SECURITIES AND EXCHANGE COMMISSIONWashington, 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 October 31,
 2010                      
|                                                                       |                                                                                           
|o                                                                      | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
 OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period from ______________ to
 ____________________

Commission file number 0-8174

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 o | Accelerated
 filer o | Non-accelerated
 filer o | Smaller
 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 December 17, 2010 was 8,076,841.

---



INDEX

|         |                                                                                                                      |  |      
|-------- | -------------------------------------------------------------------------------------------------------------------- |  | -----
|PART I   | FINANCIAL INFORMATION                                                                                                |  |      
|         |                                                                                                                      |  |      
|Item 1.  | CONDENSED CONSOLIDATED
 FINANCIAL STATEMENTS (Unaudited)                                                             |  |      
|         |                                                                                                                      |  |      
|         | Condensed Consolidated Balance Sheets, as of October 31, 2010 and
 July 31, 2010                                     |  | 1    
|         |                                                                                                                      |  |      
|         | Condensed Consolidated Statements of Operations, for the three months
 ended October 31, 2010 and 2009 (As Restated) |  | 2    
|         |                                                                                                                      |  |      
|         | Condensed Consolidated Statements of Cash Flows, for the three months
 ended October 31, 2010 and 2009 (As Restated) |  | 3    
|         |                                                                                                                      |  |      
|         | Notes to Condensed Consolidated Financial Statements                                                                 |  | 4-18 
|         |                                                                                                                      |  |      
|Item 2.  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
 RESULTS OF OPERATIONS                               |  | 19-28
|         |                                                                                                                      |  |      
|Item 3.  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                           |  | 28   
|         |                                                                                                                      |  |      
|Item 4T. | CONTROLS AND PROCEDURES                                                                                              |  | 28-29
|         |                                                                                                                      |  |      
|PART II  | OTHER INFORMATION                                                                                                    |  |      
|         |                                                                                                                      |  |      
|Item 1.  | LEGAL PROCEEDINGS                                                                                                    |  | 30   
|         |                                                                                                                      |  |      
|Item 2.  | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                                          |  | 30   
|         |                                                                                                                      |  |      
|Item 3.  | DEFAULTS UPON SENIOR SECURITIES                                                                                      |  | 30   
|         |                                                                                                                      |  |      
|Item 4.  | [REMOVED AND RESERVED]                                                                                               |  | 31   
|         |                                                                                                                      |  |      
|Item 5.  | OTHER INFORMATION                                                                                                    |  | 31   
|         |                                                                                                                      |  |      
|Item 6.  | EXHIBITS, SIGNATURES AND CERTIFICATIONS                                                                              |  | 31   

i

---



Part 1 Financial Information
Item  Financial Statements

CONOLOG CORPORATION AND SUBSIDIARIESCondensed Consolidated
Balance Sheets (Unaudited)

|                                                                                                                                                                                 |  |                    |             |                 |   |             |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ----------- | --------------- | - | ----------- | -
|                                                                                                                                                                                 |  | October
 31,
 2010 |             | July
 31,
 2010 |  
|                                                                                                                                                                                 |  |                    |             |                 |  
|ASSETS                                                                                                                                                                           |  |                    |             |                 |   |             |  
|Current
 Assets:                                                                                                                                                                 |  |                    |             |                 |   |             |  
|Cash and equivalents                                                                                                                                                             |  | $                  | 186,040     |                 | $ | 713,005     |  
|Accounts receivable, net of allowance                                                                                                                                            |  |                    | 462,593     |                 |   | 67,603      |  
|Inventory, net of reserve for obsolescence                                                                                                                                       |  |                    | 757,729     |                 |   | 826,079     |  
|Prepaid expenses                                                                                                                                                                 |  |                    | 36,562      |                 |   | 248,297     |  
|Other current assets                                                                                                                                                             |  |                    | 5,000       |                 |   | 5,000       |  
|                                                                                                                                                                                 |  |                    |             |                 |   |             |  
|Total
 Current Assets                                                                                                                                                            |  |                    | 1,447,924   |                 |   | 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 deprecatation                                                                                                                                                 |  |                    | (1,991,284  | )               |   | (1,987,284  | )
|                                                                                                                                                                                 |  |                    |             |                 |   |             |  
|Net Property and Equipment                                                                                                                                                       |  |                    | 97,956      |                 |   | 96,057      |  
|Other
 Assets:                                                                                                                                                                   |  |                    |             |                 |   |             |  
|Deferred financing fees, net of amortization                                                                                                                                     |  |                    | 302,089     |                 |   | 382,132     |  
|                                                                                                                                                                                 |  |                    |             |                 |   |             |  
|Total Other Assets                                                                                                                                                               |  |                    | 302,089     |                 |   | 382,132     |  
|                                                                                                                                                                                 |  |                    |             |                 |   |             |  
|TOTAL ASSETS                                                                                                                                                                     |  | $                  | 1,847,969   |                 | $ | 2,338,173   |  
|                                                                                                                                                                                 |  |                    |             |                 |   |             |  
|                                                                                                                                                                                 |  |                    |             |                 |   |             |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                             |  |                    |             |                 |   |             |  
|Current Liabilities:                                                                                                                                                             |  |                    |             |                 |   |             |  
|Accounts payable                                                                                                                                                                 |  | $                  | 267,836     |                 | $ | 150,880     |  
|Accrued expenses                                                                                                                                                                 |  |                    | 257,479     |                 |   | 201,000     |  
|Convertible debenture, net
 of discount of $552,741 and $0 at October 31, 2010 and July 31, 2010, respectively                                                                   |  |                    | 447,259     |                 |   |            |  
|                                                                                                                                                                                 |  |                    |             |                 |   |             |  
|Total Current Liabilities                                                                                                                                                        |  |                    | 972,574     |                 |   | 351,880     |  
|                                                                                                                                                                                 |  |                    |             |                 |   |             |  
|Non-Current
 Liabilities:                                                                                                                                                        |  |                    |             |                 |   |             |  
|Convertible debenture, net of discount of $0 and $720,687 at October 31, 2010 and July 31, 2010,
 respectively                                                                   |  |                    |            |                 |   | 279,313     |  
|                                                                                                                                                                                 |  |                    |             |                 |   |             |  
|Total Liabilities                                                                                                                                                                |  |                    | 972,574     |                 |   | 631,193     |  
|                                                                                                                                                                                 |  |                    |             |                 |   |             |  
|                                                                                                                                                                                 |  |                    |             |                 |   |             |  
|Stockholders
 Equity:                                                                                                                                                           |  |                    |             |                 |   |             |  
|Preferred stock, par value $.50; Series A; 4% cumulative; 500,000
 shares authorized 155,000 shares issued and outstanding at October 31, 2010
 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 October 31, 2010
 and July 31, 2010, respectively |  |                    | 597         |                 |   | 597         |  
|Common stock, par value $0.01; 30,000,000 shares authorized; 6,967,881
 shares issued and outstanding at October 31, 2010 and July 31, 2010,
 respectively                       |  |                    | 69,679      |                 |   | 69,679      |  
|Contributed capital                                                                                                                                                              |  |                    | 78,088,878  |                 |   | 78,088,878  |  
|Accumulated deficit                                                                                                                                                              |  |                    | (77,229,525 | )               |   | (76,397,940 | )
|Less: Treasury shares at cost - 2 shares                                                                                                                                         |  |                    | (131,734    | )               |   | (131,734    | )
|                                                                                                                                                                                 |  |                    |             |                 |   |             |  
|Total Stockholders Equity                                                                                                                                                       |  |                    | 875,395     |                 |   | 1,706,980   |  
|                                                                                                                                                                                 |  |                    |             |                 |   |             |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                       |  | $                  | 1,847,969   |                 | $ | 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
(Unaudited)

