UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-KSB

|S                                       | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934                                                    
|--------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------
|For the fiscal year ended July 31, 2005
|                                        |                                                                                                                                         
|£                                       | 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
     incorporation or organization) |  | (IRS Employer
     Identification No.) | 
| |                                                                     |  |                                       
| | 5 Columbia Road, Somerville, NJ                                     |  | 08876                                  | 
| | (Address of principal executive office)                             |  | (Zip code)                             | 

Issuers telephone number, including area code:(908) 722-8081

Securities registered pursuant to Section 12(b) of the Act:

|Title of each class           | Name of each exchange in which registered
|----------------------------- | -----------------------------------------
|                              |                                          
|Common Stock, $0.01 par value | NASDAQ Capital Markets                   

|                                                                                                                                                                                                                                                                                                                                                
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Check whether the Issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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.                                 
|YesSNo£                                                                                                                                                                                                                                                                                                                                         
|Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K contained in this form, and no disclosure will be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to the Form 10-KSB.£
|                                                                                                                                                                                                                                                                                                                                                
|The aggregate market value of the voting stock held by non-affiliates of the Registrant based on the closing sale price of $1.51 on October 17, 2005 was $11,208,949.                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                
|The number of shares outstanding of the Registrants common stock outstanding, excluding treasury shares, as of October 17, 2005 was 7,417,847.                                                                                                                                                                                                 



