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 April 30, 2011

o TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ____________________

Commission file number 000-8174

Conolog 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 Road
Somerville, 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 þ No o

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 o No o

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

Large accelerated filer oAccelerated filer oNon-accelerated filer oSmaller reporting company þ

Indicate by check mark
whether the registrant is a shell company (as defined by Rule 12b-2 of the
Exchange Act) Yes o No þ

The number of shares of common stock outstanding as of June 17, 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 April 30, 2011 and July 31, 2010                                 |  | 1    
|         |                                                                                                                |  |      
|         | Condensed
 Consolidated Statements of Operations, for the three and nine months ended
 April 30, 2011 and 2010 |  | 2    
|         |                                                                                                                |  |      
|         | Condensed
 Consolidated Statements of Cash Flows, for the nine months ended April 30,
 2011 and 2010           |  | 3    
|         |                                                                                                                |  |      
|         | Notes to
 Condensed Consolidated Financial Statements                                                          |  | 4-19 
|         |                                                                                                                |  |      
|Item 2.  | MANAGEMENTS
 DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                         |  | 19-32
|         |                                                                                                                |  |      
|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]                                                                                        |  | 35   
|         |                                                                                                                |  |      
|Item 5.  | OTHER
 INFORMATION                                                                                             |  | 35   
|         |                                                                                                                |  |      
|Item 6.  | EXHIBITS,
 SIGNATURES AND CERTIFICATIONS                                                                       |  | 35   

---



Part 1 Financial Information
Item  Financial Statements

CONOLOG CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)

|                                                                                                                                                                               |  |                 |             |               |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------------- | ----------- | ------------- | - | ----------- | -
|                                                                                                                                                                               |  | April
 30, 2011 |             | July
 31,2010 |  
|                                                                                                                                                                               |  |                 |             |               |  
|ASSETS                                                                                                                                                                         |  |                 |             |               |   |             |  
|Current
 Assets:                                                                                                                                                               |  |                 |             |               |   |             |  
|Cash and equivalents                                                                                                                                                           |  | $               | 74,181      |               | $ | 713,005     |  
|Accounts receivable, net of allowance                                                                                                                                          |  |                 | 136,829     |               |   | 67,603      |  
|Inventory, net of reserve for obsolescence                                                                                                                                     |  |                 | 755,791     |               |   | 826,079     |  
|Prepaid expenses                                                                                                                                                               |  |                 | 89,018      |               |   | 248,297     |  
|Other current assets                                                                                                                                                           |  |                 | 440         |               |   | 5,000       |  
|                                                                                                                                                                               |  |                 |             |               |   |             |  
|Total Current Assets                                                                                                                                                           |  |                 | 1,056,259   |               |   | 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                                                                                                                                                |  |                 | (2,002,784  | )             |   | (1,987,284  | )
|                                                                                                                                                                               |  |                 |             |               |   |             |  
|Net Property and Equipment                                                                                                                                                     |  |                 | 86,456      |               |   | 96,057      |  
|Other
 Assets:                                                                                                                                                                 |  |                 |             |               |   |             |  
|Deferred financing fees, net of amortization                                                                                                                                   |  |                 |            |               |   | 382,132     |  
|                                                                                                                                                                               |  |                 |             |               |   |             |  
|                                                                                                                                                                               |  |                 |             |               |   |             |  
|Total Other Assets                                                                                                                                                             |  |                 |            |               |   | 382,132     |  
|                                                                                                                                                                               |  |                 |             |               |   |             |  
|TOTAL ASSETS                                                                                                                                                                   |  | $               | 1,142,715   |               | $ | 2,338,173   |  
|                                                                                                                                                                               |  |                 |             |               |   |             |  
|                                                                                                                                                                               |  |                 |             |               |   |             |  
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIENCY)                                                                                                                              |  |                 |             |               |   |             |  
|Current Liabilities:                                                                                                                                                           |  |                 |             |               |   |             |  
|Accounts payable                                                                                                                                                               |  | $               | 285,118     |               | $ | 150,880     |  
|Accrued expenses                                                                                                                                                               |  |                 | 789,648     |               |   | 201,000     |  
|Loans from Officers                                                                                                                                                            |  |                 | 166,350     |               |   |            |  
|Convertible debenture, net of discount of $552,741 at July 31, 2010                                                                                                            |  |                 |            |               |   |            |  
|                                                                                                                                                                               |  |                 |             |               |   |             |  
|Total Current Liabilities                                                                                                                                                      |  |                 | 1,241,116   |               |   | 351,880     |  
|                                                                                                                                                                               |  |                 |             |               |   |             |  
|Non-Current
 Liabilities:                                                                                                                                                      |  |                 |             |               |   |             |  
|Convertible debenture, net of discount of $720,687 at July 31, 2010                                                                                                            |  |                 |            |               |   | 279,313     |  
|                                                                                                                                                                               |  |                 |             |               |   |             |  
|Total Liabilities                                                                                                                                                              |  |                 | 1,241,116   |               |   | 631,193     |  
|                                                                                                                                                                               |  |                 |             |               |   |             |  
|                                                                                                                                                                               |  |                 |             |               |   |             |  
|Stockholders Equity (DEFICIENCY):                                                                                                                                             |  |                 |             |               |   |             |  
|Preferred stock, par value $.50; Series A; 4% cumulative; 500,000
 shares authorized 155,000 shares issued and outstanding at April 30, 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 April 30, 2011 and
 July 31, 2010, respectively |  |                 | 597         |               |   | 597         |  
|Common stock, par value $0.01; 30,000,000 shares authorized;
 12,455,382 shares issued at April 30, 2011 and 6,967,881 shares issued at
 July 31, 2010, respectively           |  |                 | 124,554     |               |   | 69,679      |  
|Contributed capital                                                                                                                                                            |  |                 | 79,846,940  |               |   | 78,088,878  |  
|Accumulated deficit                                                                                                                                                            |  |                 | (80,016,258 | )             |   | (76,397,940 | )
|Less: Treasury shares at cost - 2 shares                                                                                                                                       |  |                 | (131,734    | )             |   | (131,734    | )
|                                                                                                                                                                               |  |                 |             |               |   |             |  
|Total Stockholders Equity (Deficiency)                                                                                                                                        |  |                 | (98,401     | )             |   | 1,706,980   |  
|                                                                                                                                                                               |  |                 |             |               |   |             |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
 (DEFICIENCY)                                                                                                                       |  | $               | 1,142,715   |               | $ | 2,338,173   |  
|                                                                                                                                                                               |  |                 |             |               |   |             |  