|                                                               |  |                                         |           |                   |   |             |  
|-------------------------------------------------------------- |  | --------------------------------------- | --------- | ----------------- | - | ----------- | -
|                                                               |  | For the Three Months
 Ended October 31, |          
|                                                               |  | 2010                                    |           | 2009
 As Restated |  
|                                                               |  |                                         |           |                   |  
|OPERATING REVENUES                                             |  |                                         |           |                   |   |             |  
|Product
 revenue                                               |  | $                                       | 526,911   |                   | $ | 468,096     |  
|                                                               |  |                                         |           |                   |   |             |  
|Cost of product revenue                                        |  |                                         |           |                   |   |             |  
|Cost of
 goods sold                                            |  |                                         | 269,804   |                   |   | 256,200     |  
|                                                               |  |                                         |           |                   |   |             |  
|Total Cost of product revenue                                  |  |                                         | 269,804   |                   |   | 256,200     |  
|                                                               |  |                                         |           |                   |   |             |  
|                                                               |  |                                         |           |                   |   |             |  
|Gross Profit                                                   |  |                                         | 257,107   |                   |   | 211,896     |  
|                                                               |  |                                         |           |                   |   |             |  
|Selling, general and administrative expenses                   |  |                                         |           |                   |   |             |  
|General and
 administrative                                    |  |                                         | 707,582   |                   |   | 2,087,853   |  
|Research and
 development                                      |  |                                         | 48,257    |                   |   | 30,848      |  
|Selling
 expenses                                              |  |                                         | 16,784    |                   |   | 38,803      |  
|                                                               |  |                                         |           |                   |   |             |  
|Total
 selling, general and administrative expenses            |  |                                         | 772,623   |                   |   | 2,157,504   |  
|                                                               |  |                                         |           |                   |   |             |  
|Loss from Operations                                           |  |                                         | (515,516  | )                 |   | (1,945,608  | )
|                                                               |  |                                         |           |                   |   |             |  
|Other Income
 (Expenses)                                       |  |                                         |           |                   |   |             |  
|Loss on derivative financial instruments                       |  |                                         |          |                   |   | (24,550,300 | )
|Interest expense                                               |  |                                         | (56,479   | )                 |   | (6,433      | )
|Interest income                                                |  |                                         |          |                   |   | 860         |  
|Induced conversion cost                                        |  |                                         |          |                   |   | (31,208     | )
|Amortization of financing fees                                 |  |                                         | (80,043   | )                 |   | (116,461    | )
|Amortization of debt discount                                  |  |                                         | (167,946  | )                 |   | (305,097    | )
|                                                               |  |                                         |           |                   |   |             |  
|Total Other Income (Expense)                                   |  |                                         | (304,468  | )                 |   | (25,008,639 | )
|                                                               |  |                                         |           |                   |   |             |  
|                                                               |  |                                         |           |                   |   |             |  
|Loss before provision for income taxes                         |  |                                         | (819,984  | )                 |   | (26,954,247 | )
|Income tax expense                                             |  |                                         | (11,601   | )                 |   | (4,957      | )
|                                                               |  |                                         |           |                   |   |             |  
|Net Loss Applicable to Common Shares                           |  | $                                       | (831,585  | )                 | $ | (26,959,204 | )
|                                                               |  |                                         |           |                   |   |             |  
|                                                               |  |                                         |           |                   |   |             |  
|Basic Loss per Common Share                                    |  | $                                       | (0.12     | )                 | $ | (13.73      | )
|Weighted Average Common Shares Outstanding - Basic and Diluted |  |                                         | 6,967,881 |                   |   | 1,963,878   |  
|                                                               |  |                                         |           |                   |   |             |  

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

2

---



CONOLOG CORPORATION AND SUBSIDIARIESCondensed Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended October 31,