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TABLE OF CONTENTS
PART IItem 1. DESCRIPTION OF BUSINESS
    1Item 2. DESCRIPTION OF PROPERTY
    10Item 3. LEGAL PROCEEDINGS
    10Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    10PART IIItem 5.MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED 
      STOCKHOLDER MATTERS
    11Item 6. MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF 
      OPERATIONS AND FINANCIAL CONDITION
    12Item 7. FINANCIAL STATEMENTS
    17Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON 
    ACCOUNTING AND FINANCIAL DISCLOSURE
    17Item 8A. CONTROLS AND PROCEDURES
    17PART IIIItem 9. DIRECTORS, EXECUTIVE OFFICERS
    19Item 10. EXECUTIVE COMPENSATION, PROMOTERS AND CONTROL PERSONS: 
    COMPLIANCE WITH SECTION 16 (A) OF THE EXCHANGE ACT
    21Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND 
    MANAGEMENT
    22Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    24Item 13. EXHIBITS
    24Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
    26SIGNATURES
    27
FORWARD LOOKING STATEMENTS
This annual report on Form 10KSB contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995, as amended. Forward-looking statements inherently involve
risks and uncertainties that could cause actual results to differ materially from those stated. Such
statements are subject to certain risks and uncertainties, including possible significant variations
in recognized revenue due to customer caused delays in installations and competition from larger
better known, that could cause actual results to differ materially from historical earnings and those
presently anticipated or projected. Furthermore, there can be no assurance that our sales will increase.
The Company does not assume any obligation to update the forward-looking information and cautions
readers not to place undue reliance on any such forward-looking statements, which speak only as of
the date made.
PART I
GENERAL INFORMATION
We are engaged in the design, produce (directly and/or through subcontractors) and distribution of
small electronic and electromagnetic components and subassemblies 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.
Item 1. BUSINESS DEVELOPMENT AND BUSINESS
We were organized in 1968 and were engaged primarily in the design
and manufacture of 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.
By
1980 it became apparent that the military segment of the business was growing while the terminal
viewer segment was a drain on cash and other resources. By the year-end the terminal viewer business
was discontinued and the inventory relating thereto was written off, allowing us to concentrate on
our military business.
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.
Since
the 1980s, we have been an active participant in providing electromagnetic wave filters for
major military programs, such as the Patriot Missile, Hawk Missile and Sea Sparrow Missile. In addition
to these projects, our components are currently used by the military in tanks, the Apache helicopters
and the MK-50 torpedoes.
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
1
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.
Also
in September 1998, we completed a sale/leaseback of our manufacturing facility. This enabled us to
significantly reduce our operating costs and increases our working capital.
In
August 2000, we acquired Independent Computer Maintenance Corporation (ICM), a provider
of installation, maintenance and troubleshooting services for commercial and corporate computer systems
and networks to businesses in the greater New York metropolitan area.
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.
In
October 2002, we ceased operating this business and entered into an Agreement to rescind the Asset
Purchase Agreement pursuant to which we acquired ICM.
In
March 2004, we ceased operating our staffing business. The assets of the wholly-owned subsidiary,
Nologoc, Inc. trading as Atlas Design, were sold.
Products
We
are engaged in the design and production of (i) transducers, which are electro-magnetic devices which
convert electrical energy into mechanical and other forms of physical energy, or conversely convert
mechanical and other forms of physical energy into electrical energy; (ii) digital signal processing
(DSP) systems and electromagnetic wave filters for differentiation among discreet audio and radio
frequencies; (iii) audio transmitters and modulators, for the transmission over telephone lines,
microwave circuits, or satellite, of electrical signals obtained from transducers, data generated
in electronic code form or by computers or other similar equipment (not manufactured by the Company);
(iv) audio receivers and demodulators which are small systems which receive and decode the signals
from the audio transmitters and convert them into digital codes for input into computers, teletypes
or other similar equipment (not manufactured by the Company) or convert such signals into mechanical
or other form of energy, such as opening or closing valves, or starting or stopping a motor; (v)
magnetic networks which are devices that permit the matching or coupling of different
types of communication equipment together or many identical or similar equipment together or onto
telephone or other transmission lines so as not to cause interference; and (vi) analog transmitters
and receivers, which permit the coding/transmission and receiving/decoding of a constantly variable
data, such as the water level in a tank, pressure in a pipe or temperature, by actually displaying
the exact information at the receiving end in digital form for storing in a computer or other devices,
or by physically displaying the information in a visual fashion such as a numerical readout or meter,
and (vii) multiplexer supervisory controls, which enable callers with high volumes of supervisory
data to transmit on fewer phone lines.
Such products are used in radio and other transmissions, telephones and telephone exchanges, air and
traffic control, automatic transmission of data for utilities, tele-printing of
2
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.
Present Status/Business Product Description
We are engaged in three basic market segments:
(A)    Commercial Sales(Under the trade name INIVEN (a wholly ownedDivision of Conolog))
- Direct sales to end-users
- Sales to system assemblers
- Sales to contractors/installers
(B)Military Sales
- Direct contract sales to the military
- As subcontractor to systems producers- Foreign governments
(C) Commercial Sales
- As Manufacturing Subcontractor
to Systems Producers.
(A) Military Sales
Military sales are primarily for our electromagnetic wave filters used in military
radios, vehicles (cars, trucks or tanks), portable (backpack), special signaling equipment and exchanges
(as in field command posts), weapon/missile guidance and control (Patriot missile, Tomahawk, Pave-Paws),
torpedo active signal recognition and differentiation mounted in the nose cone of the torpedo (MK-30,
Captor, MK-50 torpedoes), ship to ship teletype signaling filters used in deployment of ships (UCC-1
and UCC-4 systems) as well as many other signaling applications where accurate electromagnetic frequency
control is required.
Our
military sales are received through independent sales representatives who are paid a commission.
B) Commercial INIVEN Sales and Products
INIVEN equipment is designed around four (4) core product
groups:
3
(1)
Protective Tone Relay (PTR) and Protective Digital Relay (PDR) TeleprotectionSeries Communications Terminal, which includes the PTR-1000, PTR-1500 and PDR-2000.(2)
  Audio Tone & Telemetry Equipment (Audio Tone Control, Telemetering and Data Transmission Systems), which includes Series 98, 68, 40 and GEN-1.(3)
  Multiplex Supervisory Control System(4)
  Communication Link Multihead Fiber Optic Couplers and Industrial Grade 12 Baud Modems.(1)
PDR Teleprotection SeriesThe PDR-2000 is designed as a state of the art digital protection terminal. The PDR-2000 operates over 56/64 KBPS channel, G.703 or fiber optics. Combined with the hardwire CM-100 the PDR 2000 can operate seamlessly over fiber optics with existing substation equipment.(2)
    PTR Teleprotection SeriesThis product is designed as a dual system for use exclusively by electric power generators (electric
utilities and co-generators) in order to protect their transmission and distribution lines. The PTR-1000,
by monitoring the output signal of the transmission equipment in less than one hundredth of a second
protects the transmission and distribution lines.
The PTR-1000 is installed in pairs, one unit at each end of the line. Each unit is connected and in
constant communication with the other, as they continuously monitor the line for faults. In the event
of a fault occurring (such as a downed line or a short circuit) at either end, and when confirmed
by the receiving PTR-1000 unit, the line is immediately isolated for shut down, averting costly damage
and downtime.
The PTR-1000 system is composed of a transmitter, dual receivers, a logic card (brain center and controller
of the system), relay module, line interface module and power supply module. The transmitters at
each end are independent and transmit (continuously) the status (information being monitored) at their end of the line.
The
PTR-1500, is a quad system and performs as 2 duals or 4 singles with many unique features such as
multiple line operation, event recording with date stamp with optional analog or digital transmission
modes including optic fiber interface.
The PTR and PDR Teleprotection Series are designed for global use by electric utilities
and any entity generating power for its own consumption with resale of surplus power to an electric
utility, such as cities, municipalities, cooperatives and large corporations that find it more economical
to generate their own electricity.
The PDR-2000, PTR-1500 and the PTR-1000 target market is:
New installations; i.e., new transmission lines, new distribution segments, for utilities and co-generators.
4
Existing installations not properly protected, improving efficiency and reducing down time.Existing installations for upgrading to PTR-1500/1000 and PDR-2000 technology, again improving efficiency
and down time.Sales efforts for the PDR and PTR series are presently being conducted by the Companys Marketing
executives, through independent manufacturers representatives and through distributors. Sales
are targeted primarily to the largest utilities and co-generators.According to McGraw-Hill, Inc. Electrical World (Electric Utilities of the United States), in the United
States alone, there are over 500 large entities generating electricity. They are:Investor-owned
    Municipal Systems 
    Cooperative Systems
    Federal, State and District systems.(3) Audio Tone and Telemetry Equipment
For many years there has been a need for a modularly independent system that would permit a user, from
a distance, to control functions such as opening a valve, starting a motor, shutting down a compressor,
changing a traffic signal, control landing lights at an airport, activate a hazard warning on a highway,
and in return allow the user to receive information, such as the liquid level in a tank, the pressure
in a pipe, the rate of flow out of a compressor, the flow of traffic, the status of a traffic light,
airport lights, or confirmation that a command was performed. Such information is transmitted and
received and the control functions are performed from a distance utilizing telephone lines, microwave
link or direct wire.
These applications, by their nature, can be accomplished with slow speed signaling systems composed
of a transmitter on one end and a receiver on the other to carry out the necessary instructions provided
by the transmitter. Each set (transmitter/receiver combination) is called a channel.  Because of the slow speed, up to 30 channels could be made to transmit and
receive signals, in either direction on a single telephone line, microwave link or direct-wired line
at the same time. This parallel transmission permits each transmitter/receiver pair to be independent
of all the others.
This product segment includes the first generation equipment, known as GEN-1, followed by later generations
which include technological improvements and programmable capabilities to include:
GEN-1 Series
      - First generation with electromagnetic modules and first generation programmable
      modules without electro-magnetic modules.98
      and 68 Series - The latest generation applies DSP and microprocessor
      technology with full programmability, in the field or at the factory.40
      Series  - Designed to function with the 98 or 68
      series; transmits and receives variable analog data.5
GEN-1 and GEN-1 Programmable Series
The
diversity of applications for this equipment makes it available for a wide range of users who are
not restricted to a single industry. Typical industrial uses include: the measurement of water and
gas, waste water, gasoline, oil, traffic, and electricity. Typical users include: utilities, co-generators,
airports, navy yards, telephone companies, paper and pulp processors and wherever remote control
and data acquisition is required.
Because
of the ease of use and installation, GEN-1 type equipment is used in the United States by a
spectrum of users. Since our line has a distinct mechanical configuration, we designed our GEN-1
Programmable units and other improvements as replacements for existing units. These account for approximately
12% of the Companys commercial sales. The Companys line of GEN-1 equipment is extensive
and provides the user with the ability to perform multiple control functions, status monitoring as
well as continuous variable data monitoring, such as a level in a tank or pressure gauge.
Sales
for this line are primarily for the replacement of existing installations and for expansion of these
installations where it would not be economical to install the latest technology, which would not
be mechanically compatible.
Sales
to this market are made in the same manner as the PTR-1000 market except that manufacturers
representatives specialize in selling to this diverse market.
98, 68 and 40 Series represent our latest designs in the audio
tone equipment utilizing the more advanced DSP technology, which provides high accuracy and long-term
stability. These features have allowed the Company to greatly improve the scope, density and number
of functions that can be performed on a single phone line, microwave link or direct line.
Sales
of these products are made by the same agents who sell our GEN-1 products, but are also directed
to encompass more sophisticated users with larger amounts of data and control points. The mechanical
configuration of the 98 series is more compact, permitting more equipment in a given
space, while performing many more functions when it is connected to the 40 Series. The
68 Series is the 98 Series repackaged mechanically specifically for customers
with older systems permitting them to upgrade their systems to DSP technology. The 40
Series, when connected to the 98 or 68 in the same chassis, permits the continuous
monitoring of variable data.
Typical
applications for these products include transmission of the variable data (such as volume, temperature,
pressure and moisture) for water, gas, industrial gases, oil, gasoline, transportation equipment
and telephone exchanges, and for use at airports, tunnels and bridges and for security and electricity
systems.
(4) Multiplex Supervisory (IM) Control System
This product is a response to the cost and scarcity of dedicated phone lines (connections whereby the
phone link is dedicated to one subscriber), and enables customers with high volumes of supervisory
data (where many functions are monitored from a single site) to transmit data on fewer phone lines
(i.e., with more data per channel, up to a maximum of 30 channels per line).
6
Using
the 98 DSP Series as its communications link, the Company designed the Multiplexer Supervisory
Control System to handle 8 times the normal capacity per channel. The microprocessor-based system
allows a single telephone line to handle up to 900 data inputs.
This product line, because of its data density capability, may be utilized for a very broad range of
applications. This product has only recently been introduced and the Company sales efforts for it
are being conducted through its existing independent manufacturers sales representatives.
(5) Fiber Optic Link and Data Modem
The
expansion of fiber lines by our customers and their need to switch equipment from phone lines to
fiber prompted us to design and introduce a fiber-optic-coupler line to interface with the many different
fiber heads. In addition to complete data interface couplers we launched a series of 1200 Baud Modems
(Industrial Grade) for operation under the same environmental specifications in line with our products.
OUR STRATEGY
Our strategy is to develop new commercial markets by continuing to develop
new products and enhance existing products to improve both its market share and competitive position.
Growth in commercial sales is expected to come through internal growth of existing products, new
product introductions and the expansion of regional markets to meet the growing needs of its
customers for more sophisticated and comprehensive products and services.
MARKETING AND SALES
In general, the Companys products are marketed through telemarketing
and customer contacts by our direct sales force and through independent manufacturing sales representatives
and distributors.
MILITARY
- We market our military products directly and through independent manufacturing sales representatives.
COMMERCIAL
  - We market the PTR-1000, PTR-1500, PDR-2000 and all of our INIVEN products
  to utilities by means of our Sales personnel, through independent manufacturers
  representatives, and through distributors, focusing mainly on the largest utilities
  and co-generators. The long sales cycle of our systems is the result of rigorous
  utility testing in addition to many months of field operations in conjunction
  with existing equipment at the utilitys substations. In the United States
  alone there are over 500 large entities generating electricity that are identified
  as investor-owned, municipal systems, cooperative systems and federal, state
  and district systems.
We
market the Gen-1 and Gen-1 Programmable Series, as well as the 98 Series, 68
Series and 40 Series, in the same way as the PTR-1000 except that the manufacturers representatives
used by the Company specialize in selling to the diverse markets that utilize such products.
COMPETITION
The
market for our products and staffing services is very competitive. There are several companies engaged
in providing the services and in the manufacturing the products of the type
7
produced by us, most of which are substantially larger and have substantially greater name recognition
or greater financial resources and personnel. The major competitive factors include availability
of personnel, product quality, reliability, price, service and delivery. Competition is expected
to continue and intensify. The market is also characterized by rapid technological changes and advances.
We would be adversely affected if our competitors introduced technology superior products or offered
these products and services at significantly lower prices than our products.
LARGEST CUSTOMERS
Sales
to our major customers during fiscal 2005 (Bonneville Power Authority, U.S. Military) totaled $ 168,150
and $ 174,121, respectively (totaling 30% and 32% of all sales, respectively. Sales to our major
customers during fiscal 2004(Bonneville Power, Tucson Power) totaled $220,124 and $194,560,
respectively (totaling 26% and 23% of all sales, respectively). None of these customers has or had
any material relationship other than business with the Company.
INVENTORYRaw Materials
We believe that we have adequate sources of raw materials available for use in our business. Our products
are assembled from a variety of standard electronic components, such as integrated circuits, transformers,
transistors, passive components (i.e., resistors, capacitors and inductors), diodes and assorted
hardware, such as, printed circuit boards, connectors and faceplates. We are not dependent upon any
single supplier. We also purchase a number of other electronic components and sub-assemblies from
various suppliers. There has been no material increase in the cost of most raw materials and we do
not foresee a significant shortage of raw materials in the future.
In
the past, we manufactured and held in our inventory finished products pursuant to the military specifications
and based upon the military forecast for future quantities and delivery schedules. Widespread military
procurements were discontinued as a result of the end of the cold war and the downsizing of the military
establishment. As a result, we no longer manufacturer military products in advance. Rather, we only
schedule production as purchase orders are received.
MANUFACTURING
The Company currently rents approximately 7,000 square feet of the facility
located at 5 Columbia Road, for a combination of manufacturing and office space. The Company assembles,
under normal workload conditions, the product it sells, however, to accommodate the peak demands
that occur from time to time we can engage a number of subcontractors to assemble boards to our specifications.
All assemblies, however, are inspected and fully tested by the Companys quality, engineering
and testing departments. We maintain test equipment and every product is burned-in (i.e., each
product is run at full power for 48 hours) and tested prior to shipment.
WARRANTY AND SERVICE
We provide a twelve-year warranty on our products, which covers parts
and labor. The Company, at its option, repairs or replaces products that are found defective during
the warranty
8
period providing proper preventive maintenance procedures have been followed by customers. Repairs
that are necessitated by misuse of such products are not covered by our warranty.
In cases of defective products, the customer typically returns them to
our facility in Somerville, New Jersey. Our service personnel then replace or repair the defective
items and ship them back to the customer. Generally all servicing is completed at our plant 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.
RESEARCH AND DEVELOPMENTNew Products
During
fiscal 2004-2005, we introduced CM-100, first of its kind, direct substation hardened communication
consolidator that fills the existing gap in substation communications. The hardwired CM-100 will
allow our existing products, including the PDR-2000, to operate seamlessly over fiber optics together
with existing substation equipment. We plan to commerce deliveries of the CM-100 by December 2005.
During fiscal 2000-2001, we invested approximately $25,000 to complete
the accessory modules of the PTR-1500 and extend the range of our Multiplexer products. During fiscal
1999-2000 we invested approximately $1,705,257 for product development and amortization of product
costs.
During fiscal 2003-2004 we proceeded with the design and testing of the PDR-2000 8 channel digital
transfer trip communications product. During fiscal 2001-2002 we invested approximately $774,757
to complete its design of the PDR-2000, eight-channel digital transfer trip communications product.
The Company also developed a new platform for its GEN1 products allowing for its use by the Canadian
utilities.
PATENTS AND TRADEMARKS
We
do not have any patents covering any of our present products. We use the trademark INIVEN for our
commercial products. We believe that such trademark is recognized in our industry. We believe that
our prospects are dependent primarily on our ability to offer our customers high quality, reliable
products at competitive prices rather than on our ability to obtain and defend patents and trademarks.
We do not believe that our INIVEN trademark is of material importance to the Companys business.
GOVERNMENTAL REGULATION
Our
manufacturing facilities are subject to numerous existing and proposed Federal and State regulations
designed to protect the environment, establish occupational safety and health standards and cover
other matters. We believe that our operations are in compliance with existing regulations and we
do not believe that such compliance has had or will have any material effect upon our capital expenditures,
earnings or competitive position. With respect to military sales, we are not subject to any special
regulations. The products manufactured are done so in accordance with accepted commercial practices.
9
EMPLOYEES
As
of July 31, 2005, we employed 13 persons on a full-time basis, including 2 in management, 2 in sales,
1 in clerical, 1 in accounting, 1 in purchasing, 3 in engineering and 3 in production. We have enjoyed
good labor relations.
None
of our employees are represented by a labor union or bound by a collective bargaining agreement.
We have never suffered a work stoppage. We believe our future success will depend, in part, on our
continued ability to recruit and retain highly skilled management, marketing and technical personnel.
Item 2.  DESCRIPTION OF PROPERTY
Our
principal executive offices are located at 5 Columbia Somerville, New Jersey. The space consists
of approximately 7,000 square feet of which approximately 5,000 square feet is dedicated to manufacturing,
production and testing and approximately 2,000 square feet is dedicated to administrative and storage
needs. Our current monthly rent expense is $ 4,600.The executive office houses both the manufacturing
division and the temporary staffing division. In the opinion of management, the space is adequately
covered by insurance.
Item 3.  LEGAL PROCEEDINGS
NoneItem 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NA
10
PART II
Item 5.    MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET PRICE FOR COMMON STOCK AND CLASS A WARRANTS
Our Common Stock is traded on the Nasdaq Capital Market, under the symbol CNLG.
The following table sets forth, for the periods indicated, the high and low prices of the Companys
Common Stock traded on the Nasdaq Capital Market for 2005 and 2004.
Common StockFiscal Year 2005
    High
    
