15, 2011, February 24, 2011, and February 28, 2011, Robert Benou made advances to the Company in the amounts of $60,000, $91,350, $30,000 and $30,000, respectively. Mr. Benou is the chief executive officer and chairman of the Company. The advances were made by Mr. Benou to assist the Company in meeting short-term obligations. The advances are payable on demand and do not bear interest. No written agreement was entered into with respect to the advances.

NOTE 11  RESTATEMENT OF PREVIOUSLY ISSUED UNAUDITED CASH FLOW STATEMENT

As discussed in Note 1, the Company restated the January 31, 2010 Balance Sheet and Statement of Operations in the July 31, 2010 Form 10-K filing. Below is the previously reported and as restated statement of cash flows for the six months ended January 31, 2010.

|                                                                                         |                    |            |             |  |   |             |  
|---------------------------------------------------------------------------------------- | ------------------ | ---------- | ----------- |  | - | ----------- | -
|Condensed Consolidated Statements of Cash Flows for the Six Months EndedJanuary 31, 2010 | PreviouslyReported |            | As Restated
|
|                                                                                         |                    |            |             |  |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                                     |                    |            |             |  |   |             |  
|Net loss                                                                                 | $                  | (8,426,531 | )           |  | $ | (37,287,260 | )
|Adjustments to reconcile net loss to net cash used in operations:                        |                    |            |             |  |   |             |  
|Depreciation                                                                             |                    | 8,000      |             |  |   | 8,000       |  
|Amortization of deferred financing fees                                                  |                    | -          |             |  |   | 249,988     |  
|Common stock issued to officers, directors and employees                                 |                    | 2,054,433  |             |  |   | 1,411,200   |  
|Common stock issued to pay interest                                                      |                    | 6,433      |             |  |   | 26,327      |  
|Amortization of common stock issued for services                                         |                    | -          |             |  |   | 144,745     |  
|Induced conversion cost associated with convertible debt and warrants                    |                    | 150,201    |             |  |   | 150,201     |  
|Amortization of discount of convertible debentures                                       |                    | 3,601,572  |             |  |   | 755,733     |  
|Loss on Derivative Financial Instrument                                                  |                    | 1,678,621  |             |  |   | 33,728,508  |  
|Changes in assets and liabilities                                                        |                    |            |             |  |   |             |  
|Decrease in accounts receivable                                                          |                    | 182,720    |             |  |   | 182,720     |  
|(Increase) in accounts receivable - other                                                |                    |            |             |  |   | -           |  
|(Increase) in prepaid expenses                                                           |                    | 36,143     |             |  |   | (192,481    | )
|(Increase) Decrease in inventories                                                       |                    | (88,899    | )           |  |   | (39,672     | )
|(Increase) in other assets                                                               |                    | -          |             |  |   | -           |  
|(Decrease) increase in accounts payable                                                  |                    | (99,581    | )           |  |   | (99,500     | )
|(Decrease) increase in accrued expenses                                                  |                    | (47,196    | )           |  |   | 6,965       |  
|                                                                                         |                    |            |             |  |  
|Net cash used in operations                                                              |                    | (944,084   | )           |  |   | (954,526    | )
|                                                                                         |                    |            |             |  |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                                     |                    |            |             |  |   |             |  
|Purchase of property and equipment                                                       |                    | (32,061    | )           |  |   | (21,622     | )
|                                                                                         |                    |            |             |  |  
|Net cash used in investing activities                                                    |                    | (32,061    | )           |  |   | (21,622     | )
|                                                                                         |                    |            |             |  |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                                     |                    |            |             |  |   |             |  
|Proceeds from issuance of convertible debentures                                         |                    | 1,635,070  |             |  |   | 1,000,000   |  
|Proceeds from exercise of warrants                                                       |                    | -          |             |  |   | 635,070     |  
|Proceeds from note receivable                                                            |                    | 1,607      |             |  |   | 1,610       |  
|Payments for deferred loan costs                                                         |                    | (140,000   | )           |  |   | (140,000    | )
|                                                                                         |                    |            |             |  |  
|Net cash provided by financing activities                                                |                    | 1,496,677  |             |  |   | 1,496,680   |  
|                                                                                         |                    |            |             |  |  
|NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS                                          |                    | 520,532    |             |  |   | 520,532     |  
|CASH AND EQUIVALENTS - BEGINNING OF PERIOD                                               |                    | 27,358     |             |  |   | 27,358      |  
|                                                                                         |                    |            |             |  |  
|CASH AND EQUIVALENTS - END OF PERIOD                                                     | $                  | 547,890    |             |  | $ | 547,890     |  
|                                                                                         |                    |            |             |  |  

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NOTE 12  SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

|                                                |                         |           |                         |   |        
|----------------------------------------------- | ----------------------- | --------- | ----------------------- | - | -------
|                                                | Six Months Ended       
|                                                | January 31, 
      2011 |           | January 31, 
      2010
|CASH PAID DURING THE PERIOD FOR:                |                         |           |                         |   |        
|Interest expense                                | $                       | -         |                         | $ | -      
|                                                |                         |           |                        
|Income Taxes                                    | $                       | 12,044    |                         | $ | 4,957  
|                                                |                         |           |                        
|SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:  |                         |           |                         |   |        
|Debt converted to equity                        | $                       | 1,000,000 |                         | $ | 259,206
|                                                |                         |           |                        
|Common stock issued for services to be provided | $                       | -         |                         | $ | 384,000
|                                                |                         |           |                        
|Common stock issued for accrued interest        | $                       | 63,790    |                         | $ | 6,433  
|                                                |                         |           |                        

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ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL INFORMATION

Conolog Corporation (the Company, we, us, our) is engaged in the design, production (directly and/or through subcontractors) and distribution of small electronic and electromagnetic components and sub-assemblies for use in telephone, radio and microwave transmission and reception and other communication areas that are used in both military and commercial applications. Our products are used for transceiving various quantities, data and protective relaying functions in industrial, utility and other markets.

HISTORY

We were organized in 1968 and were engaged primarily in the design and manufacture electronic components and systems for military applications.

In July 1971, we merged with DSI Systems, Inc., then engaged in the development and manufacture of terminal viewers for digital retrieval of microfilm. Later that year, we changed our name to Conolog Corporation.

In 1981 we acquired one of our customers, INIVEN Corporation ("INIVEN"). At that time, we were manufacturing, on behalf of INIVEN, a line of transmitters and receivers used for controlling and transceiving the measurement of the flow of gases and liquids, by gas and water utilities for controlling the flow of waste water and sewage and measuring and controlling traffic.