|                                                                      |  |      |          |                   |   |             |  
|--------------------------------------------------------------------- |  | ---- | -------- | ----------------- | - | ----------- | -
|                                                                      |  | 2010 |          | 2009
 As Restated |  
|                                                                      |  |      |          |                   |  
|CASH FLOWS
 FROM OPERATING ACTIVITIES                                 |  |      |          |                   |   |             |  
|Net loss                                                              |  | $    | (831,585 | )                 | $ | (26,959,204 | )
|Adjustments
 to reconcile net loss to net cash used in operations:    |  |      |          |                   |   |             |  
|Depreciation                                                          |  |      | 4,000    |                   |   | 4,002       |  
|Amortization of deferred financing fees                               |  |      | 80,043   |                   |   | 116,461     |  
|Common stock issued to officers, directors and employees              |  |      |         |                   |   | 1,411,200   |  
|Common stock issued to pay interest                                   |  |      |         |                   |   | 6,433       |  
|Amortization of common stock issued for services                      |  |      | 80,000   |                   |   | 144,735     |  
|Induced conversion cost associated with convertible debt and warrants |  |      |         |                   |   | 31,208      |  
|Amortization of discount of convertible debentures                    |  |      | 167,946  |                   |   | 305,097     |  
|Loss on Derivative Financial Instrument                               |  |      |         |                   |   | 24,550,300  |  
|Changes in
 assets and liabilities                                    |  |      |          |                   |   |             |  
|(Increase) Decrease in accounts receivable                            |  |      | (394,990 | )                 |   | 12,346      |  
|Decrease (Increase) in prepaid expenses                               |  |      | 131,735  |                   |   | (5,389      | )
|Decrease in inventories                                               |  |      | 68,350   |                   |   | 62,663      |  
|(Increase) in other assets                                            |  |      |         |                   |   | (7,116      | )
|Increase (Decrease) in accounts payable                               |  |      | 116,956  |                   |   | (77,869     | )
|(Decrease) increase in accrued expenses                               |  |      | 56,479   |                   |   | 3,532       |  
|                                                                      |  |      |          |                   |   |             |  
|Net cash used in operations                                           |  |      | (521,066 | )                 |   | (401,601    | )
|                                                                      |  |      |          |                   |   |             |  
|CASH FLOWS
 FROM INVESTING ACTIVITIES                                 |  |      |          |                   |   |             |  
|Purchase of property and equipment                                    |  |      | (5,899   | )                 |   | (21,625     | )
|                                                                      |  |      |          |                   |   |             |  
|Net cash used in investing activities                                 |  |      | (5,899   | )                 |   | (21,625     | )
|                                                                      |  |      |          |                   |   |             |  
|CASH FLOWS
 FROM FINANCING ACTIVITIES                                 |  |      |          |                   |   |             |  
|Proceeds from issuance of convertible debentures                      |  |      |         |                   |   | 1,000,000   |  
|Proceeds from note receivable                                         |  |      |         |                   |   | 1,610       |  
|Payments for deferred loan costs                                      |  |      |         |                   |   | (140,000    | )
|                                                                      |  |      |          |                   |   |             |  
|Net cash provided by financing activities                             |  |      |         |                   |   | 861,610     |  
|                                                                      |  |      |          |                   |   |             |  
|NET (DECREASE)
 INCREASE IN CASH AND EQUIVALENTS                      |  |      | (526,965 | )                 |   | 438,384     |  
|CASH AND
 EQUIVALENTS - BEGINNING OF PERIOD                           |  |      | 713,005  |                   |   | 27,358      |  
|                                                                      |  |      |          |                   |   |             |  
|CASH AND
 EQUIVALENTS - END OF PERIOD                                 |  | $    | 186,040  |                   | $ | 465,742     |  
|                                                                      |  |      |          |                   |   |             |  
|                                                                      |  |      |          |                   |   |             |  
|SUPPLEMENTAL
 DISCLOSURE OF CASH FLOW INFORMATION:                    |  |      |          |                   |   |             |  
|CASH PAID
 DURING THE PERIOD FOR:                                     |  |      |          |                   |   |             |  
|Interest expense                                                      |  | $    |         |                   | $ |            |  
|                                                                      |  |      |          |                   |   |             |  
|Income Taxes                                                          |  | $    | 11,601   |                   | $ | 4,957       |  
|                                                                      |  |      |          |                   |   |             |  
|SUPPLEMENTAL
 DISCLOSURE OF NONCASH ACTIVITIES:                       |  |      |          |                   |   |             |  
|Debt converted to equity                                              |  | $    |         |                   | $ | 259,206     |  
|                                                                      |  |      |          |                   |   |             |  
|Common stock issued for
 services to be provided                      |  | $    |         |                   | $ | 384,000     |  
|                                                                      |  |      |          |                   |   |             |  

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

3

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

Restatement of Previously Issued Financial StatementsIn a Form 8-K
dated June 10, 2010, Conolog Corporation concluded that our consolidated
financial statements for the period ended October 31, 2009 would be restated
and should no longer be relied upon. Please see our Annual Report on Form 10-K
for the year ended July 31, 2010 for a summary of the adjustments to our
previously issued financial statements for the period ended October 31, 2009.
The October 31, 2009 Cash Flow Statement was not restated in our July 31, 2010
Form 10-K. See Note 12 for the previously reported and as restated statements of
cash flows.

Going ConcernThe 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 $515,516 and $1,945,608 for the three months ended
October 31, 2010 and 2009, respectively, and used cash from operations in the
amounts of $521,066 and $401,601 for the three months ended October 31, 2010
and 2009, respectively. At October 31, 2010, the Company had cash and
equivalents of $186,040. On June 23, 2010 an event of default occurred on our
outstanding convertible debentures (See Notes 5 and 11). Although, the Company
received a waiver from the note holders on November 27, 2010 there can be no
assurance that we will not suffer further events of default. 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.

NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

4

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

NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued)

Cash and EquivalentsFor 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 October 31, 2010 the Company did not have any cash
equivalents.

Receivables and Allowance for Doubtful AccountsTrade 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
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 allowance for doubtful accounts at October 31, 2010 and
July 31, 2010 was $1,000 and $1,000, respectively.

The
Company has a concentration risk in trade accounts receivable with significant
sales to the government and local agencies. One customer accounted for
approximately 88% of accounts receivable as of October 31, 2010. 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.

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

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

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

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

5

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CONOLOG CORPORATION AND 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 October 31, 2010 and July 31, 2010,

|                        |  |                  |         |               |   |         | 
|----------------------- |  | ---------------- | ------- | ------------- | - | ------- | 
|                        |  | October 31, 2010 |         | July 31, 2010 |  
|                        |  |                  |         |               |   |         | 
|Finished Goods          |  | $                | 503,532 |               | $ | 587,835 | 
|Work-in-process         |  |                  | 70,000  |               |   | 83,441  | 
|Raw materials           |  |                  | 258,197 |               |   | 228,803 | 
|                        |  |                  |         |               |   |         | 
|                        |  |                  | 831,729 |               |   | 900,079 | 
|Less: Inventory reserve |  |                  | 74,000  |               |   | 74,000  | 
|                        |  |                  |         |               |   |         | 
|Inventory, net          |  | $                | 757,729 |               | $ | 826,079 | 
|                        |  |                  |         |               |   |         | 

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

Fair Value MeasurementsThe 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 CostsThe 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 October 31, 2010 and July 31, 2010, $302,089 and $382,132, respectively
of deferred financing costs remained to be amortized. Amortization of deferred
financing costs amounted to $80,043 and $116,461 for three months ended October
31, 2010 and 2009, respectively.

6

---



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

NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued)

Derivative LiabilityDerivative
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 DiscountThe 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 CostsAdvertising/Public
Relations costs are charged to operations when incurred. These expenses were
$14,120 and $275 for the three months ended October 31, 2010 and 2009,
respectively.