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

1

---



CONOLOG CORPORATION AND SUBSIDIARIESCondensed
Consolidated Statements of Operations (Unauditied)

|                                                     |  |                                      |            |      |                                     |           |      |  |      |            |   |   |             |  
|---------------------------------------------------- |  | ------------------------------------ | ---------- | ---- | ----------------------------------- | --------- | ---- |  | ---- | ---------- | - | - | ----------- | -
|                                                     |  | For the Three MonthsEnded
 April 30, |            |      | For the Nine MonthsEnded
 April 30, |          
|                                                     |  |                                      |            |      |                                     |          
|                                                     |  | 2011                                 |            | 2010 |                                     |           | 2011 |  | 2010 |           
|                                                     |  |                                      |            |      |                                     |           |      |  |      |           
|OPERATING
 REVENUES                                  |  |                                      |            |      |                                     |           |      |  |      |            |   |   |             |  
|Product revenue                                      |  | $                                    | 501,967    |      | $                                   | 515,897   |      |  | $    | 1,179,708  |   | $ | 1,095,913   |  
|                                                     |  |                                      |            |      |                                     |           |      |  |      |            |   |   |             |  
|                                                     |  |                                      |            |      |                                     |           |      |  |      |            |   |   |             |  
|Cost of
 product revenue                             |  |                                      |            |      |                                     |           |      |  |      |            |   |   |             |  
|Cost of goods sold                                   |  |                                      | 230,248    |      |                                     | 278,412   |      |  |      | 638,986    |   |   | 621,649     |  
|                                                     |  |                                      |            |      |                                     |           |      |  |      |            |   |   |             |  
|Total Cost of product revenue                        |  |                                      | 230,248    |      |                                     | 278,412   |      |  |      | 638,986    |   |   | 621,649     |  
|                                                     |  |                                      |            |      |                                     |           |      |  |      |            |   |   |             |  
|                                                     |  |                                      |            |      |                                     |           |      |  |      |            |   |   |             |  
|Gross Profit                                         |  |                                      | 271,719    |      |                                     | 237,485   |      |  |      | 540,722    |   |   | 474,264     |  
|                                                     |  |                                      |            |      |                                     |           |      |  |      |            |   |   |             |  
|Selling,
 general and administrative expenses        |  |                                      |            |      |                                     |           |      |  |      |            |   |   |             |  
|General and administrative                           |  |                                      | 544,950    |      |                                     | 812,241   |      |  |      | 2,097,301  |   |   | 3,317,641   |  
|Research and development                             |  |                                      | 1,340      |      |                                     | 21,900    |      |  |      | 63,613     |   |   | 83,663      |  
|Selling expenses                                     |  |                                      | 79,185     |      |                                     | 6,614     |      |  |      | 113,243    |   |   | 49,421      |  
|                                                     |  |                                      |            |      |                                     |           |      |  |      |            |   |   |             |  
|Total selling, general and
 administrative expenses  |  |                                      | 625,475    |      |                                     | 840,755   |      |  |      | 2,274,157  |   |   | 3,450,725   |  
|                                                     |  |                                      |            |      |                                     |           |      |  |      |            |   |   |             |  
|Loss from Operations                                 |  |                                      | (353,756   | )    |                                     | (603,270  | )    |  |      | (1,733,435 | ) |   | (2,976,461  | )
|                                                     |  |                                      |            |      |                                     |           |      |  |      |            |   |   |             |  
|OTHER
 INCOME (EXPENSES)                             |  |                                      |            |      |                                     |           |      |  |      |            |   |   |             |  
|Loss on derivative
 financial instruments            |  |                                      |           |      |                                     | 9,054,229 |      |  |      |           |   |   | (24,674,279 | )
|Interest expense                                     |  |                                      | (3,000     | )    |                                     | (23,431   | )    |  |      | (128,269   | ) |   | (33,539     | )
|Interest income                                      |  |                                      | 58         |      |                                     | (1,416    | )    |  |      | 309        |   |   |            |  
|Other income - legal
 settlement                     |  |                                      | 10,000     |      |                                     |           |      |  |      | 10,000     |   |   |            |  
|Induced conversion cost                              |  |                                      |            |      |                                     |          |      |  |      | (649,147   | ) |   | (150,201    | )
|Amortization of financing
 fees                      |  |                                      |           |      |                                     | (180,048  | )    |  |      | (382,132   | ) |   | (445,257    | )
|Amortization of debt
 discount                       |  |                                      |           |      |                                     | (355,634  | )    |  |      | (720,687   | ) |   | (1,111,367  | )
|                                                     |  |                                      |            |      |                                     |           |      |  |      |            |   |   |             |  
|Total Other Income (Expense)                         |  |                                      | 7,058      |      |                                     | 8,493,700 |      |  |      | (1,869,926 | ) |   | (26,414,643 | )
|                                                     |  |                                      |            |      |                                     |           |      |  |      |            |   |   |             |  
|                                                     |  |                                      |            |      |                                     |           |      |  |      |            |   |   |             |  
|Net Income (Loss) before provision for income taxes  |  |                                      | (346,698   | )    |                                     | 7,890,430 |      |  |      | (3,603,361 | ) |   | (29,391,104 | )
|Income tax benefit (expense)                         |  |                                      | (2,914     | )    |                                     | 143,080   |      |  |      | (14,957    | ) |   | 137,354     |  
|                                                     |  |                                      |            |      |                                     |           |      |  |      |            |   |   |             |  
|NET INCOME (LOSS) APPLICABLE TO COMMON SHARES        |  | $                                    | (349,612   | )    | $                                   | 8,033,510 |      |  | $    | (3,618,318 | ) | $ | (29,253,750 | )
|                                                     |  |                                      |            |      |                                     |           |      |  |      |            |   |   |             |  
|                                                     |  |                                      |            |      |                                     |           |      |  |      |            |   |   |             |  
|Basic Earnings (Loss) per Common Share               |  | $                                    | (0.03      | )    | $                                   | 1.21      |      |  | $    | (0.39      | ) | $ | (7.56       | )
|                                                     |  |                                      |            |      |                                     |           |      |  |      |            |   |   |             |  
|Diluted Earnings (Loss) per Common Share             |  | $                                    | (0.03      | )    | $                                   | 0.91      |      |  | $    | (0.39      | ) | $ | (7.56       | )
|                                                     |  |                                      |            |      |                                     |           |      |  |      |            |   |   |             |  
|Weighted Average Common Shares Outstanding - Basic   |  |                                      | 12,407,651 |      |                                     | 6,642,147 |      |  |      | 9,312,840  |   |   | 3,869,034   |  
|                                                     |  |                                      |            |      |                                     |           |      |  |      |            |   |   |             |  
|Weighted Average Common Shares Outstanding - Diluted |  |                                      |           |      |                                     | 8,871,307 |      |  |      |           |   |   |            |  
|                                                     |  |                                      |            |      |                                     |           |      |  |      |            |   |   |             |  

