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

FORM 10-KSB

|                                        |                                                                                                                                            
|--------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------
|x                                       | Annual Report
  Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934                                                     
|                                        |                                                                                                                                            
|For the fiscal year ended July 31, 2006
|                                        |                                                                                                                                            
|o                                       | Transition
  Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
  for the transition period from
             to

Commission File Number: 0-8174

CONOLOG
CORPORATION(Exact name of registrant as specified in its charter)

|                                        |                    
|--------------------------------------- | -------------------
|DELAWARE                                | 22-1847286         
|(State or other jurisdiction of         | (IRS Employer      
|incorporation or organization)          | 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.

Yes x  No o

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. o

The aggregate market value of the voting
stock held by non-affiliates of the Registrant based on the closing sale price
of $1.33 on October 16, 2006 was $2,475,577.

The number of shares outstanding of the
Registrants common stock outstanding, excluding treasury shares, as of October
16, 2006 was 1,861,336.

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TABLE OF CONTENTS

|                                                                                                                        |   
|----------------------------------------------------------------------------------------------------------------------- | --
|PART I                                                                                                                  |   
|                                                                                                                        |   
|Item 1. DESCRIPTION OF BUSINESS                                                                                         | 1 
|                                                                                                                        |   
|Item 2. DESCRIPTION OF PROPERTY                                                                                         | 9 
|                                                                                                                        |   
|Item 3. LEGAL PROCEEDINGS                                                                                               | 9 
|                                                                                                                        |   
|Item 4. SUBMISSION OF MATTERS TO A VOTE OF
  SECURITY HOLDERS                                                           | 9 
|                                                                                                                        |   
|PART II                                                                                                                 |   
|                                                                                                                        |   
|Item 5 MARKET FOR REGISTRANTS COMMON
  EQUITY AND RELATED STOCKHOLDER MATTERS                                          | 10
|                                                                                                                        |   
|Item 6. MANAGEMENTS DISCUSSION AND
  ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION                         | 11
|                                                                                                                        |   
|Item 7. FINANCIAL STATEMENTS                                                                                            | 17
|                                                                                                                        |   
|Item 8. CHANGES IN AND DISAGREEMENTS WITH
  ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                          | 17
|                                                                                                                        |   
|Item 8A. CONTROLS AND PROCEDURES                                                                                        | 17
|                                                                                                                        |   
|PART III                                                                                                                |   
|                                                                                                                        |   
|Item 9. DIRECTORS, EXECUTIVE OFFICERS                                                                                   | 18
|                                                                                                                        |   
|Item 10. EXECUTIVE COMPENSATION, PROMOTERS
  AND CONTROL PERSONS:  COMPLIANCE WITH
  SECTION 16 (A) OF THE EXCHANGE ACT | 20
|                                                                                                                        |   
|Item 11. SECURITY OWNERSHIP OF CERTAIN
  BENEFICIAL OWNERS AND MANAGEMENT                                               | 21
|                                                                                                                        |   
|Item 12. CERTAIN RELATIONSHIPS AND RELATED
  TRANSACTIONS                                                               | 22
|                                                                                                                        |   
|Item 13. EXHIBITS                                                                                                       | 22
|                                                                                                                        |   
|Item 14. PRINCIPAL ACCOUNTANT FEES AND
  SERVICES                                                                       | 24
|                                                                                                                        |   
|SIGNATURES                                                                                                              | 25

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

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 helicopter and 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 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.

1

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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 increase 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
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 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.

2

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Present Status/Business Product Description

We are engaged in three
basic market segments:

(A)
Commercial Sales(Under
the trade name INIVEN (a wholly owned
Division 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), 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 by the Company.

B) Commercial INIVEN Sales and Products

INIVEN
equipment is designed around four (4) core product groups:

| |     |                                                                                                                                                                      
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Protective Tone Relay (PTR) and Protective
  Digital Relay (PDR) Teleprotection Series 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; and                                                                                                                            
|
| | (4) | Communication Link Multihead Fiber Optic
  Couplers and Industrial Grade 12 Baud Modems.                                                                             

3

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(1) PDR
Teleprotection Series

| |                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The 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 Series

This
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
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.                                                                                                                                                           
| |                                                                                                                                                                                                                                                                          
| | 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.

4

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| |                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.                                      

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 18% 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,

5

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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).

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.

6

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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 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 2006 (Bonneville Power Authority, NSTAR)
totaled $90,215 and $68,222, respectively (totaling 17% and 13% of all sales,
respectively. 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). None of these customers has or had any
material relationship other than business with the Company.