Impairment of Long-Lived AssetsWe 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 RecognitionRevenue 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.

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

7

---



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

Stock Based CompensationThe 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 StockBasic 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. Potentially dilutive securities
at October 31, 2010 consist of 2,951,036 common shares from outstanding
warrants, 1,666,667 common shares from convertible debt and 155,006 common
shares from preferred stock. Potentially dilutive securities at October 31, 2009
consist of 2,957,355 common shares from outstanding warrants, 695,306 common
shares from convertible debt and 155,006 common shares from preferred stock.

All amounts have been excluded as they are anti dilutive due to losses generated in both periods.

Use of EstimatesThe 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.

Recently Adopted Accounting PronouncementsIn 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.

In
June 2009, the FASB issued guidance which stipulates the FASB Accounting
Standards Codification is the source of authoritative U.S. GAAP recognized by
the FASB to be applied by nongovernmental entities. This guidance is effective
for the Companys fiscal year beginning August 1, 2009.

Recently Issued Accounting PronouncementsIn January 2010,
the FASB issued additional guidance on fair value measurements and disclosures
which requires reporting entities to provide information about movements of
assets among Level 1 and 2 of the three-tier fair value hierarchy established
by the existing guidance. The guidance is effective for any fiscal year that
begins after December 15, 2010, and it should be used for quarterly and annual
filings. The Company is currently evaluating the impact of this new accounting
guidance on its 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.

8

---



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

NOTE 3 - INCOME TAXESThe tax
provision for the three months ended October 31, 2010 and
2009 was $11,601 and $4,957 respectively. The Company has no open tax years prior to 2005 for the State of New
Jersey and 2003 for the federal income tax purposes which are subject to
examination.

At
July 31, 2010 and 2009, the Company has net loss carry forwards 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 carry forwards for state
income tax purposes of approximately $6,900,000 and $5,302,000 respectively to
offset future state taxable income through 2030.

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

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

|                                                          |  |                  |         | 
|--------------------------------------------------------- |  | ---------------- | ------- | 
|                                                          |  | October 31, 2010 |        
|                                                          |  |                  |        
|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

9

---



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 $8,000 as of October 31, 2010 which
has been included in accrued expenses in the Balance Sheet. During the three
month period ended October 31, 2010, the Company has included $3,000 of
interest expense in the statement of operations.

NOTE 4  STOCKHOLDERS EQUITY

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 August 2, 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 The NASDAQ Stock Market. 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. See Note 11, Subsequent
Events, for further update.

NOTE 5  CONVERTIBLE DEBENTURES

August 2009 DebenturesOn 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
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 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.

10

---



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

NOTE 5  CONVERTIBLE DEBENTURES (continued)In accordance
with the terms of the August 2009 Debentures, the occurrence of any of the
following events shall, at the option of the note holder, make all sums of
principal and interest then remaining unpaid immediately due and payable, upon
demand:

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

In
connection with the August 2009 Debentures entered into on August 3, 2009, the
Company paid Garden State Securities, Inc., the selling agent, a cash fee of
$100,000 and issued warrants to purchase 256,410 shares of the Companys common
stock. The Company calculated the fair value of the warrants on August 3, 2009 at
$231,025 using the Black-Scholes option pricing model. The assumptions used in
computing the fair value are a closing stock price of $1.14, expected
volatility of 108% over the remaining contractual life of five years and a risk
free rate of 2.66%. The Company recorded the cash fee and the fair value of the
warrants issued to Garden State Securities, Inc. plus $40,000 fee paid to an
attorney totaling $371,025 as deferred financing costs. The deferred financing
costs are being amortized over the term of the August 2009 Debenture agreement.
As of October 31, 2010, 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 October
31, 2010 and July 31, 2010 the remaining balance of the August 2009 debentures
were $0.

11

---



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

NOTE 5  CONVERTIBLE DEBENTURES (continued)
February 2010 DebenturesOn 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 October 31, 2010 the remaining
balance was $302,089.

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, Conolog Corporation (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.           

12

---



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

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

As
of October 31, 2010 the remaining balance of the February 2010 Debentures were
$447,259 which is net of an unamortized discount of $552,741.

The
following is a roll forward schedule of our February 2010 Debenture:

|                              |  |                    |           |                |   |           |   |   |         | 
|----------------------------- |  | ------------------ | --------- | -------------- | - | --------- | - | - | ------- | 
|                              |  | Principal
 Balance |           | Debt
 Discount |   | Net
 Debt |  
|                              |  |                    |           |                |   |           |  
|                              |  |                    |           |                |   |           |   |   |         | 
|Balance, August 1, 2010       |  | $                  | 1,000,000 |                | $ | (720,687  | ) | $ | 279,313 | 
|Debt issuance                 |  |                    |          |                |   |          |   |   |        | 
|Conversions                   |  |                    |          |                |   |          |   |   |        | 
|Amortization of debt discount |  |                    |          |                |   | 167,946   |   |   | 167,946 | 
|                              |  |                    |           |                |   |           |   |   |         | 
|                              |  |                    |           |                |   |           |   |   |         | 
|Balance, October 31, 2010     |  | $                  | 1,000,000 |                | $ | (552,741  | ) | $ | 447,259 | 
|                              |  |                    |           |                |   |           |   |   |         | 

Event of DefaultOn June 23, 2010, the Company received a NASDAQ Staff
Deficiency Letter. As a result of the NASDAQ Staff Determination 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 subsequent to the three month period ended October 31,
2010, the Company received a waiver from note holders. See
Note 11  Subsequent Events for an update to the NASD ruling.

13

---



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

NOTE 6  LOSS ON DERIVATIVE FINANCIAL INSTRUMENTS

Embedded Conversion Feature of August 2009 Debentures


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


August 2009 Selling Agent Warrants


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


Class A Warrants


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


14

---



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

NOTE 6  LOSS ON DERIVATIVE FINANCIAL INSTRUMENTS
(continued)


five
years and a risk free rate of 2.66%. The assumptions used in computing the fair
value of the embedded conversion feature of the 8% convertible notes are a
closing stock price of $1.14, expected volatility 159.87% over the remaining
contractual life of one year and six months and a risk free rate of 1.18%. The
fair value of the derivative increased by $0 and $6,189,500 during the three
months ended October 31, 2010 and 2009, respectively, which has been recorded
in the statements of operations.