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

2

---



CONOLOG CORPORATION AND SUBSIDIARIES 
Condensed Consolidated Statements of Cash Flows (Unaudited) 
Nine Months Ended April 30,

|                                                                   |  |      |            |      |   |             |  
|------------------------------------------------------------------ |  | ---- | ---------- | ---- | - | ----------- | -
|                                                                   |  | 2011 |            | 2010 |  
|                                                                   |  |      |            |      |  
|CASH FLOWS FROM OPERATING ACTIVITIES                               |  |      |            |      |   |             |  
|Net loss                                                           |  | $    | (3,618,318 | )    | $ | (29,253,750 | )
|Adjustments to reconcile net loss to net
 cash used in operations: |  |      |            |      |   |             |  
|Depreciation                                                       |  |      | 15,500     |      |   | 12,000      |  
|Bad debt expense                                                   |  |      | 32,866     |      |   |            |  
|Amortization of deferred financing fees                            |  |      | 382,132    |      |   | 445,257     |  
|Common stock issued to officers, directors
 and employees          |  |      |           |      |   | 1,411,200   |  
|Amortization of common stock issued for
 services                  |  |      | 80,000     |      |   | 332,800     |  
|Induced conversion cost associated with
 convertible debt          |  |      | 649,147    |      |   | 150,201     |  
|Amortization of discount of convertible
 debentures                |  |      | 720,687    |      |   | 1,111,367   |  
|Loss on Derivative Financial Instrument                            |  |      |           |      |   | 24,674,279  |  
|Changes in assets and liabilities                                  |  |      |            |      |   |             |  
|(Increase) decrease in accounts receivable                         |  |      | (102,092   | )    |   | (150,138    | )
|Decrease in prepaid expenses                                       |  |      | 79,279     |      |   | (151,963    | )
|Decrease (increase) in inventories                                 |  |      | 70,288     |      |   | (19,568     | )
|Decrease in other assets                                           |  |      | 4,560      |      |   |            |  
|(Decrease) increase in accounts payable                            |  |      | 134,238    |      |   | (35,773     | )
|Increase in accrued expenses                                       |  |      | 652,438    |      |   | 221,748     |  
|                                                                   |  |      |            |      |   |             |  
|Net cash used in operations                                        |  |      | (899,275   | )    |   | (1,252,340  | )
|                                                                   |  |      |            |      |   |             |  
|CASH FLOWS FROM INVESTING ACTIVITIES                               |  |      |            |      |   |             |  
|Purchase of property and equipment                                 |  |      | (5,899     | )    |   | (22,781     | )
|                                                                   |  |      |            |      |   |             |  
|Net cash used in investing activities                              |  |      | (5,899     | )    |   | (22,781     | )
|                                                                   |  |      |            |      |   |             |  
|CASH FLOWS FROM FINANCING ACTIVITIES                               |  |      |            |      |   |             |  
|Proceeds from issuance of convertible debentures                   |  |      |           |      |   | 2,000,000   |  
|Proceeds from issuance of Common Stock                             |  |      | 100,000    |      |   |            |  
|Proceeds from officers loan                                        |  |      | 226,350    |      |   |            |  
|Repayments of loans from officers                                  |  |      | (60,000    | )    |   |            |  
|Proceeds from exercise of warrants                                 |  |      |           |      |   | 635,070     |  
|Proceeds from note receivable                                      |  |      |           |      |   | 1,610       |  
|Payments for deferred loan costs                                   |  |      |           |      |   | (291,507    | )
|                                                                   |  |      |            |      |   |             |  
|Net cash provided by financing activities                          |  |      | 266,350    |      |   | 2,345,173   |  
|                                                                   |  |      |            |      |   |             |  
|NET INCREASE (DECREASE) IN CASH AND
 EQUIVALENTS                   |  |      | (638,824   | )    |   | 1,070,052   |  
|CASH AND EQUIVALENTS - BEGINNING OF PERIOD                         |  |      | 713,005    |      |   | 27,358      |  
|                                                                   |  |      |            |      |   |             |  
|CASH AND EQUIVALENTS - END OF PERIOD                               |  | $    | 74,181     |      | $ | 1,097,410   |  
|                                                                   |  |      |            |      |   |             |  

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

3

---



CONOLOG CORPORATION AND SUBSIDIARIES
NOTES 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 April 30, 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.