    LowFirst Quarter
    6.61
    
    1.41Second Quarter
    6.30
    
    3.40Third Quarter
    4.29
    
    1.50Fourth Quarter
    2.07
    
    1.46Common StockFiscal Year 2004
    High
    
    LowFirst Quarter
    1.45
    
    .55Second Quarter
    1.25
    
    .73Third Quarter
    8.77
    
    .60Fourth Quarter
    7.88
    
    1.65(b)           As of July 31, 2005, the Companys
Common Stock was held by approximately 744 shareholders of record. Our transfer agent is Continental
Stock Transfer & Trust Company, with offices at 17 Battery Place, 8th floor, New York, New York, telephone number (212) 509-4000. As transfer agent for our shares of common
stock the transfer agent is responsible for all record-keeping and administrative functions in connection
with the common shares of stock.
(c)           Dividends. Holders of Common Stock
are entitled to receive such dividends as may be declared by the Board of Directors of the Company.
To date, the Company has neither declared nor paid any dividends on its Common Stock or on its Preferred
A or Preferred B shares. The Company anticipates that no such dividends will be paid in the foreseeable
future. Rather, the Company intends to apply any earnings, if any, to the expansion and development
of its business. Any payment of cash dividends on any of its securities in the future will be dependent
upon the
11
future earnings of the Company, including its financial condition, capital requirement and other factors,
which the Board of Directors deems relevant.
Item 6.  MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Subsequent to July 31, 2004, (1) the remaining principal balance of $ 1,094,000 from the issuance of
convertible debentures during the fiscal year ended July 31, 2004, was converted into 1,032,075 common
shares. (2) Additionally, warrants expiring April 26, 2011 were exercised resulting in the issuance
of 270,000 common shares in exchange for $ 429,300.
On
July 29, 2004, the Company entered into a subscription agreement with certain investors to issue
and sell in a private placement exempt from the registration requirements of the Securities Act of
1933, as amended. Pursuant to the subscription agreement the Company sold to the investors 479,000
shares of its common stock and warrants to purchase 200,000 shares of the Companys common stock
at a price of $1.84 per share, which expire on July 30, [2029] and received gross proceeds of
$688,500 and net proceeds of $598,995 before deducting attorneys fees, printing fees, filing
fees and other miscellaneous fees and expenses related to the private placement. The warrants were
valued using the Black-Scholes option valuation model with a resulting allocation of the aggregate
proceeds from the subscription attributable to the warrants of $399,401. The following assumptions
were utilized to value the warrants: price per share of common stock of $1.84; expected life of five
years; expected volatility of 149%; a risk free interest rate of 3.7%; and an expected yield of 0.0%.
On February 15, 2005 the 200,000 warrants were exercised and the Company received proceeds of $ 367,500.
On February 18, 2005, the Company entered into a subscription agreement with certain investors to issue
and sell in a private placement exempt from the registration requirements of the Securities Act of
1933, as amended. Pursuant to the subscription agreement, the Company sold to the investors 1,369,355
shares of its common stock and warrants to purchase 958,549 shares of its common stock at a price
of $1.25, which expire on August 18, 2010 and received gross proceeds of $4,245,000 and net
proceeds of $3,710,650 before deducting attorneys fees, printing fees, filing fees and other
miscellaneous fees and expenses related to the private placement.
On July 19, 2005, the Company entered into a subscription agreement with certain investors to issue
and sell in a private placement exempt from the registration requirements of the Securities Act of
1933, as amended. Pursuant to the subscription agreement, the Company sold to the investors 1,200,000
shares of its common stock and warrants to purchase 1,440,000 shares of its common stock at a price
of $1.6892 per share, which expire on January 19, 2011 and the Company received gross proceeds of
$1,500,000 and net proceeds of $1,350,000 before deducting attorneys fees, printing fees, filing
fees and other miscellaneous fees and expenses related to the private placement.
RESULTS OF OPERATIONS2005 Compared to 2004Product
revenue for the fiscal year ended July 31, 2005 totaled $549,222 a decrease of 42.9% or $413,786
from $963,008 reported for fiscal year ended July 31, 2004. The Company attributed the decrease in
product revenue to delayed and extended deliveries. Subsequent to the
12
events of September
  11, 2001, utilities were required to upgrade security on newly developed products
  such as the PDR-2000 system. During the fourth quarter ended July 31, 2005 a
  substantial number of PDR-2000 systems, which had been shipped and invoiced
  in the third quarter ended April 30, 2005, were returned by the utilities for
  software upgrades to conform to these standards. Consequently the Company issued
  credits to these utilities, producing the effect of a net reduction in revenues
  for the 12 months ended July 31, 2005 when compared to the 9 months ended April
  30, 2005. This extensive re-design and testing resulted in extended delivery
  dates to customers. The Company also saw a decrease in military contract orders.
Product
cost for the fiscal year ended July 31, 2005 totaled $494,605 a decrease of 45.8% or $418,956 from
$913,561 reported for fiscal year ended July 31, 2004. The Company attributes the decrease in product
cost as a percentage of sales, a direct relation to the decrease in sales orders.
Gross
profit for products for the years ended July 31, 2005 and July 31, 2004 totaled $54,617 and $49,447,
respectively, representing 10.0% and 5.1% of product revenue. The increase in gross profit for products
is attributed to the product mix and outsourcing.
General and Administrative expenses for the years ended July 31, 2005 and July 31, 2004 totaled $1,950,289
and $774,919, respectively. The Company attributed the increase of $1,175,370, in general and administrative
expense to sales and marketing efforts and the hiring of additional sales representatives.
Research
and development expenses for the fiscal year ended July 31, 2005 increased $ 83,354 over fiscal 2004
to $ 177,338 resulting in upgrades to the PDR 2000, a high speed communications system for use in
electric power transmission pilot protection schemes, and the development of a new CM-100 product
were completed during the year.
The Companys interest income for the fiscal year ended July 31, 2005 totaled $58,154 compared
to $7,034 for fiscal year ended July 31, 2004. The totals for fiscal years 2005 and 2004 include
interest income derived from the Companys interest bearing accounts through several banks.
The Companys interest expense for the fiscal year ended July 31, 2005 totaled $23,371, compared
to $ 1,220,960 for fiscal year ended July 31, 2004. The companys interest expense for fiscal
2004 includes $ 1,200,000 of detachable warrants issued with a convertible debt having a beneficial
conversion option. The value assigned to these warrants was recorded as interest expense and not
amortized.
As
a result of the foregoing, the Company reported a net loss from continuing operations of $ 2,987,329
or $ .59 per share for fiscal 2005, compared to a net loss from continuing operations of $ 6,275,886
or $ 4.08 per share for fiscal 2004.
The
net loss from discontinued operations for fiscal year ended July 31, 2004 totaled $222,404. The discontinued
operations were a result of the sale of the Companys Atlas Design subsidiary. The decision
to sell the component was based on the intensely competitive and highly fragmented nature of the
placement services business.
2004 Compared to 2003
(Comparison does not include Atlas Design, which provided placement services, was sold during the fiscal
year 2004 and is reported as a discontinued operation at July 31, 2004.)
13
Product
revenue for the fiscal year ended July 31, 2004 totaled $963,008 an increase of 59.4% or $358,744
from $604,264 reported for fiscal year ended July 31, 2003. The Company attributed the increase in
product revenue to increased orders for its Series PTR-1500 high speed communications system.
Product
cost for the fiscal year ended July 31, 2004 totaled $913,561 an increase of 159% or $561,336 from
$352,225 reported for fiscal year ended July 31, 2003. The Company attributes the increase in product
cost to the increase in sales of the PTR-1500 and to the write down of additional obsolete inventory
in the amount of $ 263,700.
Gross
profit for products for the years ended July 31, 2004 and July 31, 2003 totaled $49,447 and $252,039,
respectively, representing 5.1% and 41.7% of product revenue. The decrease in gross profit for products
is attributed to the product mix and the additional write down of obsolete inventory.
Selling, General and Administrative expense for the years ended July 31, 2004 and July 31, 2003 totaled
$1,522,714 and $1,136,061, respectively. The Company attributed the increase of $ 386,653 in selling,
general and administrative expense to a higher commission expense, additional trade show costs and
increased professional fees due to compliance with increased regulations under the Sarbanes-Oxley
Act.
Research
and development expenses for the fiscal year ended July 31, 2004 totaled $177,338. The development
of the PDR 2000, a high speed communications system for use in electric power transmission pilot
protection schemes, was completed during the year.
The Companys interest income for the fiscal year ended July 31, 2004 totaled $7,034 compared
to $13,711 for fiscal year ended July 31, 2003. The totals for fiscal years 2004 and 2003 include
interest income derived from the Companys interest bearing accounts through several banks.
The decrease in interest income reflects the companys proactive purchasing policy of seeking
benefits through purchasing agreements.
The Companys interest expense for the fiscal year ended July 31, 2004 totaled $1,220,960, compared
to $ 17,432 for fiscal year ended July 31, 2003. The companys interest expense for fiscal 2004
includes $ 1,200,000 of detachable warrants issued with a convertible debt having a beneficial conversion
option. The value assigned to these warrants was recorded as interest expense and not amortized.
The Companys interest expense for fiscal 2003 was due to interest payments on the Companys
line of credit through Unity Bank; the maturity date of this line of credit was December 17, 2003.
As
a result of the foregoing, the Company reported a net loss from continuing operations of $ 6,275,886
or $ 4.08 per share for fiscal 2004, compared to a net loss from continuing operations of $ 1,256,405
or $ 1.38 per share for fiscal 2003.
The
net loss from discontinued operations for fiscal year ended July 31, 2004 totaled $222,404 and $
124,708 for fiscal year ended July 31, 2003. The discontinued operations were a result of the sale
of the Companys Atlas Design subsidiary. The decision to sell the component was based on the
intensely competitive and highly fragmented nature of the placement services business.
LIQUIDITY AND CAPITAL RESOURCES
14
Working
capital at July 31, 2005 was $5,281,191 compared to $285,360 at year ended July 31, 2004. The increase
in the working capital is attributable to the issuance of common stock for cash.
Accounts receivable have decreased from $148,171 at July 31, 2004 to $ 89,194 at July 31, 2005. This
decrease of $58,977 is the result of decreased sales during the 4th quarter.
The
Company expects to meet its cash requirements for the next twelve months through existing cash balances
and cash generated from operations. In addition, the Company believes that it can obtain financing
from institutional investors secured by its assets, if necessary.
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 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 judgement 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.
Income 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 collectivity of our accounts receivable.
Management specifically analyzes historical bad debts, customer credit worthiness, current economic
trends and changes
15
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 the lower cost or market. Determined by a first-in, first-out (FIFO)
method.
The Companys products are used in radio and other transmissions, telephone and telephone exchanges,
air and traffic controls, automatic transmission of data for utilities, tele-printing of transmission
data such as news and stock market information and for use by electric utilities in monitoring power
transmissions lines for faults and/or failures.
The Company currently manufactures and supports over 400 products and assemblies that have been in
the market place since 1970. The Companys inventory represents approximately 10,000 different
components and 2,500 assemblies.
The Company presents its inventory in three categories, Finished Goods, Work-in-Process and Raw Materials.
Finished Goods represents products that have been completed in connection with specific orders and
are awaiting shipment. Finished Goods can consist of produces like the PDR-2000, PTR-1500 and 1000,
Gen 1, 98 and 68 series. Work-in-Process represent components that have been requisitioned from the
warehouse and are being assembled in the assembly areas. Depending on the configurations required
by a customer, products are completed and tested within 8 to 10 business days. Raw Materials represent
components in their original packaging stored in a secured warehouse area, and may consist, in part,
of Face plates, PC boards, Digital screen assemblies, Guide rails, Capacitors, Terminals, Power supplies,
Process ships, Chassis and racks,Relays, Keypads and Resistors.
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.
Every component, regardless of age, has been purchased to meet the above criteria and may be used in
any and all above said assemblies. Management believes that this inventory, which is minimally adequate,
is required to implement the Companys commitments to military requirements for present and
delivered orders.
The Company, together with its independent auditors, following inventory analysis and repeated annual
testing, established a 3-year rule for maintaining inventory, which requires a write-down policy
for inventory parts depending on their age. The inventory is tested annually applying its 3-year
rule and the Company classifies as current assets only that amount of inventory it expects to realize
in the next one-year operating cycles, the balance of the inventory is classified as non-current.
The non-current portion of the inventory consists of the same or like components as the current portion,
however, the Company does not project these components being used in production in the next fiscal
period. The Company expects to realize the non-current portion of the inventory through its normal
sales activity over the next two fiscal years. Any parts which have not been used for 3 years are
valued at zero. Any parts, written down to a zero value under
16
the 3-year rule, are maintained in inventory to satisfy the requirements under our long-term warranty
programs.
While our inventory value at July 31, 2005 was approximately $ 1.8 million, the total of actual parts
held in inventory exceeds $ 4.5 million.
Warranty
The Company provides a twelve-year warranty on its 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.
Income Taxes
Income
taxes are provided for the tax effects of transactions reported in the financial statements and consist
of taxes currently due plus deferred taxes related primarily to differences between the bases of
assets and liabilities for financial and income tax reporting. The deferred tax assets and liabilities
represent the future tax return consequences of those differences, which will either be taxable or
deductible when the assets and liabilities are recovered or settled. Deferred taxes also are recognized
for operating losses that are available to offset future federal and state income taxes.
Item 7.   FINANCIAL STATEMENT
The
financial statements of Conolog Corporation, together with notes and the Independent Auditors Report,
are set forth immediately following Item 14 of this Form 10-KSB.
Item 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On September 13, 2004, Rosenberg Rich Baker Berman & company resigned and provided written notice
to the Company that the auditor-client relationship had ceased. The Company filed a Form 8-K wherein
it stated: The reports of Rosenberg Rich Baker Berman & Company on the consolidated financial
statements of the Company and its subsidiaries for the Companys last two fiscal years did not
Contain an adverse opinion or a disclaimer of opinion. On September 21, 2004, the Company engaged
Bagell, Josephs, Levine & Company, LLC as the independent accountant for the Registrant to audit
the Companys financial statements.
Item 8A. CONTROLS AND PROCEDURES
The
Company maintains disclosure controls and procedures designed to ensure that the information the
Company must disclose in its filings with the Securities and Exchange Commission is recorded, processed,
summarized and reported on a timely basis. The Companys Chief Executive Officer, Chief Financial
Officer and its Chief Operating Officer have reviewed and evaluated the Companys disclosure
controls and procedures as defined in Rules 13a-15(e)
17
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 (the Evaluation Date). Based on such
evaluation, such officers have concluded that, as of the Evaluation Date, the Companys disclosure
controls and procedures are effective in bringing to their attention on a timely basis material information
relating to the Company required to be included in the Companys periodic filings under the
Exchange Act.
There have not been any changes in the Companys internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the Companys most
recently completed fiscal quarter that have materially affected, or are reasonably likely to materially
affect, the Companys internal control over financial reporting.
18
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A)
OF THE EXCHANGE ACT
The
following table sets forth certain information regarding the officers and directors of the Company
as of October 27, 2005.
Name
    Age
    