NOTE 7  STOCK-BASED COMPENSATION


2002 Stock Option Plan


On
April 23, 2002, the Board of Directors of the Company adopted the 2002 Stock
Option Plan (the 2002 Plan). Under the 2002 Plan, the Company may grant up to
158 shares of common stock as either incentive stock options under Section 422A
of the Internal Revenue Code or nonqualified stock options. Subject to the
terms of the 2002 Plan, options may be granted to eligible persons at any time
and under such terms and conditions as determined by the 2002 Stock Option
Committee (the Committee). Unless otherwise determined by the Committee, each
stock option shall terminate no later than ten years (or such shorter time as
may be fixed by the Committee) after the date in which it was granted. The
exercise price for incentive stock options must be at least one hundred percent
(100%) of the fair market value of common stock as determined on the date of
the grant. The exercise price for nonqualified stock options may not be granted
at less than eighty-five percent (85%) of the fair market value of the shares
on the date of grant.As of October 31, 2010 and July 31, 2010, there had been
no shares granted under the 2002 Plan.


Stock Incentive Plans


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


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


Stock Incentive Plans


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. During the three months ended October 31, 2010 there was no stock authorized and or issued.


Securities Issued for Services


During
the three months ended October 31, 2009, the Company issued a total of 200,000
shares of common stock to non-employees for services rendered during the period
or to be rendered in future periods. These services were valued at $384,000.
Services to be performed beyond fiscal year 2010, will be amortized and
expensed to general and administrative expenses. The unamortized amount of prepaid
services at October 31, 2010 is $0. During the three months ended October 31, 2010 there was no stock authorized and or issued.


NOTE 8 - MAJOR CUSTOMERS

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

|                    |  |                |         |                           |   |                      |  |                      |  |      |   |  | 
|------------------- |  | -------------- | ------- | ------------------------- | - | -------------------- |  | -------------------- |  | ---- | - |  | 
|Three
 Months Ended |  | Total
 Revenue |         | Sales to Major
 Customers |   | Number of
 Customers |  | Percentage of
 Total | 
|                    |  |                |         |                           |   |                      |  |                      | 
|2010                |  | $              | 526,911 |                           | $ | 490,019              |  | 2                    |  | 93.0 | % | 
|2009                |  | $              | 468,096 |                           | $ | 320,221              |  | 3                    |  | 68.4 | % | 

15

---



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

NOTE 9  CONTINGENCIES


On
September 29, 2010 the Company received a subpoena from the Securities and
Exchange Commission (the Commission) in connection with an investigation of
possible securities law violations by the Company that is a non-public, fact
finding inquiry, which as noted by the Commission should not be construed as an
indication by the Commission or its staff that any violation of the law has
occurred or as an adverse reflection upon any person, entity or security. The
Company has responded to the subpoena and has not received further
correspondence from the Commission with respect to the subpoena as of the date
of this filing. At this time it is not possible to predict the outcome of the
investigation or its impact on the Company.


NOTE 10  COMMITMENTS


Total
rental expense for all operating leases of the Company amounted to
approximately $13,920 and $11,780 during the three months ended October 31,
2010 and 2009, respectively. The Company currently leases its facilities on a
month-to-month basis.


The
Companys Chief Executive Officer is serving under an employment agreement
commencing June 1, 1997 and ending May 31, 2002, which pursuant to its terms,
renews for one-year terms until cancelled by either the Company or the Chief
Executive Officer. His annual base salary as of October 31, 2010 was $417,300
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. During the quarter
ended October 31, 2010 and 2009, the Companys CEO forgave $105,000 and $0 of his salary respectively.


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 October 31, 2010 was $238,200 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. During the quarter
ended October 31, 2010 and 2009, the Companys President and Chief Operating Officer
forgave $19,208 and $0 of his salary respectively.


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.


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 August 2, 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 The NASDAQ Stock Market. 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.

16

---



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

NOTE 11  SUBSEQUENT EVENTS (continued)


In
particular, the December 13, 2010 Panel decision requires 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.

The extended date of January 31, 2011, represents
the full extent of the Panels authority to grant an exception and allow
continued listing while the Company remains deficient in stockholders equity.
The Company is working to timely satisfy the terms of the Panels decision;
however, there can be no assurance that it will be able to do so. Should the
Company be unable to meet the Panels requirements, the Panel will issue a
final determination to suspend trading of the Companys shares on The NASDAQ
Stock Market effective on the second business day from the date of the final
determination.

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 waiver will not be in effect if the Company is
delisted from The NASDAQ Stock Market subsequent to November 30, 2010.

On December 1, 2010, the
Company reduced the conversion price on its February 2010 debentures from $0.60
to $0.30.

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

At
various times subsequent to October 31, 2010, $291,809 of convertible debt and
$35,769 of accrued interest was converted into 1,108,960 shares of common
stock.

NOTE 12  RESTATEMENT OF PREVIOUSLY ISSUED UNAUDITED
CASH FLOW STATEMENT

As discussed in Note 1, the
Company restated the October 31, 2009 Balance Sheet and Statement of Operations
in the July 31, 2010 Form 10-K filing. Below is the previously reported and as
restated statement of cash flows for the three months ended October 31, 2009.