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 $1,733,435 and $2,976,461 for the nine
months ended April 30, 2011 and 2010, respectively, and used cash from
operations in the amounts of $899,275 and $1,252,340 for the nine months ended
April 30, 2011 and 2010, respectively. At April 30, 2011, the Company had cash
and equivalents of $74,181. 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.

The
Company plans 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. There can be no assurance that the Company
will be successful in achieving its goals.

4

---



CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 
(Unaudited)

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.

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 April 30, 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
April 30, 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. Two customers accounted for
approximately 56%, and 19% of accounts receivable as of April 30, 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

---



CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 
(Unaudited)

NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Inventories (continued)

Inventory consisted of the
following as of April 30, 2011 and July 31, 2010,

|                        |  |                |         |               |   |         | 
|----------------------- |  | -------------- | ------- | ------------- | - | ------- | 
|                        |  | April 30, 2011 |         | July 31, 2010 |  
|Finished Goods          |  | $              | 523,158 |               | $ | 587,835 | 
|Work-in-process         |  |                | 80,000  |               |   | 83,441  | 
|Raw materials           |  |                | 226,633 |               |   | 228,803 | 
|                        |  |                |         |               |   |         | 
|                        |  |                | 829,791 |               |   | 900,079 | 
|Less: Inventory reserve |  |                | 74,000  |               |   | 74,000  | 
|                        |  |                |         |               |   |         | 
|Inventory, net          |  | $              | 755,791 |               | $ | 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  | Quoted
 prices in active markets for identical assets or liabilities.                                                                                                                                                                                                                                                               
|          |                                                                                                                                                                                                                                                                                                                                     
|Level 2  | 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 April 30, 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 $445,257 for
nine months ended April 30, 2011 and 2010, respectively.

6

---



CONOLOG CORPORATION AND SUBSIDIARIES
NOTES 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 $10,601 for the nine months ended April 30, 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.

7

---



CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 
(Unaudited)

NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued)

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.

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 nine month
periods ended April 30, 2011 and 2010. Potentially dilutive securities at April
30, 2011 consist of 982,837 common shares from outstanding warrants and 155,006
common shares from preferred stock. See Note 4.

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.

8

---



CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 
(Unaudited)

NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued)

Future Impact of Recently Issued Accounting Standards (continued)

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 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.

9

---



CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 
(Unaudited)

NOTE 3 - INCOME TAXES

The
tax provision for the nine months ended April 30, 2011, was an expense of
$14,957 and for the nine months ended April 30, 2010 was a tax benefits of
$137.354. 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 100% of the deferred tax asset to a valuation allowance as of April
30, 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 April 30, 2011, the
total amount of unrecognized tax benefits that, if recognized, 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:

|                                                          |  |                |         | 
|--------------------------------------------------------- |  | -------------- | ------- | 
|                                                          |  | April 30, 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 $14,000 as of April 30, 2011 which has
been included in accrued expenses in the Balance Sheet. During the nine month
period ended April 30, 2011, the Company has included $14,000 of interest
expense in the statement of operations.

10

---



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

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 was 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. The reverse split has not been effectuated.

At
various times during the nine month period ended April 30, 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 nine month period ended April 30, 2011, an aggregate
1,955,782 Class C Warrants were excercised in cashless exercises into 1,646,723
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 was suspended, effective
with the open of business on February 2, 2011. The Company common stock has
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:

|                                          |  |                      |   |               |       |                  |         | 
|----------------------------------------- |  | -------------------- | - | ------------- | ----- | ---------------- | ------- | 
|                                          |  | Number
 of
 Warrants |   | Strike
 Price |       | Expiration
 date |        
|                                          |  |                      |   |               |       |                  |        
|Outstanding Warrants as of
 7/31/2010:    |  |                      |   |               |       |                  |         | 
|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 Outstanding as of
 7/31/2010        |  | 2,939,036            |   |               |       |                  |         | 
|                                          |  |                      |   |               |       |                  |         | 
|Issued                                    |  |                     |   |               |       |                  |         | 
|Cancelled:                                |  |                     |   |               |       |                  |         | 
|                                          |  |                      |   |               |       |                  |         | 
|1/19/06 Warrants                          |  | (417                 | ) | $             | 25.00 |                  | 1/19/11 | 
|Exercised:                                |  |                      |   |               |       |                  |         | 
|Class C Warrants                          |  | (1,955,782           | ) | $             | 0.10  |                  | 2/26/15 | 
|                                          |  |                      |   |               |       |                  |         | 
|                                          |  |                      |   |               |       |                  |         | 
|Outstanding Balance as of
 April 30, 2011 |  | 982,837              |   |               |       |                  |         | 
|                                          |  |                      |   |               |       |                  |         | 

11

---



CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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.

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;    

12

---



CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 5  CONVERTIBLE DEBENTURES(continued)

August 2009 Debentures(continued)

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                           
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 April 30, 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 April 30,
2011 and July 31, 2010 the remaining balance of the August 2009 debentures were
$0.