    PositionRobert S. Benou
    71
    
    Chairman, Chief Executive Officer, Chief FinancialOfficer and DirectorMarc R. Benou
    38
    
    President, Chief Operating Officer, Secretary and
    DirectorLouis S. Massad
    68
    
    DirectorEdward J. Rielly
    38
    
    DirectorDavid M. Peison
    38
    
    DirectorThomas Fogg
    68
    
    Officer, Vice President-EngineeringRobert
S. Benou has been the Companys Chairman and Chief Executive Officer since May 1, 2001. He is
also the Companys Chief Financial Officer. From 1968 until May 1, 2001, he served as the Companys
President. Mr. Benou is responsible for new product development and supervision of sales and marketing.
From June 2001 until August 2005, Mr. Benou served as a director of Henry Bros. Electronics, Inc.
(formerly known as Diversified Security Solutions, Inc.), a publicly held company that is a single-source/turn-key
provider of technology-based security solutions for medium and large companies and government agencies.
Mr. Benou is also a member of the Board of Directors of eXegenics Inc. The common stock of eXegenics
Inc. is traded on the OTC Bulletin Board. Mr. Benou is a graduate of Victoria College and holds a
BS degree from Kingston College, England and a BSEE from Newark College of Engineering, in addition
to industrial management courses at Newark College of Engineering. Robert S. Benou is the father of Marc R. Benou.
Marc
R. Benou has been the Companys President and Chief Operating Officer since May 1, 2001. Mr.
Benou joined the Company in 1991 and is responsible for material purchasing and inventory control.
From March 1995 until May 1, 2001, he served as Vice President. Mr. Benou has been on the companys
Board and has served as the Companys assistant secretary since March 1995. Mr. Benou attended
Lehigh and High Point University and holds a BS degree in Business Administration and Management.
Marc R. Benou is the son of Robert S. Benou, the Companys Chairman and Chief Executive Officer.
Louis
S. Massad has been a Director of the Company since April 1995. Mr. Massad was Chief Financial Officer
and a Director of Henry Bros. Electronics, Inc. (formerly known as Diversified Security Solutions,
Inc.). from 2000 until August 2003. From 1997 to 2000, Mr. Massad was a consultant to Diversified
Security Solutions, Inc. From 1986 to 1997, Mr. Massad was a Vice President, Chief Financial Officer
and Director of Computer Power Inc. Mr. Massad holds a BS and MS degree from Cairo University (Egypt)
and an MBA from Long Island University, New York.
19
Edward
J. Rielly has been a Director of the Company since January 1998. Mr. Rielly is a Senior Application
Developer with Household International, a financial corporation. From March 2000 to November 2001,
Mr. Rielly was a Senior Consultant with Esavio Corporation. From February 1998 to February 2000,
Mr. Rielly was an Application Developer with Chubb Corporation. From 1993 to 1998, Mr. Rielly was
an Application Developer with the United States Golf Association. Mr. Rielly is a graduate of Lehigh
University and holds a BS in Computer Science.
Thomas
R. Fogg joined the Company in 1976 as Chief Engineer responsible for analog and guidance projects.
Since 1986, Mr. Fogg has served as Vice President-Engineering; he led the design team in the development
of the Companys commercial products. Mr. Fogg holds a BSEE degree from Lafayette College and
a MSEE degree from Rutgers University. Mr. Fogg is a fellow of the Institute of Electrical and Electronic
Engineers and has published articles on delay equalization and the use of crystal resonators.
David
M. Peison has been a Director of the Company since October 2004. Since 2005, Mr. Peison has been
vice president with the emerging markets division of HSBC. From 2002 until 2005, Mr. Peison was with
Deutsche Banks global markets division in New York City. From 1992 to 2000, Mr. Peison was
in a Private Law Practice in Florida and New York City. Mr. Peison holds an MBA from Emory University
in Atlanta, Ga., a JD from The Dickinson School of Law of Pennsylvania State University and is admitted
to Florida, New York and Massachusetts Bars. Mr. Peison obtained his BA degree from Lehigh University
in Bethlehem, Pa.
Directors
hold office until the annual meeting of the Companys stockholders and the election and qualification
of their successors. Officers hold office, subject to removal at anytime by the Board, until the
meeting of directors immediately following the annual meeting of stockholders and until their successors
are appointed and qualified.
Audit Committee.
The Companys Board of Directors has determined that Louis Massad is the Audit Committees
Financial Expert.
The Company has a standing Audit Committee, the members of which are, Louis Massad, Edward J. Rielly
and David M. Peison.
Section 16(a) Compliance.
Section
  16(a) of the Exchange Act, requires our directors and officers, and persons
  who own more than 10% of our Common Stock, to file with the Securities and Exchange
  Commission initial reports of beneficial ownership and reports of changes in
  beneficial ownership of our Common Stock and other equity securities. Our officers,
  directors and greater than 10% beneficial owners are required by SEC regulation
  to furnish us with copies of all Section 16(a) forms they file. To our knowledge,
  based solely on a review of the copies of such reports furnished to us and written
  representations that no other reports were required, during the fiscal year
  ended July 31, 2005, all Section 16(a) filing requirements applicable to our
  officers, directors and greater than 10% beneficial owners were complied with
  except that Forms 4 for Marc Benou and Robert Benou were not timely filed and
  a Form 3 for Mr. David Peison was not timely filed. These forms have since been
  filed.
20
Code of Ethics.
The Corporation has adopted a Code of Ethics. This Code is publicly available on the Companys
internet website www.conolog.com.
Item 10.  EXECUTIVE COMPENSATION
The
following table sets forth the total compensation paid to, accrued and forgiven by each executive
officer during fiscal 2005.
Annual Compensation
    
    
    Long-Term CompensationName and Principal
    Fiscal
      Year-End
      (July 31)
    
    Salary
    
    Bonus
    
    Restricted
      Stock
      Awards (3)
    
    Closing Price of
      Common Stock on
      the Date of the
      Restricted Stock
      Award
    
    Securities
      Underlying
      Options/
      SARS
    
    Other
      CompensationRobert Benou, Chairman,
      Chief Executive Officer,
      Chief Financial Officer
    and Director
    2005
    
    $
    323,333
    
    $
    125,000
    (1)
    
    85,000
    
    $
    3.13
    
    
    0
    
    $
    18,000***2004
    
    $
    312,000
    
    
    0
    
    
    390,000
    
    $
    4.49
    
    
    0
    
    $
    12,780***2003
    
    $
    291,666
    *
    
    0
    
    
    0
    
    $
    0.00
    
    
    0
    
    $
    12,780***Marc Benou, President,
      Chief Operating Officer,
    Secretary and Director
    2005
    
    $
    111,000
    **
    $
    60,000
    (2)
    