17

---



|                                                                                              |  |                      |           |             |   |             |  
|--------------------------------------------------------------------------------------------- |  | -------------------- | --------- | ----------- | - | ----------- | -
|Condensed Consolidated Statements of Cash Flows for the
 Three Months Ended
 October 31, 2009 |  | Previously
 Reported |           | As Restated |  
|                                                                                              |  |                      |           |             |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                                          |  |                      |           |             |   |             |  
|Net loss                                                                                      |  | $                    | (754,269  | )           | $ | (26,959,204 | )
|Adjustments to reconcile net loss to net cash used in
 operations:                            |  |                      |           |             |   |             |  
|Depreciation                                                                                  |  |                      | 4,002     |             |   | 4,002       |  
|Amortization of deferred compensation                                                         |  |                      | 336,366   |             |   |            |  
|Amortization of deferred financing fees                                                       |  |                      | 31,779    |             |   | 116,461     |  
|Common stock issued to officers, directors and employees                                      |  |                      |          |             |   | 1,411,200   |  
|Common stock issued to pay interest                                                           |  |                      | 6,433     |             |   | 6,433       |  
|Amortization of common stock issued for services                                              |  |                      |          |             |   | 144,735     |  
|Induced conversion cost associated with convertible debt and warrants                         |  |                      | 31,208    |             |   | 31,208      |  
|Amortization of discount of convertible debentures                                            |  |                      | 3,631     |             |   | 305,097     |  
|Stock issued for services to be provided                                                      |  |                      | 384,000   |             |   |            |  
|Loss on Derivative Financial Instrument                                                       |  |                      |          |             |   | 24,550,300  |  
|Changes in assets and liabilities                                                             |  |                      |           |             |   |             |  
|Decrease in accounts receivable                                                               |  |                      | 12,346    |             |   | 12,346      |  
|(Increase) in accounts receivable - other                                                     |  |                      | (7,115    | )           |   |            |  
|(Increase) in prepaid expenses                                                                |  |                      | (345,467  | )           |   | (5,389      | )
|(Increase) Decrease in inventories                                                            |  |                      | 3,346     |             |   | 62,663      |  
|(Increase) in other assets                                                                    |  |                      |          |             |   | (7,116      | )
|(Decrease) increase in accounts payable                                                       |  |                      | (77,950   | )           |   | (77,869     | )
|(Decrease) increase in accrued expenses                                                       |  |                      | (19,468   | )           |   | 3,532       |  
|                                                                                              |  |                      |           |             |   |             |  
|Net cash used in operations                                                                   |  |                      | (391,158  | )           |   | (401,601    | )
|                                                                                              |  |                      |           |             |   |             |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                                          |  |                      |           |             |   |             |  
|Purchase of property and equipment                                                            |  |                      | (32,062   | )           |   | (21,625     | )
|                                                                                              |  |                      |           |             |   |             |  
|Net cash used in investing activities                                                         |  |                      | (32,062   | )           |   | (21,625     | )
|                                                                                              |  |                      |           |             |   |             |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                                          |  |                      |           |             |   |             |  
|Proceeds from issuance of convertible debentures                                              |  |                      | 1,000,000 |             |   | 1,000,000   |  
|Proceeds from note receivable                                                                 |  |                      | 1,607     |             |   | 1,610       |  
|Payments for deferred loan costs                                                              |  |                      | (140,000  | )           |   | (140,000    | )
|                                                                                              |  |                      |           |             |   |             |  
|Net cash provided by financing activities                                                     |  |                      | 861,607   |             |   | 861,610     |  
|                                                                                              |  |                      |           |             |   |             |  
|NET INCREASE IN CASH AND EQUIVALENTS                                                          |  |                      | 438,387   |             |   | 438,384     |  
|CASH AND EQUIVALENTS - BEGINNING OF PERIOD                                                    |  |                      | 27,358    |             |   | 27,358      |  
|                                                                                              |  |                      |           |             |   |             |  
|CASH AND EQUIVALENTS - END OF PERIOD                                                          |  | $                    | 465,745   |             | $ | 465,742     |  
|                                                                                              |  |                      |           |             |   |             |  
|                                                                                              |  |                      |           |             |   |             |  
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                             |  |                      |           |             |   |             |  
|CASH PAID DURING THE PERIOD FOR:                                                              |  |                      |           |             |   |             |  
|Interest expense                                                                              |  | $                    |          |             | $ |            |  
|                                                                                              |  |                      |           |             |   |             |  
|Income Taxes                                                                                  |  | $                    |          |             | $ | 4,957       |  
|                                                                                              |  |                      |           |             |   |             |  
|SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:                                                |  |                      |           |             |   |             |  
|Debt converted to equity                                                                      |  | $                    | 259,206   |             | $ | 259,206     |  
|                                                                                              |  |                      |           |             |   |             |  
|Common stock issued for services to be provided                                               |  | $                    | 384,000   |             | $ | 384,000     |  
|                                                                                              |  |                      |           |             |   |             |  

18

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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.

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

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

19

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Results of Operations (three months ended
October 31, 2010 compared to the three months ended October 31, 2009.

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 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.

Results of Operations

Operating Revenues

The majority of the Companys sales revenue is generated from the sales
of the PDR-2000 Teleprotection products. For the three months ended October 31,
2010 product revenues were $526,911 compared to $468,096 for the same three
months ended October 31, 2009. This increase of $58,815 or 12.6% for our fiscal
first quarter 2011 can mainly be attributed to an increase of approximate
$185,300 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 $72,100 and telemetry equipment sales of $46,300 which
were expected to decline in the coming years.

Sales changes by product type for the three
months period ended October 31, 2010 and 2009.

|                                 |  |      |         |              |  |     |      |  |               |         |          |  |       |   |   |         |   |  |        |  
|-------------------------------- |  | ---- | ------- | ------------ |  | --- | ---- |  | ------------- | ------- | -------- |  | ----- | - | - | ------- | - |  | ------ | -
|Products sold                    |  | 2010 |         | %
 to
 total |  |     | 2009 |  | %
 to 
 total |         | $ change |  | % chg |  
|                                 |  |      |         |              |  |     |      |  |               |         |          |  |       |  
|                                 |  |      |         |              |  |     |      |  |               |         |          |  |       |  
|PDR-2000
 digital teleprotection |  | $    | 457,700 |              |  | 87  | %    |  | $             | 272,400 |          |  | 58    | % | $ | 185,300 |   |  | 68.0   | %
|                                
|PTR-1500
 analog teleprotection  |  |      |        |              |  | 0   | %    |  |               | 19,000  |          |  | 4     | % |   | (19,000 | ) |  | -100.0 | %
|                                
|Telemetry
 equipment             |  |      | 28,400  |              |  | 5   | %    |  |               | 74,700  |          |  | 16    | % |   | (46,300 | ) |  | -62.0  | %
|                                
|Military
 Sales                  |  |      | 26,900  |              |  | 5   | %    |  |               | 99,000  |          |  | 21    | % |   | (72,100 | ) |  | -72.8  | %
|                                
|Spare parts                      |  |      | 11,000  |              |  | 2   | %    |  |               | 3,400   |          |  | 1     | % |   | 7,600   |   |  | 223.5  | %
|                                
|Freights                         |  |      | 4,700   |              |  | 1   | %    |  |               | 996     |          |  | 0     | % |   | 3,704   |   |  | 371.9  | %
|                                
|Discounts                        |  |      | (1,789  | )            |  | -0  | %    |  |               | (1,400  | )        |  | -0    | % |   | (389    | ) |  | 27.8   | %
|                                 |  |      |         |              |  |     |      |  |               |         |          |  |       |   |   |         |   |  |        |  
|                                
|Net Sales
 Revenues              |  | $    | 526,911 |              |  | 100 | %    |  | $             | 468,096 |          |  | 100   | % | $ | 58,815  |   |  | 12.6   | %
|                                 |  |      |         |              |  |     |      |  |               |         |          |  |       |   |   |         |   |  |        |  

20

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

The cost of goods sold for the three months ended October 31, 2010,
amounted to $269,804 as compared to $256,200 for the same three month period
ended October 3, 2009. This $13,604 or 5.3% increase in cost of goods sold can
be attributed to (a) normal volume increase as a result of the 12.6% sales
volume increase, mainly from the PRD-2000, the volume increase in cost of goods
sold were offset by approximately 7.3% due to efficient savings in the production
of the PDR-2000 and product mix change versus prior year, mainly attributed to lower sales in
military items.