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 April 30, 2011 the
remaining balance was $0.

13

---



CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 5  CONVERTIBLE DEBENTURES(continued)

February 2010 Debentures(continued)

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:

|  |                                                                                                                                                                                                                                                                                                                                                                                                    
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.

14

---



CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 5  CONVERTIBLE DEBENTURES(continued)

February 2010 Debentures(continued)

|  |                                                                                                                                                                                                                                                                                                                                                                                             
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 April 30, 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.

NOTE 6  LOSS ON DERIVATIVE FINANCIAL INSTRUMENTS

For
the nine months period ended April 30, 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 increased by $277,475 during
the nine months ended April 30, 2011 and 2010, respectively, which has been
recorded in the statements of operations.

15

---



CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 6  LOSS ON DERIVATIVE FINANCIAL INSTRUMENTS(continued)

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 $487,205 during the nine months ended April 30, 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
$1,332,305 during the nine months ended April 30, 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 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 $1,474,261 during the nine months ended April 30, 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.

16

---



CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 7  STOCK-BASED COMPENSATION

2002 Stock Option PlanOn 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 April 30, 2011 and July 31, 2010, there had been no shares granted under the
2002 Plan.

Stock Incentive PlansThe 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 ServicesDuring 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
April 30, 2011 is $0.

NOTE 8 - MAJOR CUSTOMERS

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

|                  |  |                 |           |                            |   |                       |  |                       |   |  |  |       | 
|----------------- |  | --------------- | --------- | -------------------------- | - | --------------------- |  | --------------------- | - |  |  | ----- | 
|Nine Months Ended |  | Total 
 Revenue |           | Sales to Major 
 Customers |   | Number of 
 Customers |  | Percentage of 
 Total |  
|                  |  |                 |           |                            |   |                       |  |                       |   |  |  |       | 
|2011              |  | $               | 1,182,896 |                            | $ | 999,375               |  |                       | 3 |  |  | 84.5% | 
|2010              |  | $               | 1,095,913 |                            | $ | 443,218               |  |                       | 2 |  |  | 40.4% | 

NOTE 9  COMMITMENTS

Total
rental expense for all operating leases of the Company amounted to approximately
$46,980 and $39,620 during the nine months ended April 30, 2011 and 2010,
respectively. The Company currently leases its facilities on a month-to-month
basis.

17

---



CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 9  COMMITMENTS(continued)

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 April 30, 2011 was $450,000 and
increases by $20,000 annually on January 1st of 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. For the three month
period from August 1, 2010 to October 31, 2010, the Companys CEO forgave
$105,000 of his salary. For the three month 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. During
the three months period from February 1, 2011 to April 30, 2011, the Companys
CEO did not forgive any portion of his salary, the Company has accrued and
expensed $112,500 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 April 30, 2011 was $260,200 and he
receives annual increases of $12,000 on January 1st of 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. For the three month
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 month
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. For the
three month period from February 1, 2011 to April 30, 2011 the President and
Chief Operation Officer did not forgive any portion of his salary, the Company
has accrued and expensed $72,206 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  LOANS FROM OFFICERS

Loans
payable to officers in the amount of $166,350 are payable on demand and
non-interest bearing.

NOTE 11 - 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.

18

---



CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 12  SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

|                                                |  |                                       |           |  |                                       |   |           | 
|----------------------------------------------- |  | ------------------------------------- | --------- |  | ------------------------------------- | - | --------- | 
|                                                |  | Nine
 Months 
 Ended 
 April 30, 2011 |           |  | Nine
 Months 
 Ended 
 April 30, 2010 |  
|CASH PAID DURING THE PERIOD FOR:                |  |                                       |           |  |                                       |   |           | 
|Interest expense                                |  | $                                     |          |  |                                       | $ |          | 
|                                                |  |                                       |           |  |                                       |   |           | 
|Income Taxes                                    |  | $                                     | 14,957    |  |                                       | $ | 11,099    | 
|                                                |  |                                       |           |  |                                       |   |           | 
|SUPPLEMENTAL
 DISCLOSURE OF NONCASH ACTIVITIES: |  |                                       |           |  |                                       |   |           | 
|Debt converted to equity                        |  | $                                     | 1,000,000 |  |                                       | $ | 1,037,949 | 
|                                                |  |                                       |           |  |                                       |   |           | 
|Common stock issued for services to be provided |  |                                       |          |  |                                       | $ | 508,800   | 
|                                                |  |                                       |           |  |                                       |   |           | 
|Common stock issued for accrued interest        |  | $                                     | 63,790    |  |                                       | $ | 39,545    | 
|                                                |  |                                       |           |  |                                       |   |           | 
|Warrants granted to broker                      |  | $                                     |          |  |                                       | $ | 611,281   | 
|                                                |  |                                       |           |  |                                       |   |           | 
|Cashless exercise of warrants                   |  | $                                     | 16,467    |  |                                       | $ |          | 
|                                                |  |                                       |           |  |                                       |   |           | 

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

GENERAL INFORMATIONConolog
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.

19

---



CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

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. On April 1, 2011, the Company and Computer Maintenance
Corporation reached a settlement in the amount of $10,000. This amount is shown
on the Consolidated Statement of Operations as Other 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.

Results of Operations (three months ended April 30,
2011 compared to the three months ended April 30, 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) Selling
costs, consists mainly of commissions and trade shows expenditures; (iv) Research and Development expenses 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.

20

---



CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

Results of Operations(three months ended
April 30, 2011 compared to the three months ended April 30, 2010).