During 1987, we made a strategic decision to redirect our focus from military to commercial markets. Since that time, we have refocused on manufacturing and marketing our products for the commercial marketplace rather than depend on the military and defense-related markets. Our primary emphasis was on products for electric utilities, co-generation of power, gas and water companies, traffic control for departments of transport (DOT) and airports utilizing DSP (Digital Signal Processing) technology.

In September 1998, we acquired the assets of Atlas Design, Inc., a human resource outsourcing company, to further our strategy of mergers and acquisitions, and to assist in providing qualified engineering and technical staff in support of our longer term contracts.

In January 2001, we acquired substantially all of the assets of Prime Time Staffing Inc. and Professional Temp Solutions, Inc. These companies provided permanent and temporary employees for the graphics design firms, book publishing companies and engineering businesses.

During the year ended July 31, 2001, we formed a wholly owned subsidiary, Lonogoc Corporation (currently inactive). In August, 2000, Lonogoc Corporation purchased the assets of Independent Computer Maintenance Corporation, which provided installation, maintenance, and troubleshooting of computer systems and networks. On October 22, 2002, we entered an agreement to rescind the Asset Purchase Agreement between us and Independent Computer Maintenance Corporation. Under the rescission agreement, Conolog and its subsidiary agreed to transfer all assets previously purchased pursuant to the Asset Purchase Agreement, to the extent they still exist, to the former seller. The return of the purchase price paid for the assets was $600,000, $300,000 in cash at closing, a note, which is secured by a first mortgage on a condominium, for $150,000 bearing an interest rate of 7.5% of which will be paid over 24 months in equal monthly installments of $6,750 per month beginning December
2002, and an unsecured note receivable for $137,350 payable over 10 years beginning December 2004 bearing an interest rate of 5%. During fiscal 2009, the maker of the note stopped making payments on this note receivable and the Company reserved $83,100 at July 31, 2009. During fiscal 2010 the maker of the note made only one payment of $1,610. The Company filed legal action and a Judgment was granted in favor of the Company. Any future collections from the principal will be recorded as income.

In March 2004, we ceased operating our staffing business. The assets of our wholly-owned subsidiary, Nologoc, Inc. trading as Atlas Design, were sold to the subsidiary's Vice President. In consideration of the sale, we received $34,000 in cash.

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Results of Operations (three months ended January 31, 2011 compared to the three months ended January 31, 2010).

Description of Revenues

We derive operating revenues from the sales of products used in radio and other transmissions, telephones and telephone exchanges, air and traffic control, automatic transmission of data for utilities, tele-printing of transmitted data such as news and stock market information and for use by electric utilities in monitoring power transmission lines for faults and/or failures. Our products may be used independently or in combination with other products to form a system type configuration, whereby our equipment is pre-assembled in a large cabinet with other equipment in a configuration that would provide the end user with protection as well as operational status displays.

Description of Expenses

Our expenses include the following: (i) Costs of revenues, which consists primarily of costs to manufacture the products we ship, these costs include raw materials, direct labor, overhead expenses associated with manufacturing and freight shipping costs; (ii) General and administrative (G&A)expenses, which consists of compensation and benefits for all non-manufacturing employees, compensation costs also includes stock-based awards to employees and directors. Also included in G&A expenses is professional services for legal, accounting and business consultants, as well as, rent, depreciation and general corporate expenditures.; and (iii) Sellingcosts, consists mainly of commissions and trade shows expenditures; (iv) Research and Developmentexpenses represent the costs of our development efforts related to new products; (v) Other income (expense)consist of interest on cash and cash equivalents, interest expense
consist of interest expense on convertible debentures. Other expenses consist of change in fair value of derivatives associated with the convertible debentures, along with amortization of debt discount and deferred financing fees also associated with the convertible debentures.

Results of Operations

Operating Revenues

The majority of the Companys sales revenue is generated from the sales of the PDR-2000 Teleprotection products. For the three months ended January 31, 2011 product revenues were $150,831 compared to $111,920 for the same three months ended January 31, 2010. This increase of $38,911 or 34.9% for our fiscal second quarters 2011 can mainly be attributed to an increase of approximate $139,700 in sales revenues for the PDR-2000. The increase in our PDR-2000 sales were offset by declines in military sales of $71,400 and telemetry equipment sales of $19,400 which were expected to decline in the coming years.

Sales changes by product line for the three months period ended January 31, 2011 and 2010.

|                                |         |           |      |          |           |     |   |         |   |        |  
|------------------------------- | ------- | --------- | ---- | -------- | --------- | --- | - | ------- | - | ------ | -
|                                |         | % tototal |      |          | % tototal |     |  
|Products sold                   | 2011    |           | 2010 | $ change | % chg    
|                               
|PDR-2000 digital teleprotection | 139,700 | 93        | %    |          | -         | 0   | % | 139,700 |   | 100.0  | %
|PTR-1500 analog teleprotection  | -       | 0         | %    |          | 8,600     | 8   | % | (8,600  | ) | -100.0 | %
|Telemetry equipment             | 9,800   | 6         | %    |          | 29,200    | 26  | % | (19,400 | ) | -66.4  | %
|Military Sales                  | -       | 0         | %    |          | 71,400    | 64  | % | (71,400 | ) | -100.0 | %
|Spare parts                     | 1,100   | 1         | %    |          | 2,600     | 2   | % | (1,500  | ) | -57.7  | %
|Freights                        | 231     | 0         | %    |          | 120       | 0   | % | 111     |   | 92.5   | %
|Discounts                       |         | 0         | %    |          |           | 0   | % | -       |   | 0      | %
|                                |         |           |     
|Net Sales Revenues              | 150,831 | 100       | %    |          | 111,920   | 100 | % | 38,911  |   | 34.8   | %
|                                |         |           |     

Cost of Product Revenue

Cost of product revenue consist primary of costs to manufacture the products systems that were shipped. These costs include raw materials, direct labor and overhead expenses associated with production and freight costs

The cost of goods sold for the three months ended January 31, 2011, amounted to $138,934 as compared to $87,038 for the same three month period ended January 31, 2010. This $51,896 or 59.6% increase in cost of goods sold can be attributed to (a)

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normal volume increase as a result of the 34.8% sales volume increase, mainly from the PRD-2000, and (b) the product mix change versus prior year, mainly no sales in military items and lower sales in telemetry items in 2011. The majority of product sold in the three months ended January 31, 2011 were the PDR-2000 which have the higher cost of goods than any other products in our product line.

Gross Profit

Gross profit for the three month period ended January 31, 2011 was $11,897 or 7.9% of revenues versus $24,882 or 22.2% of revenues for the three month period ended January 31, 2010. This decline of 52.1% is attributed to the very aggressive pricing on the PDR-2000 to one customer that was necessary to secure a contract in a competitive bid. Forty-two units were delivered in the fiscal second quarter 2011 and the contract expires in fiscal 2011.