    80,000
    
    $
    3.13
    
    
    02004
    
    $
    98,500
    **
    
    0
    
    
    340,000
    
    $
    4.49
    
    
    02003
    
    $
    91,333
    **
    
    0
    
    
    0
    
    $
    0.00
    
    
    0Thomas Fogg,
      Vice President -
    Engineering
    2005
    
    $
    40,602
    
    
    0
    
    
    20,000
    
    $
    3.13
    
    
    02004
    
    $
    40,602
    
    
    0
    
    
    0
    
    $
    0
    
    
    02003
    
    $
    40,602
    
    
    0
    
    
    50,000
    
    $
    1.08
    
    
    0* For the fiscal year ended July 31, 2003, Robert Benou forgave his entire salary for such fiscal year and for the fiscal year ended July 31, 2004, Mr. Benou forgave his entire salary for such fiscal year.** For the fiscal year ended July 31, 2003, Marc Benou forgave $54,644 of his salary and for the fiscal year ended July 31, 2004, Mr. Benou forgave $63,500 of his salary.*** Other compensation consisted of a car allowance.(1) The Company began paying Robert Benous 2005 bonus in September 2005, in monthly installments of $9,000, which may increase depending on the Companys cash requirements. Mr. Benous entire bonus of $125,000 will be paid in the next fiscal year. The Company is recording the liability in fiscal year-ended July 31, 2005 because the bonus was paid for Mr. Benous contributions to the Company during the 2005 fiscal year.(2) The Company paid Marc Benous bonus in two installments of $30,000 in August and September 2005, respectively. The Company is recording the liability in fiscal year-ended July 31, 2005 because the bonus was paid for Mr. Benous contributions to the Company during the 2005 fiscal year.21
(3) On February 10, 2005, our stockholders approved the granting of 350,000 shares of our common stock
to our directors, officers and employees. As of July 31, 22005, all of these shares were granted.
On July 9, 2002 our stockholders approved our 2002 Stock Option Plan under which up to 190,000 shares
of our common stock may be granted to our employees, directors and consultants. To date, no options
have been granted under this plan. The exercise price of options granted under the 2002 Stock Option
Plan will be the fair market value of our common stock on the date immediately preceding the date
on which the option is granted.
EMPLOYMENT AGREEMENTS
Mr.
Robert Benou 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 Mr. Benou. Mr. Benous annual base salary as of July 31, 2005 was $350,000 and increases
by $20,000 annually on June 1st of each year. In addition, Mr. Benou 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-KSB. The employment
agreement also entitles Mr. Benou 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.
Mr.
Marc Benou 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 Mr.
Benou. Mr. Benous annual base salary as of July 31, 2005 was $112,000 and he receives annual
increases of $6,000 on June 1st of each year. Mr. Benou 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-KSB. The employment agreement also
entitles Mr. Benou 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.
Item 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT
The
following table sets forth, as of July 31, 2005, certain information with respect to the beneficial
ownership of our common stock by each stockholder known by us to be the beneficial owner of more
than 5% of our common stock and by each of our current directors and executive officers. Each person
has sole voting and investment power with respect to the shares of common stock, except as otherwise
indicated.
This table is prepared based on information supplied to us by the listed security holders, any Schedules
13D or 13G and Forms 3 and 4, and other public documents filed with the SEC.
Under thee rules of the Securities and Exchange Commission, a person is deemed to be a beneficial owner
of a security if that person has or shares voting power, which includes the power to vote or direct
the voting of the security, or investment power, which includes the power
22
to vote or direct the voting of the security. The person is also deemed to be a beneficial owner of
any security of which that person has a right to acquire beneficial ownership within 60 days. Under
the Securities and Exchange Commission rules, more than one person may be deemed to be a beneficial
owner of the same securities, and a person may be deemed to be a beneficial owner of securities as
to which he or she may not have any pecuniary beneficial interest. Unless otherwise noted, the address for each of the named individuals is c/o Conolog Corporation, 5
Columbia Road, Somerville, New Jersey 08876.
Shares of common stock which an individual or group has a right to acquire within 60 days pursuant
to the exercise or conversion of options are deemed to be outstanding for the purpose of computing
the percentage ownership of such individual or group, but are not deemed to be outstanding for the
purpose of computing the percentage ownership of any other person shown in the table. The applicable
percentage of ownership is based on 7,417,847 shares issued and outstanding.
Name and Title
    Amount and 
      Nature of
      Beneficial 
      Ownership
    
    Percent of 
      ClassRobert S. Benou, Chairman, Chief Executive Officer, Chief Financial
    208,400
    
    2.81
    %Officer and DirectorMarc R. Benou, President, Chief Operating Officer, Secretary and Director
    229,000
    
    3.09
    %Thomas Fogg, Vice President  Engineering
    20,000
    
    *Louis Massad, Director
    0
    
    *Edward J. Rielly, Director
    0
    
    *David M. Peison, Director
    20,000
    
    *All Officers and Directors as a Group (6 persons)
    477,000
    
    6.43
    %DKR Soundshore Oasis Holding Fund Limited
    400,000
    (1)
    5.39
    %Barclays Global Investors, N.A.
    417,709
    (2)
    5.63
    %Excalibur Limited Partnership
    590,000
    (3)
    7.95
    %* Less than 1%.
(1) The beneficial ownership of DKR Soundshore Oasis Holding Fund Limited does not include (i) 200,000
shares of our common stock issuable upon exercise of a warrant with an exercise price of $1.25 per
share because this warrant cannot be exercised until January 20, 2006, and (ii) 400,000 shares of
our common stock issuable upon the exercise of a warrant with an exercise price of $1.6892 per share
because this warrant cannot be executed until January 18, 2006. DKR Oasis Management Company LP,
pursuant to an investment management agreement with DKR Soundshore Oasis Holding Fund Ltd., has voting
and investment authority over DKR Soundshore Oasis Holding Fund Ltd. Seth Fisher is the managing
partner of Oasis Management Holdings LLC, one of the general partners of DKR Oasis Management Company,
LP, and as such has ultimate trading authority over DKR Soundshore Oasis Holding Fund Ltd. Mr. Fischerdisclaims
beneficial ownership over these securities. The address for DKR Soundshore Oasis Holding Fund Limited
is 18 Church Street, Hamilton, HM11 Bermuda.
(2) The information for Barclays Global Investors, N.A. is based on information contained in a Schedule
13G filed with the Securities and Exchange Commission on February 16, 2005. The
23
principal business address for Barclays Global Investors, N.A. is 45 Fremont Street, San Francisco,
CA 94105.
(3) The beneficial ownership of Excalibur Limited Partnership does not include (i) 75,000 shares of
our common stock issuable upon exercise of a warrant with an exercise price of $1.25 per share because
this warrant cannot be exercised until January 20, 2006 and (ii) 440,000 shares of our common stock
issuable upon the exercise of a warrant with an exercise price of $1.6892 per share because this
warrant cannot be exercised until January 18, 2006. William Hechter is the president of Excalibur
Limited Partnership and as such has voting and investment control over these securities. Mr. Hechter
disclaims beneficial ownership of these securities.
Item 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Robert
Benou, our Chairman, Chief Executive Officer and Chief Financial Officer has made a series of non-recourse
loans to the Company totaling $326,428 as of July 31, 2002. The Company repaid $56,499 during fiscal
year 2003, $ 103,000 during fiscal 2004 and the balance of $ 166,929 plus simple interest of $ 23,371
was paid during fiscal year 2005. Each loan bears an interest rate of 4.00% and must be paid by the
Company one year from the date the loan is made.
Item 13.  EXHIBITS
(a)
  Exhibits.Index of ExhibitsExhibit No.
  Description of Exhibits3.1
Certificate of Incorporation - incorporated by reference to the Registrants Exhibit 3.01 to Registration
Statement on Form S-1 (File No. 2-31302).3.1.1
Certificate of Amendment of Certificate of Incorporation - incorporated by reference to Exhibit 3.02
to the Registrants Registration Statement on Form S-1 (File No. 2-31302).3.1.2
Certificate of Amendment of Certificate of Incorporation incorporated by reference to Exhibit 4 to
the Registrants Current Report on Form 8-K for July 1971.3.1.3
Certificate of Ownership and Merger with respect to the merger of Data Sciences (Maryland) into the
Registrant and the change of Registrants name from Data Sciences Incorporated to
DSI Systems, Inc. - incorporated by reference to Exhibit 3.03(a)to the Registrants
Registration Statement on Form S-1 (File No. 2-31302).3.1.4
Certificate of the Designation, Preferences and Relative, Participating, Option or Other Special
Rights and Qualifications, Limitations or Restrictions thereof of the Series A Preferred Stock
(par value $.50) of DSI Systems, Inc. - incorporated by reference to Exhibit 3.04 to the Registrants
Registration Statement on Form S-1 (File No. 2-31302).3.1.5
Certificate of the Designation, Preferences and Relative, Participating, Option or Other Special Rights
and Qualifications, Limitations or Restrictions thereof of the Series B24
Preferred Stock (par value $.50) of DSI Systems, Inc. - incorporated by reference to Exhibit 1 to the
Registrants Current Report on Form 8-K for November 1972.3.1.6
Certificate of Ownership and Merger respecting merger of Conolog Corporation into the Registrant and
the changing of the Registrants name from DSI Systems, Inc. to Conolog Corporation
- incorporated by reference to Exhibit 3 to the Registrants Current Report on Form 8-K for
June 1975.3.2
Amended By-Laws - incorporated by reference to Exhibit 3(h) to the Registrants Annual Report
on Form 10-K for the fiscal year ended July 31, 1981.4.1
  Specimen Certificate for shares of Common Stock (1)10.1
  Employment Agreement dated June 1, 1997 between Robert Benou and Conolog Corporation (2)10.2
  Employment Agreement dated June 1, 1997 between Marc Benou and Conolog Corporation (2)10.3
  Conolog Corporation 2002 Stock Option Plan (3)10.4
  Subscription Agreement dated as of July 17, 2005, among Conolog Corporation and the subscribers named therein (4)10.5
  Form of Warrant (issued by Conolog Corporation pursuant to the July 17, 2005 Subscription Agreement) (4)10.6
  Form of Brokers Warrant (issued by Conolog Corporation pursuant to the July 17, 2005 Subscription Agreement) (4)10.7
  Subscription Agreement dated December 3, 2004 (5)10.8
  Form of Warrant (issued pursuant to the December 3, 2004 Subscription Agreement)10.9
  Form of Brokers Warrant issued pursuant to the December 3, 2004 Subscription Agreement14.1
  Code of Ethics (4)21.1
  List of Subsidiaries*23.1
  Consent of Bagell, Josephs, Levine and Company LLC*31.1
  Rule 13a-14a/15d-14a Certification of Robert Benou*31.2
  Rule 13a-14a/15d-14a Certification of Marc Benou*32.
  Section 1350 Certification*________________________* Filed herewith25
(1)
Incorporated by reference to Registrants Registration Statement on Form S-1 (File No. 33-92424).(2)
Incorporated by reference to the Registrants Registration Statement on Form S-1 (File No. 0-8174)
as filed on September 12, 1997.(3)
Incorporated by reference to the Registrants Proxy Statement pursuant to Section 14(a) of the
Securities Exchange Act of 1934 filed on June 25, 2003.(4)
Incorporated by reference to the 8-K filed with the Securities and Exchange Commission on July 25,
2005.(5)
Incorporated by reference to the 8-K filed with the Securities and Exchange Commission on December
10, 2004.Item 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES
Bagell, Josephs, Levine & Company LLC was retained by the Company on September 21, 2004 to serve
as its principal accountant. Prior to that date, Bagell, Josephs, Levine & Company LLC did not
perform any services nor receive any fees from the Company.
Audit Fee
Bagell, Josephs, & Company LLC billed the Company in the aggregate amount of $33,000 and $21,000
for professional services rendered for their audit of our annual financial statements and their reviews
of the financial statements included in our Forms 10-QSB for the years ended July 31, 2005 and 2004,
respectively.
AUDIT-RELATED FEES
No fees were billed for the years ended July 31, 2005 and 2004 for assurance and related services by
Bagell, Josephs, Levine & Company LLC that are reasonably related to the performance of the audit
or review of the Companys financial statements and are not reported under the category Audit
Fees described above.
TAX FEES
No fees were billed for the years ended July 31, 2005 and 2004 for tax compliance, tax advice, or tax
planning services by Bagell, Josephs, Levine & Company LLC that are reasonably related to the
performance of the audit or review of the Companys financial statements and are not reported
under the category Audit Fees described above.
ALL OTHER FEES
No fees were billed to the Company by Bagell, Josephs, Levine & Company LLC for the years ended
July 31, 2005 and 2004 for services not described above.
It is the policy of the Companys Board of Directors that all services other than audit, review
or attest services, must be pre-approved by the Board of Directors. All of the services described
above were approved by the Board of Directors.
26
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Conolog Corporation
October 26, 2005
    By:
    /s/ Robert S. BenouChairman, Chief Executive OfficerIn accordance with the Exchange Act, this report has been signed below by the following persons, on
behalf of the registrant and in the capacities and on the dates indicated.
October 26, 2005
    /s/ Robert S. BenouChairman, Chief Executive Officer and 
    Chief Financial OfficerOctober 26, 2005
    /s/Marc R. BenouPresident, Chief Operating Officer, 
      Secretary and
    DirectorOctober 26, 2005
    /s/Louis S. MassadDirectorOctober 26, 2005
    /s/Edward J. RiellyDirectorOctober 26, 2005s
    /s/David M. PeisonDirector27
Conolog Corporation and Subsidiaries
Consolidated Financial Statements
July 31, 2005 and 2004