Gross profitGross profit for the three month period ended
October 31, 2010 was $257,107 or 48.8% of revenues versus $211,896 or 45.3% of
revenues for the three month ended October 31, 2009. The increase in gross
profit was mainly due to a 68% increase in sales volume for the PDR-2000 for
the three months ended October 31, 2010 over the same three month period in
2009. The increase in sales for the PDR-2000 can be attributed to an increase in
unit sales and higher unit sales pricing which generated an approximately 5%
higher gross profit margin as compared to our fiscal first
quarter 2009. Product mix caused a slight decline of approximately 1.5% for a
net increase in gross profit margin of 3.5%.

Operating Expenses

General and Administrative:
For the three months period ended October 30, 2010, general and administrative
expenses decreased $1,380,271 to $707,582 from $2,087,853 for the three months
period ended October 31, 2009. This decrease of approximately 66% can be
attributed to the following: (a) Compensation expense, which is comprised of
salaries, health insurance, and payroll taxes decreased approximately
$1,553,400 for the three months ended October 31, 2010, to an amount of
approximately $138,200 versus approximately $1,691,600 for same prior year
three month period. The decrease in compensation expense was primarily due to
the issuance of stock to employees which created a noncash expense of
$1,411,200 during the three months ended October 31, 2009 compared to $0 during
the three months ended October 31, 2010. Also during the three months ended
October 31, 2010 salaries and benefits declined approximately $81,200 compared
to the three months ended October 31, 2009 due to the reductions of salaries
from senior management, (b) Professional fees increased approximately $101,900
over the prior year three months period mainly due to legal fees and accounting
fee associated with the restatement of prior filed financial statements. (c)
Stock expenses associated with raising capital decline approximately $40,000
versus the prior three months period and travel and entertainment for first
quarter fiscal year 2011decreased approximately $10,000 as the Company made an
effort to reduce costs.

Research and Development:
For the three month period ended October 31, 2010 research and development cost
were $48,257 an increase of $17,409 versus the prior year total of $30,848.
This increase in our research and development costs can mainly be attributed to
on-going research in new products, and enhancing the current glow worm project.

Selling Expenses:
For the three month period ended October 31, 2010 selling expenses were
$16,784, a decline of $22,019 or 57%. This decline is mainly due to reduced
costs for trade shows and reduced fees paid on commission.

Total Other Income and Expenses
For the three month period ended October 31, 2010, other income and expense was an
expense of $304,468, a decrease of $24,704,171 versus the three months ended
October 31, 2009 expense amount of $25,008,639. This decrease in other income and expense
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 $24,550,300 for the
three months ended October 31, 2009 as compared to $0 for the three months
ended October 31, 2010. Amortization expenses associated with debt discount and
deferred financing fees for the three month period ended October 31, 2010 and 2009
was $247,989 and $421,558 respectfully and declined $173,569 for the three months ended October
31, 2010 versus the prior year three month period.

21

---



Net Income (Loss) Applicable to Common SharesThe Company recorded a net loss of $831,585 for
the three month period ended October 31, 2010, as compared to a net loss of
$26,959,204 for three month period ended October 31, 2009. The decrease in net
loss of $26,127,619 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 $24,550,300 for the three month period ended October 31, 2009. An increase in
gross profit margin of approximately $45,200 also contributed to a decrease in net loss, as well as, reduction in operating expenses of approximately $1,396,846
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 three months ended October 31, 2010 of
($0.12) basic and diluted loss per share compared to a net loss per common
share of ($13.73) basic and diluted loss per share, for the three months ended
October 31, 2009.

Status of Certain Press Releases Issued:On January 27, 2010, the Company announced that it
started production of its GlowWorm Fiber Optic Detector. We initially
produced 100 units of the Glow Worm. Those units along with additional
modified units are being marketed to the electrical utility industry and
broadband communication companies. Initial interest is high. Since this is a
new type of product customers are requesting to field test the Glow Worm
before ordering.

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 is expected to occur in March of
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 originally estimated.

LIQUIDITY AND FINANCIAL CONDITION

We have had recurring losses from operations of $515,516 and $1,945,608
for the three months ended October 31, 2010 and 2009, respectively and used
cash from operations in the amounts of $521,066 and $401,601 for the three
months period ended October 31, 2010 and 2009, respectively. At October 31,
2010, the Company had cash and equivalents of $186,040. On August 13, 2010, an
event of default occurred on our outstanding convertible debentures. Although,
the Company received a waiver from the note holders there can be no assurance
that we will not suffer further events of default and that if we do a waiver
will be obtained from our note holders.

At October 31, 2010, the Company had total current assets of $1,447,924
and total current liabilities of $972,574, resulting in working capital of
$475,350 compared to working capital of $1,508,104 at year ended July 31, 2010.
The Companys current assets consists of $186,040 in cash and cash equivalent,
$462,593 in accounts receivable, $757,729 in inventory and $36,562 in prepaid
expenses. Accounts receivable increased from $67,603 at July 31, 2010 to
$462,593 at October 31, 2010. This increase in our accounts receivable is the
result of significant sales ($526,911) in the three months period ended October
31, 2010.

22

---



LIQUIDITY AND FINANCIAL CONDITION (continued)

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

At various times subsequent to October 31, 2010, $291,809 of
convertible debt and $35,769 of accrued interest was converted into 1,108,960
shares of common stock.

OPERATING ACTIVITIES

Net cash used in operating activities was $521,066 for the three months
period ended October 31, 2010, as compared to net cash used in operating
activities in the amount of $401,601 for the three months period ended October
31, 2009, an increase of $119,465, this increase in use of cash can be
attributed to: (1) lower cash collections in our fiscal first quarter 2011 as
compared to our first quarter 2010, due to the growth of accounts receivable as
a result lower sales in our fiscal fourth quarter 2010. (2) Offsetting the
lower cash collection was an increase in accounts payable resulting in
approximately $195,000 less cash to pay billings versus the prior year first
quarter. (3) The Company also decreased prepaid expenses versus prior year
resulting lower cash spending of approximately $137,000. (4) The remaining
balance was a result of lower cash operating expenses versus the prior year
three month period.