Operating Expenses

General and Administrative: For the three month period ended January 31, 2011, general and administrative expenses increased $427,222 to $844,769 from $417,547. This increase of approximately 102.3% can be attributed to the following: (a) Compensation expense, which is comprised of salaries, health insurance, and payroll taxes increased approximately $48,000 for the three months ended January 31, 2011, to an amount of approximately $253,350 versus approximately $205,350 for same prior year three month period, (b) Professional fees increased approximately $276,000 over the prior year three months period mainly due to legal fees and accounting fee associated with the restatement of prior filed financial statements. Public relations and stock expense fees also associated with refilling issues increased approximately $95,200 versus the prior three months period and various all other administrative expenses increased approximately $8,022.

Research and Development:For the three month period ended January 31, 2011 research and development cost were $14,016, a decrease of $16,899 versus the prior year total of $30,915. Our research and development costs can mainly be attributed to on-going research in the CM-100, and enhancing the PDR-2000 and GlowWorm products.

Selling Expenses:For the three month period ended January 31, 2011 selling expenses were $17,274, an increase of $13,269. This increase is mainly due to timing of our in sales public relations expenses occurred second quarter 2011 versus first quarter 2010.

Total Other Income and Expenses:For the three month period ended January 31, 2011, other income/expense was an expense of $1,572,516, a decrease of $8,327,186 versus the three months ended January 31, 2010 expense amount of $9,899,702. This decrease in other income is primary the result of the loss on derivative financial instrument associated with a subscription agreement entered into in fiscal year 2010. The Company recorded a loss on derivative financial instruments of $9,178,209 for the three months ended January 31, 2010 as compared to $0 for the three months ended January 31, 2011. Amortization expenses associated with debt discount and deferred financing fees increased $255,446 for the three months ended January 31, 2010 versus the prior year three month period. Induced conversion costs associated with debt conversion also increased $530,154, for the three months ended January 31, 2010 versus the prior year three month period.

Net Income (Loss) Applicable to Common Shares

The Company recorded a net loss of $2,437,120 for the three month period ended January 31, 2011, as compared to a net loss of $10,328,057 for three month period ended January 31, 2010. The decrease in net loss of $7,890,937 can mainly be attributed to noncash transactions related to the subscription agreement entered into in August 2009, which resulted in a net loss on the derivative financial instrument of $9,178,209. Offsetting the derivative loss change were (a) a small decline in gross profit margin of approximately $13,000 and (b) increases in induced conversion cost of approximately $505,800, (c) increases in expenses associated with amortization of financing fees, debt discount and interest expense association with debt conversion for the three months ended January 31, 2011, in the amount of approximately $342,000, and (d) increase in selling, general and administrative expenses of approximately $427,000. As a result of the foregoing, the Company reported net loss applic
able to common
shares for the three months ended January 31, 2011 of ($0.28) basic and diluted loss per share compared to a net loss per common share of ($3.34) basic and diluted loss per share, for the three months ended January 31, 2010.

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Results of Operations (six months ended January 31, 2011 compared to the six months ended January 31, 2010).Results of Operations 
  Operating Revenues

The majority of the Companys sales revenue is generated from the sales of the PDR-2000 Teleprotection products. For the six months ended January 31, 2011 product revenues were $677,742 compared to $580,016 for the same six months ended January 31, 2010. This increase of $97,726 or 16.8% for our fiscal first two quarters 2011 can mainly be attributed to an increase of approximate $325,000 in sales revenues for the PDR-2000 as customers move to digital systems from analog. The increase in our PDR-2000 sales were offset by declines in military sales of $143,500 and telemetry equipment sales of $65,700 which were expected to decline in the coming years.

Sales changes by product line for the six months period ended January 31, 2011 and 2010.

|                                |         |           |      |   |          |           |   |     |   |          |   |        |  
|------------------------------- | ------- | --------- | ---- | - | -------- | --------- | - | --- | - | -------- | - | ------ | -
|                                |         | % tototal |      |   |          | % tototal |   |    
|Products sold                   | 2011    |           | 2010 |   | $ change | % chg    
|                               
|PDR-2000 digital teleprotection | 597,400 |           | 88   | % |          | 272,400   |   | 47  | % | 325,000  |   | 119.3  | %
|PTR-1500 analog teleprotection  | -       |           | 0    | % |          | 27,600    |   | 5   | % | (27,600  | ) | -100.0 | %
|Telemetry equipment             | 38,200  |           | 6    | % |          | 103,900   |   | 18  | % | (65,700  | ) | -63.2  | %
|Military Sales                  | 26,900  |           | 4    | % |          | 170,400   |   | 29  | % | (143,500 | ) | -84.2  | %
|Spare parts                     | 12,100  |           | 2    | % |          | 6,000     |   | 1   | % | 6,100    |   | 101.7  | %
|Freights                        | 4,932   |           | 1    | % |          | 1,116     |   | 0   | % | 3,816    |   | 341.9  | %
|Discounts                       | (1,790  | )         | -0.3 | % |          | (1,400    | ) | 0   | % | (389     | ) | 27.8   | %
|                                |         |           |     
|Net Sales Revenues              | 677,742 |           | 100  | % |          | 580,016   |   | 100 | % | 97,727   |   | 16.8   | %
|                                |         |           |     

Cost of Product Revenue

Cost of product revenue consist primary of costs to manufacture the products systems that were shipped. These costs include raw materials, direct labor and overhead expenses associated with production and freight costs

The cost of goods sold for the six months ended January 31, 2011, amounted to $408,738 as compared to $343,237 for the same six month period ended January 31, 2010. This $65,501 or 19% increase in cost of goods sold can be attributed to (a) normal volume increase as a result of the 16.8% sales volume increase, mainly from the PRD-2000, and (b) a 2% increase due to the product mix change versus prior year, mainly lower sales in military items and telemetry.

Gross Profit

Gross profit for the six month period ended January 31, 2011 was $269,004 or 39.7% of revenues versus $236,779 or 40.8% of revenues for the six month period ended January 31, 2010. The increase in dollar gross profit was mainly due to increase in sales volume for the PDR-2000 for the six months ended January 31, 2011 over the same six month period in 2010. The increase in sales for the PDR-2000 can be attributed to increase in units sales and higher unit sales pricing which generated an approximately 5% to 2% higher gross profit margin on the PDR-2000 as compared to our fiscal first half 2010. The overall gross margin percent decline 1.1% mainly due to product mix

Operating Expenses

General and Administrative: For the six month period ended January 31, 2011, general and administrative expenses decreased $953,049 to $1,552,351 from $2,505,400 for the six month period ended January 31, 2010. This decrease of approximately 38% can be attributed to the following: (a) Compensation expense, which is comprised of salaries, health insurance, and payroll taxes decreased approximately $1,483,000 for the six months ended January 31, 2011, to an amount of approximately $391,000 versus approximately $1,874,000 for same prior year six month period. The decrease in compensation expense was primarily due to the issuance of stock to employees which created a noncash expense of $1,411,200 during the six months ended January 31, 2010 compared to $0 during the six months ended January 31, 2011. Also in compensation expense during the six months ended January 31, 2011 salaries and benefits declined approximately $72,000 compared to the six

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months ended January 31, 2010 due to the reductions of salaries from senior management, (b) Professional fees increased approximately $519,000 over the prior year six months period mainly due to legal fees and accounting fee associated with the restatement of prior filed financial statements. For the same reason, stock expenses increased approximately $56,000 versus the prior six months period. Travel and entertainment decreased approximately $26,000 and all other general and administrative decreased approximately $19,000.