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 April 30, 2011
product revenues were $501,967 compared to $515,897 for the same three months
ended April 30, 2010. This decrease of $13,930 or 2.7% for our fiscal third
quarter 2011 can mainly be attributed to a decrease of approximately $46,000 in
sales revenues for telemetry equipment sales, which were expected to decline in
the coming years. This decline in our the three months sales was partially
offset by an increase in sales of approximately $31,000 in Military sales and
all other products net to a decline of approximately $2,000.

|                                                                                           |  |      |         |             |  |     |      |  |             |         |           |  |        |   |   |         |   |  |       |   
|------------------------------------------------------------------------------------------ |  | ---- | ------- | ----------- |  | --- | ---- |  | ----------- | ------- | --------- |  | ------ | - | - | ------- | - |  | ----- | --
|Sales
 changes by product line for the three months period ended April 30, 2011 and
 2010. | 
|Products
 sold                                                                             |  | 2011 |         | % to
 total |  |     | 2010 |  | % to
 total |         | $
 change |  | %
 chg |  
|                                                                                           |  |      |         |             |  |     |      |  |             |         |           |  |        |   |   |         |   |  |       |   
|                                                                                           |  |      |         |             |  |     |      |  |             |         |           |  |        |   |   |         |   |  |       |   
|PDR-2000 digital teleprotection                                                            |  | $    | 399,595 |             |  | 80  | %    |  | $           | 410,500 |           |  | 80     | % | $ | (10,905 | ) |  | -2.7  | % 
|PTR-1500 analog
 teleprotection                                                            |  |      | 23,766  |             |  | 5   | %    |  |             | 17,400  |           |  | 3      | % |   | 6,366   |   |  | 36.6  | % 
|Telemetry equipment                                                                        |  |      | 36,108  |             |  | 7   | %    |  |             | 82,000  |           |  | 16     | % |   | (45,892 | ) |  | -55.9 | % 
|Military Sales                                                                             |  |      | 31,171  |             |  | 6   | %    |  |             | 0       |           |  | 0      | % |   | 31,171  |   |  | 100.0 | % 
|Spare parts                                                                                |  |      | 5,583   |             |  | 1   | %    |  |             | 6,000   |           |  | 1      | % |   | -417    |   |  | .7    | % 
|Freight                                                                                    |  |      | 6,178   |             |  | 1   | %    |  |             | 2,775   |           |  | 1      | % |   | 3,403   |   |  | 122.6 | % 
|Discounts                                                                                  |  |      | (434    | )           |  | 0   | %    |  |             | (2,778  | )         |  | -1     | % |   | 2,344   |   |  | 84.4  | % 
|                                                                                           |  |      |         |             |  |     |      |  |             |         |           |  |        |   |   |         |   |  |       |   
|Net Sales Revenues                                                                         |  | $    | 501,967 |             |  | 100 | %    |  | $           | 515,897 |           |  | 100    | % | $ | (13,930 | ) |  | (2.7  | %)
|                                                                                           |  |      |         |             |  |     |      |  |             |         |           |  |        |   |   |         |   |  |       |   

Cost of Product Revenue

Cost
of product revenue consists primarily 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 April 30, 2011, amounted to
$230,248 as compared to $278,412 for the same three month period ended April
30, 2010. This $48,164 or 17.3% decrease in cost of goods sold can be
attributed to a 14.6% reduction in material component costs and 2.7% reduction
due to volume.

Gross Profit

Gross
profit for the three month period ended April 30, 2011 was $271,719 or 54% of
revenues versus $237,485 or 46% of revenues for the three month period ended
April 30, 2010. This increase of 8% is mainly attributed to costs reduction in
material component costs. Selling prices were basically flat versus the same
three month period a year ago.

Operating Expenses

General and Administrative:
For the three month period ended April 30, 2011, general and administrative
expenses decreased $267,291 to $544,950 from $812,241. This decrease of
approximately33% can be attributed to the following: (a) Compensation expense,
which is comprised of salaries, health insurance, and payroll taxes decreased
approximately $13,000 for the three months ended April 30, 2011, , (b)
Professional fees decreased approximately $162,000 over the prior year three
months period mainly due to a reduction in the use of outside consultants, and
(c) all other costs associated with non-manufacturing overhead items such as
rent, utilities, telephone and travel decreased approximately $92,000.

21

---



CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

Operating Expenses(continued)

Research and Development: For the three month period ended April 30,
2011 research and development cost were $1,340, a decrease of $20,560 versus
the prior year total of $21,900. 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 April 30, 2011 selling expenses were
$79,185, an increase of $72,571 versus the prior year total of $6,614. This
increase is mainly due to timing of our in sales public relations expenses
occurred third quarter 2011 versus second quarter 2010.

Total Other Income and Expenses: For the three month period ended April 30,
2011, other income/expense was income of $7,058, a decrease of $8,486,642
versus the three months ended April 30, 2010 income amount of $8,493,700. This
decrease in other income is primary the result of adjustments to the fair value
of the derivative liability associated with a subscription agreement entered
into in fiscal year 2010 resulting in income of $9,054,229 offset by a decrease
in amortization of financing fees and debt discount of approximately $536,000.

Net Income (Loss) Applicable to Common SharesThe Company
recorded a net loss of $349,612 for the three month period ended April 30,
2011, as compared to a net income of $8,033,510 for three month period ended
April 30, 2010. The decrease in net income of $8,383,122 can mainly be
attributed to noncash transactions related to the subscription agreement
entered into in August 2009, which resulted in a gain on derivative financial
instrument of $9,054,229. For the three months period ended April 30, 2011
gross profit increased, $34,234, general and administrative costs were
approximately $267,000 lower than the prior year three month period, research
and development was also down versus the prior three month period in the
approximate amount of $20,500 but selling expense was approximately $72,500
higher. As a result of the foregoing, the Company reported net loss applicable
to common shares of ($0.03) basic and diluted loss per share compared to a net
income per common share of $1.21 for basic and $0.91 for diluted for the three
months ended April 30, 2010.