INVENTORY

Raw 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

7

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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 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 DEVELOPMENT

New Products- CM-100 platform

During
fiscal 2005-2006, we introduced the CM-100, which we believe is the 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 commence
deliveries of the CM-100 by December 2006.

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 our design of
the PDR-2000, eight-channel digital transfer trip communications product.

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.

8

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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.

EMPLOYEES

As
of July 31, 2006, we employed 14 persons on a full-time basis, including 2 in
management, 1 in sales, 1 in clerical, 1 in accounting, 1 in purchasing, 5 in
engineering and quality control 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

None

Item 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS

None

9

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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 2006 and 2005.

|                 |  |              |      |     |  |      | 
|---------------- |  | ------------ | ---- | --- |  | ---- | 
|                 |  | Common Stock |     
|                 |  |              |     
|Fiscal Year 2006 |  | High         |      | Low | 
|                 |  |              |      |     | 
|                 |  |              |      |     |  |      | 
|First Quarter    |  |              | 2.13 |     |  | .92  | 
|                 |  |              |      |     |  |      | 
|Second Quarter   |  |              | 1.16 |     |  | .86  | 
|                 |  |              |      |     |  |      | 
|Third Quarter    |  |              | 1.01 |     |  | .81  | 
|                 |  |              |      |     |  |      | 
|Fourth Quarter   |  |              | .90  |     |  | .36  | 
|                
|                 |  |              |      |     |  |      | 
|                 |  | Common Stock |     
|                 |  |              |     
|Fiscal Year 2005 |  | High         |      | Low | 
|                 |  |              |      |     | 
|                 |  |              |      |     |  |      | 
|First Quarter    |  |              | 6.61 |     |  | 1.41 | 
|                 |  |              |      |     |  |      | 
|Second Quarter   |  |              | 6.30 |     |  | 3.40 | 
|                 |  |              |      |     |  |      | 
|Third Quarter    |  |              | 4.29 |     |  | 1.50 | 
|                 |  |              |      |     |  |      | 
|Fourth Quarter   |  |              | 2.07 |     |  | 1.45 | 

(b) As of July 31, 2006, the Companys Common Stock was held by
approximately 739 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 future earnings of the Company, including its financial
condition, capital requirement and other factors, which the Board of Directors
deems relevant.

10

---



EQUITY
COMPENSATION PLAN INFORMATION

The following table sets forth the
information indicated with respect to our compensation plans under which our
common stock is authorized for issuance.

|                                                             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  |                                                                                     |  |                                                                                                                                                            
|------------------------------------------------------------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  |                                                                                     |  |                                                                                                                                                            
|                                                             |  | Number of Securities to
  be issuedupon exercise of
  outstanding
  options, warrants and rights(a)                                                                                                                                                                                                                                                                                                                                                          |  | Weighted average
  exercise price ofoutstanding
  options,
  warrants and rights(b) |  | Number of securities
  remaining available for
  future issuance under
  equity compensation plans
  (excluding securities
  reflected in column (a))
  (c)
|                                                             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  |                                                                                     |  |                                                                                                                                                            
|Equity
  compensation plans approved by security holders     |  | 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. |  | N/A                                                                                 |  | 190,000                                                                                                                                                    
|                                                             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  |                                                                                     |  |                                                                                                                                                            
|Equity
  compensation plans not approved by security holders |  | N/A                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  |                                                                                     |  |                                                                                                                                                            
|                                                             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  |                                                                                     |  |                                                                                                                                                            
|Total                                                        |  | 190,000                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |                                                                                     |  |                                                                                                                                                            
|                                                             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  |                                                                                     |  |                                                                                                                                                            

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 1,032,076 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, 2009 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

11

---



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.

Pursuant
to a Subscription Agreement, dated January 19, 2006 the Company sold and issued
to three Subscribers Convertible Notes having an aggregate principal balance of
$1,250,000 which are convertible into 1,000,000 shares of common stock at a
conversion price of $ 1.25 per share, and warrants to purchase 1,000,000 shares
of common stock at a price of $ 0.9579 per share. Interest payable on these
notes accrues at a rate of 5% per annum. The maturity date is January 10, 2010.
The convertible notes and warrants have been recorded in compliance with
APB-14. The $ 1,250,000 of proceeds attributed to the Convertible Debenture are
recorded based upon their relative fair value. The value assigned to the
warrants of $ 401,363 has been recorded as a discount to the convertible
debenture. Additionally, the warrants valued at $ 0.9579 per share represents a
Beneficial Conversion feature calculated at their intrinsic value and amounted
to $46,157. This beneficial conversion feature has been recorded as a discount
to the convertible debenture. This aggregate discount to the debt of $447,520
will be amortized over the life of the debt using the effective interest
method.