Research and Development:For the six month period ended January 31, 2011 research and development cost were $62,273, a slight increase versus the prior year total of $61,763. Our research and development costs can mainly be attributed to ongoing research in the CM-100, and enhancing the PDR-2000 and GlowWorm products.

Selling Expenses:For the six month period ended January 31, 2011 selling expenses were $34,058, a decline of $18,197 or 20%. This decline is mainly due to reduced travel expenses and reduced fees paid on commission.

Total Other Income and Expenses:For the six month period ended January 31, 2011, other income/expense was an expense of $1,876,984, a decrease of $33,031,357 versus the six months ended January 31, 2010 expense amount of $34,908,341. This decrease in other income is primary the result of the loss on derivative financial instrument associated with a subscription agreement entered into in fiscal year 2010. The Company recorded a loss on derivative financial instruments of $33,728,508 for the six months ended January 31, 2010 as compared to $0 for the six months ended January 31, 2011. Amortization expenses associated with debt discount and deferred financing fees increased approximately $97,098 for the six months ended January 31, 2010 versus the prior year six month period. Induced conversion costs and interest expense associated with debt conversion also increased approximately $595,000 for the six month period ended January 31, 2011

Net Income (Loss) Applicable to Common Shares

The Company recorded a net loss of $3,268,705 for the six month period ended January 31, 2011, as compared to a net loss of $37,287,260 for six month period ended January 31, 2010. The decrease in net loss of approximately $34,018,555 can mainly be attributed to noncash transactions related to the subscription agreement entered into in August 2009, which resulted in a net loss on the derivative financial instrument of $33,728,508. An increase in gross profit margin of approximately $32,200 also contributed to an increase in income, as well as, reduction in operating expenses of approximately $961,289 mainly a result of noncash stock compensation of $1,411,200 in first quarter fiscal year 2010. As a result of the foregoing, the Company reported net loss applicable to common shares for the six months ended January 31, 2011 of ($0.42) basic and diluted loss per share compared to a net loss per common share of ($14.75) basic and diluted loss per share, for the six months
ended January 31, 2010.

Status of Certain Press Releases Issued:

On January 11, 2011, at the Annual Meeting of Shareholders of the Company, the Companys shareholders approved the election of Robert S. Benou, Marc R. Benou, Louis S. Massad, Edward J. Rielly and David M. Peison as directors to the Companys board of directors.

On February 1, 2010, the Company issued a press release announcing that it had received advanced orders for its PDR Systems valued at over $1,900,000. At the time of this press release we had advanced orders for $1,900,000. Approximately, two weeks subsequent to the press release we received an actual purchase order in the amount of $638,000. The advance order on this $638,000 actual purchase was $936,000 resulting in a decrease of $298,000 from the advanced orders to the actual purchases by the customer. Other advanced orders related to the $1,900,000 in the amount of $964,000 have been subsequently received and shipped through October 31, 2010.

On February 17, 2010, the Company issued a press release announcing that it had received releases for its PDR 2000 systems valued at $638,000. One of our customers placed one purchase order with the Company for two separate deliveries of the PDR systems totaling $638,000 in revenue. The first shipment was for immediate delivery which commenced February 25, 2010 and completed April 8, 2010. The balance of the shipment was released in January for all digital PDR-2000s and the remaining analog PDR-2000s are awaiting technical approval before shipment but is expected in fiscal 2011. The original estimate from the customer for this order was for $936,000 (which was part of the $1,900,000 advance order  as discussed above). The difference between the original estimate of $936,000 and the final order shipped of $638,000 was due to less expensive options and 33 fewer units ordered than estimated.

On March 3, 2011, the Company issued a press release announcing that it had dismissed WithumSmith+Brown, PC (Withum), and engaged Wolinetz, Lafazan & Company, CPAs, P.C. (Wolinetz) as the Companys independent registered public accounting firm. The decision to dismiss Withum and engage Wolinetz was approved by the audit committee of the Companys board of directors on March 3, 2011.

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The report of Withum on our financial statements for each of the past two fiscal years contained no adverse opinion or a disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles, except that, the report expressed substantial doubt about the Companys ability to continue as a going concern.

During our two most recent fiscal years and through the date of dismissal, the Company had no disagreements with Withum on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Withum, would have caused it to make reference to the subject matter of such disagreements in its report on our financial statements for such periods.

During the Companys two most recent fiscal years and through the date of the dismissal, there were no reportable events as defined under Item 304(a)(1)(v) of Regulation S-K adopted by the SEC.

On March 9, 2011, the Company issued a press release announcing that Robert Benou, the chief executive officer and chairman of the Company had made advances to the Company in the amounts of $60,000 on February 8, 2011, $91,350 on February 15, 2011, $30,000 on Febuary 24, 2011 and $30,000 on February 28, 2011. These advances were made to assist the Company in meeting short-term obligations. The advances are payable on demand and do not bear any interest rate and no written agreement was entered into with respect to the advances.

LIQUIDITY AND FINANCIAL CONDITION

We have had recurring losses from operations of $1,379,678 and $2,373,192 for the six months ended January 31, 2011 and 2010, respectively and used cash from operations in the amounts of $807,521 and $954,526 for the six month period ended January 31, 2011 and 2010, respectively. At January 31, 2011, the Company had cash and equivalents of $14,585. On August 13, 2010, an event of default occurred on our outstanding convertible debentures. The Company received a waiver from the note holders and the debentures were converted entirely before January 31, 2011.

At January 31, 2011, the Company had total current assets of $1,020,983 and total current liabilities of $861,227, resulting in working capital of $159,756 compared to working capital of $1,508,104 at year ended July 31, 2010. The Companys current assets consists of $14,585 in cash and cash equivalent, $179,527 in accounts receivable, $803,554 in inventory and $23,317 in prepaid expenses and other current assets. Accounts receivable increased from $67,603 at July 31, 2010 to $179,527 at January 31, 2011. This increase in our accounts receivable is the result of sales increase of $97,727 for the six months period ended January 31, 2011 and timing of collections.