Results of Operations (nine months ended April 30, 2011
compared to the nine months ended April 30, 2010).

Operating Revenues

The majority of the
Companys sales revenue is generated from the sales of the PDR-2000
Teleprotection products. For the nine months ended April 30, 2011 product
revenues were $1,179,708 compared to $1,095,913 for the same nine months ended
April 30, 2010. This increase of $83,795 or 7.6% for our fiscal first three
quarters of 2011 can mainly be attributed to an increase of approximate
$314,000 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 approximately $112,000 and telemetry equipment sales of
approximately $102,000 which were expected to decline in the coming years. All
other products net to a decline of approximately $16,000.

Sales changes by product line for the nine months period ended April
30, 2011 and 2010.


|                                 |  |      |           |             |  |      |      |  |             |           |           |  |        |   |   |          |   |  |       |  
|-------------------------------- |  | ---- | --------- | ----------- |  | ---- | ---- |  | ----------- | --------- | --------- |  | ------ | - | - | -------- | - |  | ----- | -
|Products
 sold                   |  | 2011 |           | % to
 total |  |      | 2010 |  | % to
 total |           | $
 change |  | %
 chg |  
|                                 |  |      |           |             |  |      |      |  |             |           |           |  |        |  
|                                
|PDR-2000 digital
 teleprotection |  | $    | 996,995   |             |  | 85   | %    |  | $           | 682,900   |           |  | 62     | % | $ | 314,095  |   |  | 46.0  | %
|PTR-1500 analog
 teleprotection  |  |      | 23,766    |             |  | 2    | %    |  |             | 45,070    |           |  | 4      | % |   | (21,304  | ) |  | -47.3 | %
|Telemetry equipment              |  |      | 74,308    |             |  | 6    | %    |  |             | 175,950   |           |  | 16     | % |   | (101,642 | ) |  | -57.8 | %
|Military Sales                   |  |      | 58,071    |             |  | 5    | %    |  |             | 170,500   |           |  | 16     | % |   | (112,429 | ) |  | -65.9 | %
|Spare parts                      |  |      | 17,850    |             |  | 2    | %    |  |             | 23,000    |           |  | 2      | % |   | (5,150   | ) |  | 22.4  | %
|Freights                         |  |      | 10,945    |             |  | 1    | %    |  |             | 3,723     |           |  | 0      | % |   | 7,222    |   |  | 194   | %
|Discounts                        |  |      | (2,227    | )           |  | -0.3 | %    |  |             | (5,230    | )         |  | 0      | % |   | (3,003   | ) |  | -57.4 | %
|                                 |  |      |           |             |  |      |      |  |             |           |           |  |        |   |   |          |   |  |       |  
|Net Sales Revenues               |  | $    | 1,179,708 |             |  | 100  | %    |  | $           | 1,095,913 |           |  | 100    | % | $ | 83,795   |   |  | 7.6   | %
|                                 |  |      |           |             |  |      |      |  |             |           |           |  |        |   |   |          |   |  |       |  

22

---



CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

Operating Revenues(continued)

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 nine months ended April 30, 2011, amounted to
$638,986 as compared to $621,649 for the same nine month period ended April 30,
2010. This $17,337 or 2.8% increase in cost of goods sold can be attributed to
normal volume increase as a result of the 7.6% sales volume increase, mainly
from the PRD-2000 and a 4.8% reduction in material component costs.

Gross Profit

Gross
profit for the nine month period ended April 30, 2011 was $540,722 or 45.8% of
revenues versus $474,264 or 43.2% of revenues for the nine month period ended
April 30, 2010. The increase in dollar gross profit was mainly due to increase
in sales volume for the PDR-2000 for the nine months ended April 30, 2011 over
the same nine 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. Gross
margin also improved as a result of the material component costs saving
achieved through the nine months ended April 30, 2011.

Operating Expenses

General and Administrative: For the nine month period ended April 30,
2011, general and administrative expenses decreased $1,220.340 to $2,097,301
from $3,317,641 for the nine month period ended April 30, 2010. This decrease
of approximately 37% can be attributed to the following: (a) Compensation
expense, which is comprised of salaries, health insurance, and payroll taxes
decreased approximately $1,507,000 for the nine months ended April 30, 2011, to
an amount of approximately $516,000 versus approximately $1,531,000 for same
prior year nine month period. The decrease in compensation expense was
primarily due to the issuance of stock to officers, directors and employees
which created a noncash expense of $1,411,200 during the nine months ended
April 30, 2010 compared to $0 during the nine months ended April 30, 2011. Also
in compensation expense during the nine months ended April 30, 2011 salaries
and benefits declined approximately $72,000 compared to the nine months ended
April 30, 2010 due to the reductions of salaries from senior management, (b)
Professional fees increased approximately $377,000 over the prior year nine
months period mainly due to legal fees and accounting fee associated with the
restatement of prior filed financial statements.

Research and Development: For the nine month period ended April 30,
2011 research and development costs were $63,613, a decrease of $20,050 versus
the prior year total of $83,663. 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 nine month period ended April 30, 2011 selling expenses were
$113,243, an increase of $63,822 or 129% versus the prior year total of
$49,421. This increase is mainly due to the timing of selling expenditures
versus prior year.