Annual Report on Form 10-K
Item 8, Item 14 (a)(1) and (2)
Consolidated Financial Statements
Years Ended July 31, 2005 and 2004

Conolog Corporation and Subsidiaries
Somerville, New Jersey

Form 10-K - Item 14 (a) (1) and (2)Index to the Consolidated Financial StatementsConolog Corporation and SubsidiariesJuly 31, 2005 and 2004
PageThe following consolidated financial statements of the registrant are included in Item 14:Report Of Independent Registered Public Accounting Firm
    F-1Consolidated Balance Sheets as of July 31, 2005 and 2004
    F-2 - F-3Consolidated Statements of Operations for the years ended July 31, 2005 and 2004
    F-4Consolidated Statements of Stockholders Equity for the yearsended July 31, 2005 and 2004
    F-5Consolidated Statements of Cash Flows for the years ended July 31, 2005 and 2004
    F-6 - F-7Notes to Consolidated Financial Statements
    F-8- F-20BAGELL, JOSEPHS, LEVINE & COMPANY, L.L.C.Certified Public Accountants
High Ridge CommonsSuites 400-403200 Haddonfield Berlin RoadGibbsboro, New Jersey 08026(856) 346-2828  Fax (856) 346-2882
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of DirectorsConolog CorporationSomerville, New Jersey
We have audited the accompanying consolidated balance sheets of Conolog Corporation and Subsidiaries
(the Company) as of July 31, 2005 and 2004 and the related consolidated statements of
operations, changes in stockholders equity, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Companys management. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinions.
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of Conolog Corporation and its Subsidiaries as of July 31, 2005
and 2004, and the results of its operations, changes in stockholders equity, and cash flows
for the years then ended in conformity with accounting principles generally accepted in the United
States of America.
BAGELL, JOSEPHS, LEVINE & COMPANY, L.L.C.BAGELL, JOSEPHS, LEVINE & COMPANY, L.L.C.Certified Public AccountantsGibbsboro, New Jersey
September 30, 2005
MEMBER OF:
  AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTSNEW JERSEY SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTSPENNSYLVANIA INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTSF-1
CONOLOG CORPORATION AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS 
      JULY 31, 2005 and 2004ASSETS2005
    
    2004CURRENT ASSETS:Cash and cash equivalents
    $
    4,471,072
    
    $
    1,119,768Accounts receivable - net of allowance for doubtful
    accounts of $1,000.
    
    89,194
    
    
    148,171Prepaid expenses
    
    23,755
    
    
    Current portion of note receivable
    
    14,864
    
    
    7,920Inventory
    
    900,000
    
    
    500,000Other current assets
    
    252,599
    
    
    44,099Total Current Assets
    
    5,751,484
    
    
    1,819,958Property, Plant and Equipment:Machinery and equipment
    
    1,324,504
    
    
    1,307,558Furniture and fixtures
    
    423,342
    
    
    409,459Automobiles
    
    34,097
    
    
    21,340Computer software
    
    147,203
    
    
    147,203Leasehold improvements
    
    30,265
    
    
    30,2651,959,411
    
    
    1,915,825Less: accumulated depreciation and amortization
    
    (1,868,405
    )
    
    (1,821,215
    )91,006
    
    
    94,610OTHER ASSETS:Inventory, net of current portion
    
    970,212
    
    
    1,424,417Note receivable, net of current portion
    
    125,106
    
    
    140,720Total Other Assets
    
    1,095,318
    
    
    1,565,137TOTAL ASSETS
    $
    6,937,808
    
    $
    3,479,705The accompanying notes are an integral part of the consolidated financial statements.
F-2
CONOLOG CORPORATION AND SUBSIDIARIES
      CONSOLIDATED BALANCE SHEETS 
      JULY 31, 2005 AND 2004LIABILITIES AND STOCKHOLDERS EQUITY2005
    
    2004LIABILITIES:Current Liabilities:Convertible debt
    $
    
    
    $
    1,094,000Accounts payable
    
    46,650
    
    
    209,575Accrued expenses
    
    248,643
    
    
    66,734Accrued legal fees
    
    175,000
    
    
    74,417Loan from officer
    
    
    
    
    77,427Accrued payroll
    
    
    
    
    12,445Total Liabilities
    
    470,293
    
    
    1,534,598STOCKHOLDERS EQUITYPreferred stock, par value $.50; Series A; 4% cumulative;
    162,000 shares authorized; 155,000 shares issued and
    outstanding at July 31, 2005 and 2004, respectively.
    
    77,500
    
    
    77,500Preferred stock, par value $.50; Series B; $.90 cumulative;
    50,000 shares authorized; 1,197 shares issued and outstanding
    at July 31, 2005 and 2004, respectively.
    
    597
    
    
    597Common stock, par value $0.01; 20,000,000 shares authorized;
    7,417,847 and 2,879,001 shares issued and outstanding at
    July 31, 2005 and 2004 respectively including 220 shares
    held in treasury.
    
    74,172
    
    
    28,795Contributed capital
    
    35,425,721
    
    
    27,495,048Retained (deficit)
    
    (28,391,938
    )
    
    (25,400,429
    )Treasury shares at cost
    
    (131,734
    )
    
    (131,734
    )Deferred compensation
    
    (547,750
    )
    
    Prepaid consulting
    
    (39,053
    )
    
    (124,670
    )Total Stockholders Equity
    
    6,467,515
    
    
    1,945,107TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    $
    6,937,808
    
    $
    3,479,705The accompanying notes are an integral part of the consolidated financial statements.
F-3
CONOLOG CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS 
      FOR THE YEARS ENDED JULY 31, 2005 AND 20042005
    
    2004OPERATING REVENUESProduct revenue
    $
    549,222
    
    $
    963,008COST OF PRODUCT REVENUES
    
    494,605
    
    
    913,561GROSS PROFIT
    
    54,617
    
    
    49,447OPERATING EXPENSESGeneral and administrative costs
    
    1,950,289
    
    
    774,919Selling and trade shows
    
    274,503
    
    
    124,857Professional fees
    
    374,292
    
    
    528,954Research and development
    
    177,338
    
    
    93,984Stock based compensation
    
    547,750
    
    
    3,592,000Total Operating Expenses
    
    3,324,172
    
    
    5,114,714LOSS BEFORE OTHER INCOME (EXPENSE)
    
    (3,269,555
    )
    
    (5,065,267
    )OTHER INCOME (EXPENSE)Interest income
    
    58,154
    
    
    7,034Interest expense
    
    (23,371
    )
    
    (20,960
    )Beneficial interest
    
    
    
    
    (1,200,000
    )Other income
    
    720
    
    
    3,307Total Other Income (Expense)
    
    35,503
    
    
    (1,210,619
    )LOSS FROM CONTINUING OPERATIONS
  BEFORE INCOME TAX BENEFIT
    
    (3,234,052
    )
    
    (6,275,886
    )Benefit from income taxes
    
    246,723
    
    
    LOSS FROM CONTINUING OPERATIONS
    
    (2,987,329
    )
    
    (6,275,886
    )DISCONTINUED OPERATIONS:Loss from discontinued operations (net of
     income tax benefit of $0)
    
    
    
    
    (94,515
    )(Loss) from disposal of discontinued operations (Net
    of income tax expense of $0)
    
    
    
    
    (127,889
    )NET LOSS APPLICABLE TO COMMON SHARES
    $
    (2,987,329
    )
    $
    (6,498,290
    )NET LOSS PER COMMON SHARE - CONTINUING OPERATIONS
    $
    (0.59
    )
    $
    (4.08
    )NET LOSS PER COMMON SHARE - DISCONTINUED OPERATIONS
    $
    
    
    $
    (0.14
    )WEIGHTED AVERAGE NUMBER OF COMMON
  SHARES OUTSTANDING
    
    5,024,671
    
    
    1,537,801The accompanying notes are an integral part of the consolidated financial statements.
F-4
CONOLOG CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
      FOR THE YEARS ENDED JULY 31, 2005 AND 2004Series A 
      Preferred Stock
    
    Series B 
      Preferred Stock
    
    Common Stock
    
    Contributed
      Capital
    
    Contributed
      Capital -
      Warrants
    
    Retained
      Earnings
      (Deficit)
    
    Treasury
      Stock
    
    Deferred
      Compensation
    
    Prepaid
      Consulting
    
    Total 
      Stockholders EquityShares
    
    Amount
    Shares
    
    Amount
    Shares
    
    AmountBalance at July 31, 2003
    155,000
    
    $
    77,500
    
    1,197
    
    $
    597
    
    1,299,182
    
    $
    12,999
    
    $
    21,729,632
    
    $
    
    
    $
    (18,897,959
    )
    $
    (131,734
    )
    $
    (222,212
    )
    $
    (68,458
    )
    $
    2,500,365Common shares issued to directors
    
    
    
    
    
    
    
    
    
    
    800,000
    
    
    8,000
    
    
    3,584,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,592,000Common shares issued to consultants
    
    
    
    
    
    
    
    
    
    
    599
    
    
    5
    
    
    527
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    532Issuance of warrants with convertible debt
    
    
    
    
    
    
    
    
    
    
    0
    
    
    0
    
    
    0
    
    
    1,200,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,200,000Conversion of debt
    
    
    
    
    
    
    
    
    
    
    100,000
    
    
    1,000
    
    
    105,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    106,000Common shares and warrants issued in
subscription agreement
    
    
    
    
    
    
    
    
    
    
    479,000
    
    
    4,791
    
    
    284,308
    
    
    399,401
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    688,500Shares issued for
services to be
provided
    
    
    
    
    
    
    
    
    
    
    200,000
    
    
    2,000
    
    
    188,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (190,000
    )
    
    Amortization of consultant services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    133,788
    
    
    133,788Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    222,212
    
    
    
    
    
    222,212Net loss for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,498,290
    )
    