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LIQUIDITY AND FINANCIAL CONDITION (continued)

Cash expenditures have exceeded revenues for the prior year and Management expects this consumption of cash to continue into next year. Our operations have been and will continue to be funded from existing cash balances and private placements of equity funding. During our fiscal year ended July 31, 2010, we have raised $2,000,000 from the sale of convertible debentures and $635,070 from the exercise of warrants (See FINANCING ACTIVITIES, below). We are dependent on improved operating results and raising additional funds over the next twelve month period. There are no assurances that we will be able to raise additional funding. In the event that we are unable to generate sufficient cash flow or receive proceeds from offerings of debt or equity securities, the Company may be forced to curtail or cease it activities and/or operations.

OPERATING ACTIVITIES

Net cash used in operating activities was $807,521 for the six months period ended January 31, 2011, as compared to $954,526 net cash used in operating activities for the six month period ended January 31, 2010, a decrease of $147,005, this decrease in use of cash can be attributed to: (a) cash operating expenses increased approximately $613,000 for the six months period ended January 31, 2011 versus 2010 (b) accounts receivable increased due to lower cash collections in our fiscal first half year of 2011 as compared to 2010, resulted in use of cash of approximately $295,000. Offsetting the increases in uses of cash for the six months ended January 31, 2011 compared to January 31, 2010, were decreases in (c) prepaid expenses, a reduction versus prior year of approximately $342,000, (d) inventory decreased resulting in a reduction change of approximately $62,000, (e) accounts payable and accrued expense increased, resulting in a reduction of approximately $651,000.

INVESTING ACTIVITIES

Net cash used in investing activities for the six month period ended January 31, 2011 was $5,899 for the purchase of manufacturing equipment. For six month period ended January 31, 2010 net cash used investing activities was $21,622 also for the purchase of equipment.

FINANCING ACTIVITIES

Net cash provided from financing activities was $115,000 for the six month period ended January 31, 2011, as compared to $1,496,680 provided in same six month period in 2010. In the six month period ended January 31, 2011 the Company received proceeds of $100,000 from sale of common stock and $15,000 from a loan from Company officer. For the six months ended January 31, 2010, the Company received $1,000,000 related to issuance of convertible debentures and $635,070 related to the exercising of warrants and incurred $140,000 in expense associated with the loan debentures.

On August 3, 2009, the Company entered into a Subscription Agreement pursuant to which it sold a $500,000 convertible debenture on August 3, 2009 and a $500,000 Debenture on September 24, 2009. (collectively, the August 2009 Debentures). The initial interest rate of the August 2009 Debentures is 4% per annum and upon the shareholder Approval the interest rate will be 8% per annum. The August 2009 Debentures have maturity dates of 15 months from their closing dates. Interest shall accrue from the closing date and shall be payable quarterly, in arrears, commencing six months after the closing date. The August 2009 debentures are convertible into shares of the Companys common stock at a conversion price of $0.78 per share. Commencing six months after the closing date, the Conversion Price shall be adjusted to the lesser of the $0.78 or 75% of the lowest three closing bid prices for the Companys common stock for the ten days prior to when the August
2009 Debenture is converted.

In connection with the August 2009 Debentures, the Company issued Class A and Class B warrants. The Class A warrants provide the holder with the option to purchase 2,564,102 shares of the Companys common stock at an exercise price $1.12 per share. The Class A warrants are exercisable for a period beginning on August 3, 2009 and terminate on August 3, 2014. Additionally, the 40,000 Class B Warrants issued entitles the holder until July 3, 2012, to purchase up to $4,000,000 of principal amount of the Companys 8% notes on the same terms as the August 2009 Debentures. Upon the exercise of the Class B Warrants, the holder of the Class B Warrant will be issued two Class C Warrants for each share of the Companys common stock that would be issued on the exercise date of the Class B Warrant assuming the full conversion of the notes issued on such date. The Class C warrants entitle the warrant holder to purchase 10,256,408 shares of the Companys Common
Stock with and exercise price equal to the lesser of 105 % of the closing bid price of the Companys common stock or the exercise price of the Class A Warrants. For each $100,000 principal of notes purchased pursuant to the Class B Warrants, the holder will surrender 1,000 Class B Warrants.

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FINANCING ACTIVITIES(continued)

The August 2009 Debentures cannot be converted to the extent such conversion would cause the Debenture holder, together with such holders affiliates, to beneficially own in excess of 4.99% of the of the Companys outstanding common stock immediately following such conversion. The Company also entered into a Security Agreement pursuant to which it granted the Subscribers a security interest in its assets. The Security Agreement will terminate when the August 2009 Debentures, including outstanding interest due thereon are repaid.

In connection with the August 2009 Debenture agreement entered into on August 3, 2009, the Company paid Garden State Securities, Inc., the selling agent, a cash fee of $100,000 and issued warrants to purchase 256,410 shares of the Companys common stock. The Company calculated the fair value of the warrants on August 3, 2009 at $231,025 using the Black-Scholes option pricing model.

At various times during the year ended July 31, 2010, an aggregate $1,000,000 of the August 2009 Debentures and $36,968 of accrued interest were converted into 1,329,447 shares of the Companys common stock. As of July 31, 2010 the remaining balance of the August 2009 Debentures were $0.

On February 24, 2010, holders of the Class B warrants exercised 10,000 Class B Warrants to purchase $1,000,000 in convertible notes (February 2010 Debentures). The February 2010 Debentures were issued under the same terms as the August 2009 Debentures. With the exercise of the 10,000 Class B warrants, the Company also issued Class C Warrants to purchase 2,564,104 shares of the Companys common stock at an exercise price of $1.12.

In connection with the exercise of the Class B warrants and pursuant to Selling Agent Agreement the Company paid Garden State Securities, Inc., a cash fee of $100,000 and issued Garden State additional warrants to purchase 256,410 shares of the Companys common stock. The Company calculated the fair value of the warrants on March 3, 2010 to be $380,256 using the Black-Scholes option pricing model.

The August 2009 Debentures, February 2010 Debentures, Class A warrants, Class B warrants, Class C warrants and the warrants granted to the selling agent contain provisions whereby if the Company shall offer, issue or agree to issue any common stock or securities into or exercisable for shares of common stock to any person or entity at a price per share or conversion or exercise price per share which shall be less than the conversion price of the August 2009 Debentures and February 2010 Debentures or less than the exercise price of the Class A warrants, Class B warrants, Class C warrants or the warrants granted to the selling agent, then the conversion price and the warrant exercise price shall automatically be reduced to such other lower issue price. Due to this provision, the embedded conversion features of the Debentures and the warrants are not considered indexed to the Companys stock. Accordingly, these financial instruments have been recorded as a derivative
liability.