Total Other Income and Expenses: For the nine month period ended April 30,
2011, other income/expense was an expense of $1,869,926, a decrease of
$24,544,717 versus the nine months ended April 30, 2010 expense amount of
$26,414,643. 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 $24,674,279 for the nine months ended April 30, 2010
as compared to $0 for the nine months ended April 30, 2011. Amortization expenses
associated with debt discount and deferred financing fees decreased
approximately $453,805 for the nine months ended April 30, 2011 versus the
prior year nine month period. Induced conversion costs and interest expense
associated with debt conversion also increased approximately $594,000 for the
nine month period ended April 30, 2011

23

---



CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

Net Income (Loss) Applicable to Common SharesThe Company
recorded a net loss of $3,618,318 for the nine month period ended April 30,
2011, as compared to a net loss of $29,253,750 for nine month period ended
April 30, 2010. The decrease in net loss of approximately $25,635,432 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 $24,674,279. An increase in gross profit
margin of approximately $42,702 also contributed to an increase in income, as
well as, reduction in operating expenses of approximately $1,176,568 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 nine months ended April 30, 2011 of ($0.39) basic and
diluted loss per share compared to a net loss per common share of ($7.56) basic
and diluted loss per share, for the nine months ended April 30, 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 May 3,
2011, the customer informed the Company that it is canceling the remaining
$269,640 on this order.

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.

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.

24

---



CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

Status of Certain Press Releases Issued:(continued)

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 February 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.

On
April 28, 2011, the Company issued a press release announcing that it had
received advanced orders for its PDR Systems, from two customers, valued at
over $135,000 and $391,000, respectfully, All units included in the $135,000
order have been shipped. Delivery of the units in the $391,000 are scheduled to
be shipped in June and July.

LIQUIDITY AND FINANCIAL CONDITION

We
have had recurring losses from operations of $1,733,435 and $2,976,461 for the
nine months ended April 30, 2011 and 2010, respectively and used cash from
operations in the amounts of $899,275 and $1,252,340 for the nine month period
ended April 30, 2011 and 2010, respectively. At April 30, 2011, the Company had
cash and equivalents of $74,181. 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
April 30, 2011, the Company had total current assets of $1,056,259 and total
current liabilities of $1,241,116, resulting in working capital deficit of
$184,857 compared to working capital of $1,508,104 at year ended July 31, 2010.
The Companys current assets consists of $74,181 in cash and cash equivalent,
$136,829 in accounts receivable, $755,791 in inventory and $89,458 in prepaid
expenses and other current assets. Accounts receivable increased from $67,603
at July 31, 2010 to $136,829 at April 30, 2011. This increase in our accounts
receivable is the result of sales increase of $83,795 for the nine months
period ended April 30, 2011 and timing of collections.

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 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 $899,275 for the nine months period ended
April 30, 2011, as compared to $1,252,340 net cash used in operating activities
for the nine month period ended April 30, 2010, a decrease of $353,065, this
decrease in use of cash can be attributed to: (a) cash operating expenses
increased approximately $396,000 for the nine months period ended April 30,
2011 versus 2010. Offsetting the increases in uses of cash for the nine months ended
April 30, 2011 compared to April 30, 2010, were decreases in (b) prepaid
expenses, a reduction versus prior year of approximately $232,000, (c)
inventory decreased resulting in a reduction change of approximately $90,000,
(d) accounts payable and accrued expense increased, resulting in a reduction of
approximately $601,000, (e) accounts receivable increased less than the prior
nine months in 2010 resulting in lower use of cash of approximately $48,000 and
other assets increased approximately $4,000.

25

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CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

INVESTING ACTIVITIES

Net
cash used in investing activities for the nine month period ended April 30,
2011 was $5,899 for the purchase of manufacturing equipment. For nine month
period ended April 30, 2010 net cash used investing activities was $22,781 also
for the purchase of equipment.

FINANCING ACTIVITIES

Net
cash provided from financing activities was $266,350 for the nine month period
ended April 30, 2011, as compared to $2,345,173 provided in same nine month
period in 2010. In the nine month period ended April 30, 2011 the Company
received proceeds of $100,000 from sale of common stock and $166,350 from a
loan from Company officer. For the nine months ended April 30, 2010, the
Company received $2,000,000 related to issuance of convertible debentures and
$635,070 related to the excising of warrants and incurred $291,507 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.

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.

26

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CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

FINANCING ACTIVITIES(continued)

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.

At various times during the
nine month period ended April 30, 2011, $1,000,000 of convertible debt and
$63,790 of accrued interest was converted into 4,784,933 shares of common
stock.

27

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CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

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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CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

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.

29

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CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

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.

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  | Quoted
 prices in active markets for identical assets or liabilities.                                                                                                                                                                                                                                                               
|          |                                                                                                                                                                                                                                                                                                                                     
|Level 2  | 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.

30

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CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS(continued)

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 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.

31

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CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

FORWARD LOOKING STATEMENTSThis 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, processed, summarized and reported within the time periods
specified in SEC rules and forms.

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.

32

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CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

ITEM 4. CONTROLS AND PROCEDURES (continued)

Material Weaknesses in Internal Control over Financial
Reporting (continued)

Based
upon our evaluation, our Chief Executive Officer and Chief Financial Officer
have concluded that our disclosure controls and procedures were not effective
as April 30, 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 ReportingThe 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.

33

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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 April 30, 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.

34

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Item 4. Removed and Reserved

Item 5. Other Information  None

Item 6. Exhibits

|                |  |                                                                                                                                   | 
|--------------- |  | --------------------------------------------------------------------------------------------------------------------------------- | 
|Exhibit
 Number |  | Description                                                                                                                       | 
|                |  |                                                                                                                                   | 
|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: June
 17, 2011 | By /s/
 Robert S. Benou        | 
|                     |                                | 
|                     | Robert S.
 Benou              
|                     | Chief
 Executive Officer,     
|                     | (Principal
 Executive Officer)
|                     | Chief
 Financial Officer      
|                     | (Principal
 Financial Officer)

35

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