INVESTING ACTIVITIES

Net cash used in investing activities for the three months period ended
October 31, 2010 was $5,889 for the purchase of manufacturing equipment. For the
three months period ended October 31, 2009 net cash used investing activities
was $21,625 also for the purchase of equipment.

FINANCING ACTIVITIES

The Company received no funds from financing activities for the three
months period ended October 31, 2010, as compared to net cash provided from
financing activities of $861,610 provided in same three months period ended
October 31, 2009.

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.

23

---



FINANCING ACTIVITIES
(continued)

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

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

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

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

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

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

On June 18, 2010, Conolog Corporation (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.

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

At various times subsequent to October 31, 2010, $291,809 of
convertible debt and $35,769 of accrued interest was converted into 1,108,960
shares of common stock.

24

---



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.

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.

25

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INVENTORY VALUATIONS, COMPONENTS AND AGING
(continued)

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

WARRANTY

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

INCOME TAXES

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

DERIVATIVE LIABILITY

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

STOCK BASED COMPENSATION

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

FAIR VALUE OF FINANCIAL INSTRUMENTS

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

26

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FAIR VALUE MEASUREMENTS

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

|          |                                                                                                                                                                                                                                                                                                                                    
|--------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Level 1  | 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

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Recently Adopted Accounting Pronouncements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|In May 2008, the FASB issued guidance related to accounting for
 convertible debt instruments that may be settled in cash upon conversion
 (including partial cash settlements). This guidance requires a portion of
 this type of convertible debt to be recorded as equity and to record interest
 expense on the debt portion at a rate that would have been charged on
 nonconvertible debt with the same terms. This guidance is effective for the
 Companys fiscal year beginning August 1, 2009. The adoption of this guidance
 did not have a significant impact on the Companys consolidated financial
 statements.

In June 2008, the FASB issued guidance related to determining whether
instruments granted in share-based payment transactions are participating
securities. Securities participating in dividends with common stock according
to a formula are participating securities. This guidance determined that
unvested shares of restricted stock and stock units with nonforfeitable rights
to dividends are participating securities. Participating securities require the
two-class method to be used to calculate basic earnings per share. This
method lowers basic earnings per common share. This guidance is effective for
the Companys fiscal year beginning August 1, 2009. The adoption of this
guidance did not have a significant impact on the Companys consolidated
financial statements.

In June 2008, the FASB reached a consensus regarding the determination
of whether an instrument (or an embedded feature) is indexed to an entitys own
stock, which is the first part of the scope exception related to accounting for
derivative instruments and hedging activities. This guidance is effective for
the Companys fiscal year beginning August 1, 2009. The Company determined that
the conversion features embedded in its convertible Debentures and certain of
its warrants with price protection provisions are not considered to be indexed
to the Companys own stock, therefore, they do not meet the scope exception and
thus should be accounted for as a liability. During the three and nine months
ended April 30, 2010, the adoption of this guidance resulted in a gain of
$9,054,229 and a loss of $24,674,279, respectively on the Companys derivative
financial instruments.

In June 2009, the FASB issued guidance which stipulates the FASB
Accounting Standards Codification is the source of authoritative U.S. GAAP
recognized by the FASB to be applied by nongovernmental entities. This guidance
is effective for the Companys fiscal year beginning August 1, 2009. The
adoption of this guidance did not have a significant impact on the Companys
consolidated financial statements.

27

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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Recently Issued Accounting Pronouncements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|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 Company is currently
 evaluating the impact of this new accounting guidance on its consolidated
 financial statements.

In January 2010, the FASB issued additional guidance on fair value
measurements and disclosures which requires reporting entities to provide
information about movements of assets among Level 1 and 2 of the three-tier
fair value hierarchy established by the existing guidance. The guidance is
effective for any fiscal year that begins after December 15, 2010, and it
should be used for quarterly and annual filings. The Company is currently
evaluating the impact of this new accounting guidance on its 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 its financial statements.

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

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

The forward-looking statements contained or incorporated in this
document are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 (Securities Act) and Section 21E of the Securities
Exchange Act of 1934 (Exchange Act) and are subject to the safe harbor
created by the Private Securities Litigation Reform Act of 1995. These
statements include declarations regarding our plans, intentions, beliefs or
current expectations.

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 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.

28

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|        |                                    
|------- | -----------------------------------
|ITEM 4. | CONTROLS AND PROCEDURES (continued)

Material Weaknesses in Internal Control over
Financial Reporting

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

Based upon our evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures
were not effective as October 31, 2010, because of the material weaknesses in
internal control over financial reporting as discussed below:

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

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

Changes in Internal Control over Financial
Reporting

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

29

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PART II - OTHER
INFORMATION

Item 1. Legal Proceedings  None.

Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds: Subsequent to the quarter ended October 31,
2010, 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 Rule 506 of Regulation D as promulgated by
the SEC under the Securities Act of 1933, as amended (the Securities Act)
an/or Section 4(2) of 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 of 1933.

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 requires 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.

The extended date of January 31, 2011, represents the full extent of the Panels authority
to grant an exception and allow continued listing while the Company remains
deficient in stockholders equity. The Company is working to timely satisfy the
terms of the Panels decision; however, there can be no assurance that it will
be able to do so. Should the Company be unable to meet the Panels
requirements, the Panel will issue a final determination to suspend trading of
the Companys shares on The NASDAQ Stock Market effective on the second business
day from the date of the final determination.

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 waiver will not be in effect if the
Company is delisted from The NASDAQ Stock Market subsequent to November 30,
2010.

30

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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 pursuant to Section 302 of the Sarbanes Oxley Act.                                      
|31.2            |  | Certification
 of 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                                                                                                                                                                  
|In accordance with the requirements of the Exchange Act, the
 Registrants caused this report to be signed on its behalf by the
 undersigned, thereunto and duly authorized.

CONOLOG CORPORATION

|                         |                                         | 
|------------------------ | --------------------------------------- | 
|Date:
 December 20, 2010 | By /s/
 Robert S. Benou                 | 
|                         |                                         | 
|                         | Robert S.
 Benou                        | 
|                         | Chairman,
 Chief Executive Officer,    
|                         | (Principal
 Executive Officer)          | 
|                         | Chief
 Financial Officer and Treasurer,
|                         | (Chief
 Accounting Officer)             | 

31

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