On June 18, 2010, the Company entered into an amendment with the holders of its outstanding convertible debentures and warrants. Pursuant to the amendments, the parties agreed to the following: (i) remove the above provision which allowed for an adjustment to the conversion price of the debentures or exercise price of the debentures, (ii) the conversion feature of the February 2010 Debentures were adjusted to a fixed conversion price $0.60, (iii) all future Class C Common Stock Purchase Warrants issued upon exercise of the Class B Common warrants shall have an exercise price of $0.50 per share, (iv) the exercise price of the outstanding Class C warrants shall be adjusted to $0.50 per share, (v) the exercise price of the outstanding selling agent warrants shall be adjusted to $0.60 per share.

As a result, of the June 18, 2010 amendments the embedded conversion features of the debentures and the warrants were considered indexed to the Companys stock. Accordingly, the outstanding derivative liabilities were reclassified to additional paid in capital at their fair value on June 18, 2010 with the change in fair value being recorded in the statement of operation.

After the accounting for the embedded derivatives, induced conversion costs, interest expense, amortization of debt discounts and amortization of deferred financing fees the above financing transactions increased our net loss by $21,514,072. The $21,514,072 had no effect on the Companys cash flow. Through the accounting for induced conversion costs, exercise of warrants, conversions of convertible debt and the reclassification of derivative liabilities the above financing transactions increased our additional paid in capital by $23,998,405.

On December 1, 2010, the Company reduced the conversion price on its February 2010 debentures from $0.60 to $0.30. As a result of the reduction in the conversion price the Company recognized a beneficial conversion feature in the amount of $300,000.

On December 8, 2010, the Company reduced the exercise price of its outstanding Class C Warrants from $0.50 to $0.10. As a result of the reduction of the exercise price the Company recognized additional interest expense in the amount of $65,253.

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At various times during the six month period ended January 31, 2011, $1,000,000 of convertible debt and $63,790 of accrued interest was converted into 4,784,933 shares of common stock.

INFLATION

Management believes that the results of operations have not been affected by inflation and management does not expect inflation to have a significant effect on its operations in the future.

CRITICAL ACCOUNTING POLICIES

The Companys condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America, which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, at the date of the financial statements and reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management uses its best judgment in valuing these estimates and may, as warranted, solicit external professional advice and other assumptions believed to be reasonable. The following critical accounting policies, some of which are impacted significantly by judgments, assumptions and estimates, affect the Companys consolidated financial statements.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The estimates and assumptions made by management as based upon available current information, historical experience and other factors that are believed to be reasonable under the circumstances. The estimates and assumptions made by management involve risks and uncertainties which could cause reported amounts to differ materially from actual future results. If managements estimates and assumptions are inaccurate, the Companys reported amounts and disclosures of contingent assets and liabilities could be materially and adversely affected.
Management considers its reserve for inventory and accounting for derivative liabilities to be significant estimates.

REVENUE RECOGNITION

Revenue is recorded in accordance with the guidance of the SECs Staff Accounting Bulletin (SAB) No. 104, which supersedes SAB No. 101. Revenue from product sales are recognized at the time of shipment (when title has passed) upon fulfillment of acceptance terms; products are not sold on a conditional basis. Therefore, when delivery has occurred the sale is complete as long as the collection of the resulting receivable is probable.

RECEIVABLES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

The preparation of financial statements requires our management to make estimates and assumptions relating to the collectability of our accounts receivable. Management specifically analyzes historical bad debts, customer credit worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. The Company has a concentration risk in trade accounts receivable with significant sales to the government and local agencies. The credit evaluation process has mitigated the credit risk, such losses have been minimal, and within management expectations.

INVENTORY VALUATIONS, COMPONENTS AND AGING

Inventories are valued at lower of cost or market using the first-in, first-out (FIFO) method. Finished goods costs included raw materials, labor and manufacturing overhead costs. Excess and obsolete inventory costs are expensed and a reserve for slow-moving inventory is made on managements estimates.

Finished goods are products that have been completed in connection with specific orders and are awaiting shipment. Work-in-Process represents raw material components that have been requisitioned from the warehouse and are being assembled in the manufacturing area. Raw Materials consist of components parts purchased from various suppliers and are used to build our finished products. Various raw material parts are also maintained to support warranty claims for commercial and military products. Typical raw material products include PC boards, digital screen assemblies, guide rails, capacitors, terminals, power supplies, process chips, resistors, keypads, relays and face plates.

28

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INVENTORY VALUATIONS, COMPONENTS AND AGING(continued)

The Company provides a twelve-year warranty on all commercial products and is required by government regulation to design and produce military products with a minimum 25-year operating life in addition to shelf life.

The Company maintains a significant amount of raw material component parts and some of this raw material inventory is not expected to be realized within a twelve month operating cycle from the balance sheet date. For any raw material part which has not been purchased within the last twelve months from the balance sheet date, it is evaluated as part of the slow moving inventory and is part of our reserve review. The Company estimated a usage rate for its raw material component parts for what it expects to use over a 36 month period. Any excess inventory based on this projected usage rate is written off as excess and obsolete. The Company then reserves 100% of the estimated usage that is over 12 months and less than 36 months. Certain raw material parts which have been written down to a zero value, may still be maintained in inventory to satisfy possible requirements under the warranty programs but are valued at zero. Ongoing, the Company evaluates the inventory parts
based on their age and usage over a 36 month period to determine inventory and obsolescence and reserve adjustments.

WARRANTY

The Company provides a twelve-year warranty on its commercial products and 25 years on its military products: the warranty covers parts and labor. The Company, at its option, repairs or replaces products that are found defective during the warranty period providing proper preventive maintenance procedures have been followed by customers. Repairs necessitated by misuse of such products are not covered by our warranty. In cases of defective products, the customer typically returns them to the Companys facility in Somerville, New Jersey. The Companys service personnel will replace or repair the defective items and ship them back to the customer. All servicing is completed at the Companys main facility and customers are charged a fee for those service items that are not covered by the warranty. We do not offer our customers any formal written service contracts. Our warranty costs have historically been insignificant and therefore a provision was not
warranted. Management continues to monitor the costs and will provide a warranty provision if circumstances change.

INCOME TAXES

The Company follows the authoritative guidance for accounting for income taxes. Deferred income taxes are determined using the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Based upon the companys evaluation, management has concluded that there are no significant uncertain tax positions requiring recognition in the consolidated financial statements or adjustments to deferred tax assets and related valuation allowance. A valuation allowance is recorded when the expected recognition of a deferred tax asset is considered to be unlikely

DERIVATIVE LIABILITY

Derivative liabilities consist of certain common stock warrants, and conversion features embedded in our convertible Debenture notes. These financial instruments are recorded in the balance sheet at fair value, determined using the Black-Scholes option pricing model, as liabilities. Changes in fair value are recognized in the statement of operations in the period of change.