    
    
    
    
    
    
    
    
    
    (6,498,290
    )Dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,180
    
    
    
    
    
    (4,180
    )
    
    
    
    
    
    
    
    
    
    
    Balance at July 31, 2004
    155,000
    
    $
    77,500
    
    1,197
    
    $
    597
    
    2,878,781
    
    $
    28,795
    
    $
    25,895,647
    
    $
    1,599,401
    
    $
    (25,400,429
    )
    $
    (131,734
    )
    $
    
    
    $
    (124,670
    )
    $
    1,945,107Conversion of debt
    
    
    
    
    
    
    
    
    
    
    1,032,076
    
    
    10,321
    
    
    1,083,679
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,094,000Common shares issued for cash
    
    
    
    
    
    
    
    
    
    
    2,569,355
    
    
    25,686
    
    
    3,049,649
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,075,335Costs directly related to stock
      subscriptions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,093,781
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,093,781
    )Warrants issued for common stock shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,187,928
    )
    
    3,857,593
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,669,665Warrants converted to common
stock shares
    
    
    
    
    
    
    
    
    
    
    470,000
    
    
    4,700
    
    
    2,391,501
    
    
    (1,599,401
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    796,800Shares issued for services to be provided
    
    
    
    
    
    
    
    
    
    
    117,000
    
    
    1,170
    
    
    333,181
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (334,351
    )
    
    Amortization of consultant services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    419,968
    
    
    419,968Common shares issued to officers,
directors and employees
    
    
    
    
    
    
    
    
    
    
    350,000
    
    
    3,500
    
    
    1,092,000
    
    
    
    
    
    
    
    
    
    
    
    (1,095,500
    )
    
    
    
    
    Amortization officers, directors and
employee compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    547,750
    
    
    
    
    
    547,750Exchange lots / escheatment
    
    
    
    
    
    
    
    
    
    
    635
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss for the Year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,987,329
    )
    
    
    
    
    
    
    
    
    
    
    (2,987,329
    )Dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,180
    
    
    
    
    
    (4,180
    )
    
    
    
    
    
    
    
    
    
    
    Balance at July 31, 2005
    155,000
    
    $
    77,500
    
    1,197
    
    $
    597
    
    7,417,847
    
    $
    74,172
    
    $
    31,568,128
    
    $
    3,857,593
    
    $
    (28,391,938
    )
    $
    (131,734
    )
    $
    (547,750
    )
    $
    (39,053
    )
    $
    6,467,515The accompanying notes are an integral part of the consolidated financial statements.
F-5
CONOLOG CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS 
      FOR THE YEARS ENDED JULY 31, 2005 AND 20042005
    
    2004CASH FLOWS FROM OPERATING ACTIVITIESNet loss from continuing operations
    $
    (2,987,329
    )
    $
    (6,275,886
    )Adjustments to reconcile net loss to net cash
  (used in) continuing operations:Depreciation
    
    50,530
    
    
    41,255Amortization of deferred compensation
    
    547,750
    
    
    222,212Amortization of prepaid consulting expense
    
    419,968
    
    
    133,788Net (loss) on sale of subsidiaries
    
    
    
    
    (127,889
    )Gain on sale of equipment
    
    (400
    )
    
    Common stock issued for services
    
    
    
    
    593Common stock based compensation
    
    
    
    
    3,592,000Warrants issued with convertible debt
    
    
    
    
    1,200,000Changes in assets and liabilities(Increase) decrease in accounts receivable
    
    58,977
    
    
    (114,639
    )Decrease in inventories
    
    54,205
    
    
    24,711(Increase) in other current assets
    
    (232,255
    )
    
    (19,959
    )Decrease in deferred income taxes
    
    
    
    
    323,959Increase (decrease) in accounts payable
    
    (162,925
    )
    
    97,263Increase (decrease) in accrued expenses and other liabilities
    
    270,047
    
    
    (189
    )Net cash (used in) continuing operations
    
    (1,981,432
    )
    
    (902,781
    )DISCONTINUED OPERATIONSNet (loss)
    
    
    
    
    (94,515
    )Change in net assets of discontinued operations
    
    
    
    
    230,995Net cash provided by discontinued operations
    
    
    
    
    136,480CASH FLOWS FROM INVESTING ACTIVITIESProceeds from sale of equipment
    
    400
    
    
    Purchase of equipment and leasehold improvements
    
    (46,926
    )
    
    Net cash (used in) investing activities
    
    (46,526
    )
    
    The accompanying notes are an integral part of the consolidated financial statements.
F-6
CONOLOG CORPORATION AND SUBSIDIARIES 
      CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
      FOR THE YEARS ENDED JULY 31, 2005 AND 20042005
    
    2004CASH FLOWS FROM FINANCING ACTIVITIESRepayment of line of credit
    $
    
    
    $
    (250,000
    )Proceeds of loan from officer
    
    
    
    
    202,500Repayment of loan from officer
    
    (77,427
    )
    
    (158,002
    )Proceeds from issuance of convertible debt
    
    
    
    
    1,200,000Proceeds from issuance of stock, net of issuance costs
    
    4,651,219
    
    
    Proceeds from issuance of stock and warrants
    
    796,800
    
    
    688,500Proceeds from note receivable
    
    8,670
    
    
    97,629Proceeds from sale of subsidiary
    
    
    
    
    34,000Net cash provided by financing activities
    
    5,379,262
    
    
    1,814,627NET INCREASE IN CASH
  AND CASH EQUIVALENTS
    
    3,351,304
    
    
    1,048,326CASH AND CASH EQUIVALENTS -
  BEGINNING OF YEAR
    
    1,119,768
    
    
    71,442CASH AND CASH EQUIVALENTS - END OF YEAR
    $
    4,471,072
    
    $
    1,119,768SUPPLEMENTAL DISCLOSURE OF CASH FLOW
  INFORMATION:CASH PAID DURING THE YEAR FOR:Interest expense
    $
    23,371
    
    $
    12,294SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:Debt converted to equity
    $
    1,094,000
    
    $
    106,000Common stock issued for services to be provided
    $
    334,350
    
    $
    124,670Common stock issued for deferred compensation
    $
    1,095,500
    
    $
    The accompanying notes are an integral part of the consolidated financial statements.
F-7
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSJULY 31, 2005 AND 2004
NOTE 1-
  NATURE OF ORGANIZATIONConolog 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, 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.NOTE 2-
  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESPrinciples 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.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 twelve months or less.InventoriesInventories are valued at the lower of cost (determined on a first-in, first-out basis) or market.F-8
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)JULY 31, 2005 AND 2004
NOTE 2-
  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)Property, Plant and EquipmentProperty, plant and equipment are carried at cost, less allowances for depreciation and amortization.
Depreciation and amortization are computed by the straight-line method over the estimated useful
lives of the assets. Depreciation and amortization was $50,530 and $41,255 for the years ended July
31, 2005 and 2004, respectively. Repairs and maintenance expenditures which do not extend the useful
lives of the related assets are expensed as incurred.Research and DevelopmentResearch and Development costs are expensed as incurred. Research and Development costs were $177,338
and $ 93,984 for the years ended July 31, 2005 and 2004 respectively.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.Advertising CostsAdvertising costs are charged to operations when incurred. Advertising expense was $7,301 and $6,994
for the years ended July 31, 2005 and 2004, respectively.Shipping and Handling CostsShipping and handling costs are expensed as incurred and amounted to $10,373 and $25,627 for the years
ended July 31, 2005 and 2004, respectively.F-9
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)JULY 31, 2005 AND 2004
NOTE 2-
  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
    (CONTINUED)Securities Issued for ServicesThe Company accounts for common stock issued for compensation services of Officers, Directors
and employees by reference to the fair market value of the Companys stock on the date
of stock issuance. Consulting service and commission expense is recorded at the rate that such services
are normally paid at.Fair Value of Financial InstrumentsThe carrying amounts of cash, accounts receivable, other current assets, accounts payable and accrued
expenses approximates fair value because of the short maturity of these instruments.Income TaxesIncome taxes are provided for the tax effects of transactions reported in the financial statements
and consist of taxes currently due plus deferred taxes related primarily to differences between the
bases of assets and liabilities for financial and income tax reporting. The deferred tax assets and
liabilities represent the future tax return consequences of those differences, which will either
be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes
also are recognized for operating losses that are available to offset future federal and state income
taxes.Loss Per Share of Common StockLoss per share of common stock is computed by dividing net loss (after dividends on preferred shares)
by the weighted average number of shares of Common Stock outstanding during the year. The preferred
dividends are not reflected in arriving at the net loss as they are not material and would have no
effect on earning per share available to common shareholders. The number of weighted average shares
used in the computations were 5,024,671 and 1,537,801 for 2005 and 2004 respectively. The effect
of assuming the exchange of Series A Preferred Stock and Series B Preferred Stock in 2005 and 2004
would be anti-dilutive.F-10
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)JULY 31, 2005 AND 2004
NOTE 2-
  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(CONTINUED)Loss Per Share of Common Stock  (Continued)The effect of assuming the exercise of outstanding warrants at July 31, 2005 would be anti-dilutive.
The following transactions occurred after July 31, 2004, which, had they taken place during fiscal
2004, would have changed the number of shares used in the computations of earnings per share: (1)
$1,094,000 debenture was converted into 1,032,076 common stock shares; (2) 470,000 common stock shares
were issued as a result of warrants being exercised.The following is a reconciliation of the computation for basic and diluted EPS:July 31,
      2005
    
    July 31,
      2005Net Loss
    $
    (2,987,329
    )
    $
    (6,498,290
    )Weighted-average common shares
   outstanding (Basic)
    
    5,024,671
    
    
    1,537,801Weighted-average common stock    
   equivalents:Stock options
    
    
    
    
    Warrants
    
    
    
    
    Weighted-average common shares
   outstanding (Diluted)
    
    5,024,671
    
    
    1,537,801F-11
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)JULY 31, 2005 AND 2004
NOTE 2-
  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)Use of EstimatesThe preparation of financial statements in conformity with generally accepted accounting principles
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 financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.Recent Accounting PronouncementsOn December 16, 2004, the Financial Accounting Standards Board (FASB) published Statement
of Financial Accounting Standards No. 123 (Revised 2004), Share-Based Payment (SFAS 123R).
SFAS 123R requires that compensation cost related to share-based payment transactions be recognized
in the financial statements. Share-based payment transactions within the scope of SFAS 123R include
stock options, restricted stock plans, performance-based awards, stock appreciation rights, and employee
share purchase plans. The provisions of SFAS 123R are effective for small business issuers as of
the first interim period that begins after December 15, 2005. Accordingly, the Company will implement
the revised standard in the third quarter of fiscal year 2006. Currently, the Company accounts for
its share-based payment transactions under the provisions of APB 25, which does not necessarily require
the recognition of compensation cost in the financial statements. Management is assessing the implications
of this revised standard, which may materially impact the Companys results of operations in
the third quarter of fiscal year 2006 and thereafter.In November 2004, the FASB issued Financial Accounting Standards No. 151 (FAS 151), Inventory
Costs  an amendment of ARB No. 43, Chapter 4. FAS 151 clarifies the accounting for abnormal
amounts of idle facility expense, freight, handling costs and spoilage. In addition, FAS 151 requires
companies to base the allocation of fixed production overhead to the costs of conversion on the normal
capacity of production facilities. FAS 151 is effective for the Company in 2006. The Company does
not expect FAS 151 to have a material impact on its results or financial statements.F-12
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 2005
  AND 2004
NOTE 3-
  CONCENTRATIONS OF BUSINESS AND CREDIT RISKAt times throughout the year, the Company may maintain certain bank accounts in excess of FDIC insured
limits. The company provides credit in the normal course of business. The Company performs ongoing
credit evaluations of its customers and maintains allowances for doubtful accounts based on factors
surrounding the credit risk of specific customers, historical trends, and other information.NOTE 4-
  INVENTORYInventory consisted of the following as of July 31,:2005
    