STOCK BASED COMPENSATION

The Company follows the authoritative guidance for accounting for stock-based compensation. This guidance requires that new, modified and unvested share-based payment transactions with employees, such as grants of stock options and restricted stock, be recognized in the financial statements based upon their fair value at the grant date and recognized as compensation expense over their vesting periods. The Company also follows the guidance for equity instruments issued to consultants.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of cash and cash equivalents, accounts receivable, other current assets, accounts payable, accrued expenses and short term convertible Debentures approximates fair value because of the short maturity of these instruments. The recorded value of long-term debt approximates its fair value as the terms and rates approximate market rates.

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FAIR VALUE MEASUREMENTS

The authoritative guidance for fair value measurements defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or the most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact. The guidance describes a fair value hierarchy based on the levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:

|                    |                                                                                                                                                                                                                                                                                                                                                                                                     
|------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Level 1 
Level 2  | Quoted prices in active markets for identical assets or liabilities.
Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or corroborated by observable market data or substantially the full term of the assets or liabilities.
|                   
|Level 3            | Unobservable inputs that are supported by little or no market activity and that are significant to the value of the assets or liabilities.                                                                                                                                                                                                                                                          

DEBT DISCOUNT

The Company follows the authoritative guidance for accounting for debt discount and valuation of detachable warrants the Company recognized the value of detachable warrants issued in conjunction with issuance of the secured convertible Debenture notes. The Company valued the warrants using the Black-Scholes pricing model. The Company recorded the warrant relative fair value as an increase to additional paid-in capital and discount against the related debt. The discount attributed to the value of the warrants is amortized over the term of the underlying debt using the effective interest method.

EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS

In December 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-29, Business Combinations (ASC Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations. The amendments in this ASU affect any public entity as defined by ASC Topic 805 that enters into business combinations that are material on an individual or aggregate basis. The amendments in this ASU specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the
reported pro forma revenue and earnings. The amendments are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The Company does not expect adoption of ASU 2010-29 to have a material impact on the Companys results of operations or financial condition.

In December 2010, the FASB issued ASU 2010-28, Intangibles - Goodwill and Other (ASC Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. The amendments in this ASU modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with the existing guidance and examples, which require that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the
fair value of a reporting unit below its carrying amount. For public entities, the amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The Company does not expect the adoption of ASU 2010-28 to have a material impact on the Companys results of operations or financial condition.

In April 2010, the FASB issued ASU 2010-17, Revenue Recognition  Milestone Method(ASU 2010-17). ASU 2010-17 provides guidance on the criteria that should be met for determining whether the milestone method of revenue recognition is appropriate. A vendor can recognize consideration that is contingent upon achievement of a milestone in its entirety as revenue in the period in which the milestone is achieved only if the milestone meets all criteria to be considered substantive. The following criteria must be met for a milestone to be considered substantive. The consideration earned by achieving the milestone should (i) be commensurate with either the level of effort required to achieve the milestone or the enhancement of the value of the item delivered as a result of a specific outcome resulting from the vendors performance to achieve the

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milestone; (ii) be related solely to past performance; and (iii) be reasonable relative to all deliverables and payment terms in the arrangement. No bifurcation of an individual milestone is allowed and there can be more than one milestone in an arrangement. Accordingly, an arrangement may contain both substantive and non-substantive milestones. ASU 2010-17 is effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Management evaluated the potential impact of ASU 2010-17 and does not expect its adoption to have a material effect on the Companys results of operations or financial condition.

In January 2010, the FASB issued ASU 2010-06, Improving Disclosures about Fair Value Measurements. ASU 2010-06 amends ASC 820 to require a number of additional disclosures regarding fair value measurements. The amended guidance requires entities to disclose the amounts of significant transfers between Level 1 and Level 2 of the fair value hierarchy and the reasons for these transfers, the reasons for any transfers in or out of Level 3, and information in the reconciliation of recurring Level 3 measurements about purchases, sales, issuances and settlements on a gross basis. The ASU also clarifies the requirements for entities to disclose information about both the valuation techniques and inputs used in estimating Level 2 and Level 3 fair value measurements. The amended guidance is effective for interim and annual financial periods beginning after December 15, 2009. The adoption of ASU 2010-06 did not have a significant effect on the Companys financial
statements.

In October 2009, the FASB issued guidance on multiple deliverable revenue arrangements which eliminates the residual method of allocation and requires the relative selling price method when allocating deliverables of a multiple-deliverable revenue arrangement. The determination of the selling price for each deliverable requires the use of a hierarchy designed to maximize the use of available objective evidence including, vendor specific objective evidence, third party evidence of selling price, or estimated selling price. This guidance is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, and must be adopted in the same period using the same transition method. If adoption is elected in a period other than the beginning of a fiscal year, the amendments in these standards must be applied retrospectively to the beginning of the fiscal year. Full retrospective application of these
amendments to prior fiscal years is optional. Early adoption of these standards may be elected. The adoption of this guidance did not have a significant impact on the Companys consolidated financial statements.

Management does not believe that any other recently issued, but not currently effective, accounting standards if currently adopted would have a material effect on the accompanying consolidated financial statements.

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FORWARD LOOKING STATEMENTS

This document and the documents incorporated in this document by reference contain forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact contained in this document and the materials accompanying this document are forward-looking statements.

The forward-looking statements are based on the beliefs of our management, as well as assumptions made by information currently available to our management. Frequently, but not always, forward-looking statements are indentified by the future tense and by words such as believes, expects, anticipates, intends, will, may, could, would, projects, continues, estimates, or similar expressions. Forward-looking statements are not guarantees of future performance and actual results could differ materially from those indicated by the forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our or our industrys actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or
achievements expressed or implied by the forward-looking statements.

Forward-looking statements are expressly qualified in their entirely by this cautionary statement. The forward-looking statements included in this document are made as of the date of this document and, except as may required under applicable securities laws, we do not undertake any obligation to update forward-looking statements to reflect new information, subsequent events or otherwise.

ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

N/A

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures.Our management, with the participation of our principal executive officer (chief executive officer) and principal financial officer (chief financial officer), conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act), as of the end of the period covered by this report. Based on this evaluation, and due to the material weaknesses in our internal control over financial reporting (as described in the Material Weakness in Internal Control over Financial Reportingbelow), our chief executive officer and chief financial officer concluded our disclosure controls and procedures were not effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, proce
ssed, summarized and reported within the time periods specified in SEC rules and forms.

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ITEM 4. CONTROLS AND PROCEDURES (continued)

Material Weaknesses in Internal Control over Financial Reporting

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Companys annual or interim financial statements will not be prevented or detected in a timely basis.

Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as January 31, 2011, because of the material weaknesses in internal control over financial reporting as discussed below:

- The Company lacks sufficient personnel with an appropriate level of experience and knowledge of generally accepted accounting principles and SEC reporting rules and requirements.
- The Company lacks adequate accounting resources to address non routine and complex transactions and financial reporting matters on a timely basis. Consequently various accounts were materially misstated in the previously issued financial statements which has caused a restatement of previously reported amounts.
- The Company lacks adequate segregation of duties control concerning Information Technology (IT). IT personnel perform accounting transactions, programming function and controls security function with the Company for IT.
- The Company lacks appropriate environmental controls needed to ensure the security and reliability of IT equipment.
- The Company lacks adequate journal entry approval and disclosure controls needed to identify and prevent misstatements in the consolidated financial statements and accompanying footnotes.
- The Companys control environment does not have adequate segregation of duties; the Company only had one person performing all accounting-related functions on-site duties.

Remediation of Material Weaknesses in Internal Control over Financial Reporting

The Company has commenced efforts to address the material weaknesses in its internal control over financial reporting and its control environment through the following actions:

- Supplementing existing resources with technically qualified third party consultants.
- Institute a more stringent approval process for financial transactions
- Perform additional procedures and analysis for significant transactions as a mitigating control in the control environment due to segregation of duties issues.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings  None.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds: During the quarter ended January 31, 2011, Note Holders exercised conversion rights to convert $291,809 of principal and $35,769 of interest to 1,108,960 unregistered shares of common stock. In connection with the foregoing, the Company relied upon the exemption from securities registration afforded by Section 4(2) of the Securities Act of 1933, as amended (the Securities Act). No advertising or general solicitation was employed in offering the securities. The offerings and sales were made to a limited number of persons, all of whom were accredited investors, and transfer was restricted by the Company in accordance with the requirements of the Securities Act.

Item 3. Defaults upon Senior Securities  Defaults upon Senior Securities  On June 23, 2010, the Company received a NASDAQ Staff Deficiency Letter stating that the Company no longer complied with the NASDAQ Listing Rules (the Listing Rules) for continued listing on The NASDAQ Stock Market (NASDAQ) because the Company had not maintained a minimum of $2,500,000 in stockholders equity as required by Listing Rule 5550(b)(1), and because the Companys Form 10-Q for the period ended April 30, 2010, had not yet been reviewed in accordance with Statement of Auditing Standards No. 100, as required by Rule 8-03 of Regulation S-X, pursuant to Listing Rule 5250(c)(1). Thereafter, on June 23, 2010, the Company received a NASDAQ Staff Determination Letter indicating that the Staff had concluded that the Company had not solicited proxies or held its annual meeting within the timeframe required by Listing Rules 5620(a) and 5620(b) and
accordingly, determined to initiate procedures to delist the Companys securities from NASDAQ. Finally, on August 13, 2010, the Company received a NASDAQ Staff Deficiency Letter stating that, as the bid price of the Companys common stock had closed below the minimum $1.00 per share requirement set forth in by NASDAQ Listing Rule 5550(a)(2), and in accordance with Listing Rule 5810(c)(3)(A), the Company had been provided 180 calendar days, or until February 9, 2011, to regain compliance with that requirement.

On September 16, 2010, the Company attended a hearing before the NASDAQ Listing Qualifications Panel (the Panel) to present its plan to evidence compliance with all applicable Listing Rules and to request an extension of time within which to do so. By decisions dated October 19, 2010, November 3, 2010, November 23, 2010 and December 13, 2010, the Panel determined to continue the Companys listing on NASDAQ, subject to certain conditions.

In particular, the December 13, 2010 Panel decision required that:

> 1. On or before January 14, 2011, the Company shall inform the Panel that it has held its annual shareholders meeting, and,
>   2. On or before January 31, 2011, the Company shall disclose on Form 8-K that it has regained compliance with the NASDAQ stockholders equity requirement of $2.5 million. The Company shall also, by this date, provide information to the Panel sufficient to demonstrate to the Panels satisfaction that the Company can maintain compliance with the equity requirement throughout the coming year.

The December 13, 2010, determination follows the Panels initial decision, dated October 19, 2010, the terms of which were reported on a Form 8-K filed with the Securities and Exchange Commission (SEC) on October 22, 2010, as modified by the Panels determination, dated November 3, 2010, granting an extension to the Company the terms of which were reported on a Form 8-K filed with the SEC on November 3, 2010, as modified by the Panels determination on November 23, 2010, granting an extension to the Company the terms of which were reported on a Form 8-K filed on November 24, 2010.

In accordance with Listing Rule 5800, the Company requested a hearing before the NASDAQ Listing Qualifications Panel, which ultimately granted the Company an extension through January 31, 2011, to evidence compliance with the Rule. The Company did not timely regain compliance with the Rule, however. Accordingly, on January 31, 2011, NASDAQ notified the Company that its common stock will be delisted from The NASDAQ Capital Market and that trading of its common stock will be suspended, effective with the open of business on February 2, 2011.

As a result of the NASDAQ Staff Determination Letter, an event of default under the February 2010 Debenture occurred. The note holders did not exercise their rights upon an event of default and on November 27, 2010 the Company received a waiver from the note holders. Pursuant to the waiver, the note holders waived any event of default (as defined in the Notes pursuant to Article IV Section 4.8, Events of Default) including any increase in the interest rate of the Notes which may have occurred and which may occur from the date of the inception of the agreement until July 31, 2011, as a result of notification from the NASDAQ that the Company is not in compliance with the conditions for such continued listing. The note holders did not exercise their right upon an event of default and December 2010, the Company received a waiver from note holders.

Item 4. Removed and Reserved

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Item 5. Other Information  None

Item 6. Exhibits

|                          |                                                                                                                                                                                                     
|------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number
      10.1 | Description
      Securities Purchase Agreement, dated as of January 6, 2011, between the Company and Robert Benou (filed with 8-K/A filed on January 21, 2011 and incorporated herein by reference)
|                          |                                                                                                                                                                                                     
|31.1                      | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act.                                                                             
|                          |                                                                                                                                                                                                     
|32                        | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002.                                                                     

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto and duly authorized.

CONOLOG CORPORATION

|                     |                                                                                                                                                                                                                      
|-------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Date: March 21, 2011 | By /s/ Robert S. Benou
        Robert S. Benou 
        Chairman, Chief Executive Officer, 
        (Principal Executive Officer) 
        Chief Financial Officer and Treasurer, 
        (Chief Accounting Officer)

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