    2004Finished Goods
    $
    454,377
    
    $
    783,348Work-in-process
    
    10,448
    
    
    14,790Raw materials
    
    1,405,387
    
    
    1,126,279$
    1,870,212
    
    $
    1,924,417Inventory of $970,212 was classified as non-current. Only the amount the Company expects to realize in the next operating cycle has been classified as current.NOTE 5-
  OPERATING LEASE COMMITMENTSThe Company leases their facilities and various equipment under operating leases. Total rental expense
for all operating leases of the Company amounted to approximately $55,680 and $54,302 during the
years ended July 31, 2005 and 2004, respectively. The Company currently leases its facilities on
a month-to-month basis.F-13
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 2005
  AND 2004
NOTE 6-
    INCOME TAXESThe income tax (benefit) is comprised of the following:July 31,2005
    
    2004Current Income Taxes
    $
    
    
    $
    Federal
    
    
    
    
    State
    
    (246,723
    )
    
    $
    (246,723
    )
    $
    In 1998, the State of New Jersey enacted legislation allowing emerging technology and/or biotechnology
companies to sell their unused New Jersey Net Operating Loss (NOL) Carryover and Research
and Development Tax Credits (R&D Credits) to corporate taxpayers in New Jersey. During
fiscal year ended July 31, 2003, the Company entered into an agreement under which it sold a portion
of its NOL carryover. The total estimated proceeds of this transaction was recorded as a benefit
in the accompanying financial statements.A reconciliation between taxes computed at the federal statutory rate and the effective tax rate follows:July 31,2005
    
    2004Federal statutory tax rate
    
    34.0
    %
    
    34.0
    %Valuation Allowance on NetOperating Loss Carryover
    
    (34.0
    %)
    
    (34.0
    %)Permanent and other differences
    
    
    
    
    
    %
    
    %F-14

CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 2005
  AND 2004
NOTE 6-                INCOME TAXES (CONTINUED)
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.At July 31, 2005, the Company has net operating loss carryforwards for federal and state income tax
purposes of approximately $32,860,000, which is available to offset future Federal and State taxable
income, if any. The federal and state net operating loss carryforwards expire as follows:Federal
    
    
    State2010
    
    $
    
    
    $
    90,0002011
    
    
    
    
    
    6,400,0002013
    
    
    250,000
    
    
    2,985,0002014
    
    
    1,230,000
    
    
    2015
    
    
    960,000
    
    
    2017
    
    
    550,000
    
    
    2018
    
    
    1,660,000
    
    
    2019
    
    
    860,000
    
    
    2020
    
    
    2,140,000
    
    
    2021
    
    
    2,650,000
    
    
    2022
    
    
    3,150,000
    
    
    2023
    
    
    550,000
    
    
    2024
    
    
    6,400,000
    
    
    2025
    
    
    2,985,000
    
    
    $
    23,385,000
    
    $
    9,475,000At July 31, 2005, deferred tax assets consist of the following:Net operating loss carry-forwards
    $
    8,516,400Less: valuation allowance
    
    (8,516,400
    )$
    -0-At July 31, 2005, the Company had deficits accumulated in the approximate amount of $28,388,000, available
to offset future taxable income through 2025. The Company established valuation allowances equal
to the full amount of the deferred tax assets due to the uncertainty of the utilization of the operating
losses in future periods.F-15

CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 2005
  AND 2004
NOTE 7-
  LOAN FROM OFFICERLoan from officer represents advances made by an officer of the company. The advances are due one year
after the date of receipt and bear interest at a rate of 4% per annum. Total advances made by the
officer were $0 and $202,500 for the years ended July 31, 2005 and 2004, respectively. Repayments
to the officer were $77,427 and $158,002 for the years ended July 31, 2005 and 2004, respectively.
The balance due to the officer at July 31, 2005 was $0.NOTE 8-
  PROFIT SHARING PLANThe Company sponsors a qualified profit sharing plan that covers substantially all full time employees.
Contributions to the plan are discretionary and determined annually by management. No contributions
to the plan were made during the years ended July 31, 2005 and 2004.The Plan also provides an employee savings provision (401(k) plan whereby eligible participating employees
may elect to contribute up to 15% of their compensation to an investment trust. The Company made
matching contributions to the plan of $160,542 and $ 0 for the fiscal years ended July 31, 2005 and
2004 respectively.NOTE 9-
  STOCKHOLDERS EQUITYThe Series A Preferred Stock provides 4% cumulative dividends, which were $111,483 ($0.72 per share)
in arrears at July 31, 2005. In addition, each share of Series A Preferred Stock may be exchanged
for one share of Common Stock upon surrender of the Preferred Stock and payment of $48,000 per share.
The Company may redeem the Series A Preferred Stock at $.50 per share plus accrued and unpaid dividends.The Series B Preferred Stock provides cumulative dividends of $0.90 per share, which were $36,696 ($30.66
per share) in arrears at July 31, 2005. In addition, each share of Series B Preferred Stock is convertible
into .005 of one share of Common Stock.The Company has reserved 155,059 shares of Common Stock for Series A and B Preferred Stock.F-16
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)JULY 31, 2005 AND 2004
NOTE 9-
  STOCKHOLDERS EQUITY (CONTINUED)On July 29, 2004, the Company entered into a subscription agreement with a group of investors for common
stock and warrants to purchase shares of common stock. The Company sold to the investors 479,000
shares of common stock and 200,000 warrants with an exercise price of $1.84, which expire on July
30,2029. The Company received $688,500 in exchange for the shares and warrants. The warrants were
valued using the Black-Scholes option valuation model with a resulting allocation of the aggregate
proceeds from the subscription attributable to the warrants of $399,401. The following assumptions
were utilized to value the warrants: price per share of common stock of $1.84; expected life of five
years; expected volatility of 149%; a risk free interest rate of 3.7%; and an expected yield of 0.0%.On February 15, 2005 the above 200,000 warrants were exercised and the Company received proceeds of
$ 367,500.On February 18, 2005, the Company entered into a subscription agreement with a group of investors for
common stock and warrants to purchase shares of common stock. The Company sold to the investors 1,369,355
shares of common stock and 958,549 warrants with an exercise price of $1.25, which expire on August
18, 2010. The Company received $4,245,000 in exchange for the shares and warrants.On July 19, 2005, the Company entered into a subscription agreement with a group of investors for common
stock and warrants to purchase shares of common stock. The Company sold to the investors 1,200,000
shares of common stock and 1,440,000 warrants with an exercise price of $1.6892, which expire on
January 19, 2011. The Company received $1,500,000 in exchange for the shares and warrants.F-17
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)JULY 31, 2005 AND 2004
NOTE 9-
  STOCKHOLDERS EQUITY (CONTINUED)A summary of the Companys warrant activity is as follows:Year Ended July 31, 2005Number 
      of 
      Warrants
    
    Weighted
      average 
      Exercise
      priceBalance at July 31, 2003
    
    
    
    
    Issued April 2004
    
    470,000
    
    $
    1.69Balance at July 31, 2004
    
    470,000
    
    
    1.69Issued February 2005
    
    958,549
    
    
    1.25Issued July 2005
    
    1,440,000
    
    
    1.69Exercised September 2004
    
    (270,000
    )
    
    1.59Exercised February 2005
    
    (200,000
    )
    
    1.84Forfeited
    
    
    
    
    Balance at July 31, 2005
    
    2,398,549
    
    $
    1.28NOTE 10-
  CONVERTIBLE DEBENTURESOn April 26, 2004, the Company entered into a Securities Purchase Agreement with an investor, whereby
the Company issued and sold to the investor, in a private placement, a $1,200,000 principal amount
Secured Convertible Term Note and warrants to purchase 270,000 shares of common stock. The principal
amount of the note was repayable at the rate of $50,000 per month, plus accrued interest, if any,
commencing on May 1, 2005 and may be paid at the investors option in cash or shares of the
Companys common stock at the conversion rate of $1.06.The 270,000 warrants were exercised on September 27, 2004 at an exercise price of 1.59. The warrants
were valued using the Black-Scholes option valuation model with a resulting allocation to interest
expense of $1,200,000. The following assumptions were utilized to value the warrants: price per share
$4.55; expected life of seven years; expected volatility of 151%; a risk free interest rate of 3.4%;
and an expected yield of 0.0%.As of July 31, 2004, $106,000 of principal was converted into 100,000 common shares. During Fiscal
2005, the remainder of $ 1,094,000 of principal was converted into 1,032,076 common shares.F-18
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)JULY 31, 2005 AND 2004
NOTE 11-
    MAJOR CUSTOMERSThe following summarizes sales to major customers (each 10% or more of net sales) by the Company:Year Ended
    
    
    Sales to Major
      Customers
    
    
    Number of
    Customers
    
    
    Percentage of
      Total2005
    
    
    $
    342,271
    
    
    2
    
    
    62.0%2004
    
    
    $
    414,684
    
    
    2
    
    
    49.0%NOTE 12-
  STOCK OPTION PLAN2002 Stock Option PlanOn April 23, 2002, the Board of Directors of the Company adopted the 2002 Stock Option Plan (the
2002 Plan). Under the 2002 Plan, the Company may grant up to 190,000 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 July 31, 2005, there had been no shares granted under the 2002 Plan.NOTE 13-
  PREPAID CONSULTINGDuring Fiscal Year July 31, 2005, the Company issued 117,000 shares of common stock to various consultants
for services. Of these, 37,500 shares issued were for services that extend into the future and are
amortized against invoices billed by the consultants for actual services rendered 79,500 of the shares
issued were for services performed in fiscal year 2005 and were expensed in value at the date of
the agreement, as there was no readily determinable value for the consulting services provided or
to be provided. The Company accounted for the prepaid value of consulting services in accordance
with EITF 00-18, Accounting Recognition for Certain Transactions Involving Equity Instruments Granted
to Other Than Employees.F-19
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)JULY 31, 2005 AND 2004
NOTE 14-
  DISCONTINUED OPERATIONSOn April 30, 2004, the Company sold the assets of its wholly owned subsidiary, Nologoc Corporation,
T/A Atlas Design, Incorporated. The decision to sell the component was based on the intensely competitive
and highly fragmented nature of the placement services business. The subsidiary was sold to the vice-president
of operations of Atlas Design. The Company received $34,000 of proceeds and recorded a loss from
the disposal of $127,889. Net sales of Atlas Design, Incorporated were $439,174 and $783,195 for
the years ended July 31, 2004 and 2003, respectively.NOTE 15-
  SUBSEQUENT EVENTSNone.F-20