RESULTS OF OPERATIONS

2006 Compared to 2005

Product
revenue for the fiscal year ended July 31, 2006 totaled $547,767 a decrease of
$1,455 from the product revenue reported for the fiscal year ended July 31,
2005 of $549,222. The Company attributes this slight decrease in revenues to
the continued delay and extended deliveries by the Companys utility customers
due to extensive re-design and testing by these utilities.

Product
  cost for the fiscal year ended July 31, 2006 amounted to $282,932 or 51.6% of
  product revenues. Product cost for the fiscal year ended July 31, 2005 amounted
  to $494,605 or 90.0% of product revenues. The Company attributes the decrease
  in the current years product cost of $211,673 and corresponding increase
  in the current years Gross Profit of $210,620 (before offset by the write
  down of obsolete inventory parts) to the continued outsourcing of assembly boards
  and the introduction of new assembly standards under ISO-9000, which have made
  the assembly process more cost efficient.

For
fiscal year ended July 31, 2006 the Company, in accordance with its inventory
management policy, wrote down $245,326 of cost relating to inventory parts
which had become obsolete or which were not used in the manufacturing process
in the prior three years.

Total
Operating expenses for fiscal July 31, 2006 amounted to $3,402,284, an increase
of $78,112 from $3,324,172 reported for fiscal July 31, 2005. The Company
attributes this increase in part to Research and Development costs of $ 376,713
on its new CM-100 platform system.

12

---



The
Companys interest income increased by $77,687 for the fiscal year ended July
31, 2006 to $135,841 compared to $58,154 for fiscal year ended July 31, 2005.
The totals for fiscal years 2006 and 2005 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, 2006 totaled
$83,680, compared to $23,371 for fiscal year ended July 31, 2005. The increase
in interest expense is attributed to interest paid on the convertible debenture
issued on January 19, 2006. This convertible debenture bears interest at 5% per
annum and future payments will be made in common stock in lieu of cash.

As
a result of the foregoing, the Company reported a net loss from continuing
operations of $3,330,089 or $.45 per share for fiscal 2006, compared to a net
loss from continuing operations of $2,987,329 or $ .59 per share for fiscal
2005. Of the $.45 loss per share for July 31, 2006, the write down of inventory
accounted for $.04 loss per share

2005 Compared to 2004

Product
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 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 $3,324,172 and $5,114,714, respectively. The Company attributes the
decrease of $1,790,542 in general and administrative expense, in part, to the
decrease in stock-based compensation; however, this decrease was partially
off-set by (i) salaries paid to officers in fiscal 2005 which had not been paid
in fiscal 2004; (ii) reinstatement of certain employee benefits, which had been
suspended in fiscal 2004; and (iii) an increase in expenses related to
increased sales and marketing efforts. At a meeting on February 10, 2005, the
Companys shareholders approved a proposal that authorized the Companys Board
to issue from time-to-time an aggregate of 350,000 shares of the Companys
common stock to its directors and employees, including its officers, and on
February 10, 2005, the Companys Board of Directors granted an aggregate of
350,000 shares of the Companys common stock to its directors and employees,
including its officers. Stock grants to the Companys employees, officers and
directors are an expense which is reflected as a part of the Companys general
and administrative cost. The

13

---



amount of this
expense is determined by multiplying the number of shares granted by the
closing price of the Companys common stock as reported on the Nasdaq Capital
Market on the day before the grant. Stock-based compensation expenses for the
year ended July 31, 2005 was $547,750, which was a decrease of $3,044,250 from
the $3,592,000 in stock-based compensation expenses for the fiscal year ended
July 31, 2004.

Research
and development expenses for the fiscal year ended July 31, 2005 increased
$83,354 over fiscal 2004 to $177,338 resulting from 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 which 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.

LIQUIDITY AND CAPITAL RESOURCES

Working
capital at July 31, 2006 was $3,649,799 compared to $5,281,191 at year ended
July 31, 2005. The decrease in the working capital is attributable to the
reduction of inventory and the reduction of cash used in development of the
CM-100 platform.

Accounts
receivable have increased from $89,194 at July 31, 2005 to $183,622 at July 31,
2006. This increase of $94,428 is the result of increased 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.

14

---



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 judgment in valuing these
estimates and may, as warranted, solicit external professional advice and other
assumptions believed to be reasonable. The following critical accounting
policies, some of which are impacted significantly by judgments, assumptions
and estimates, affect the Companys consolidated financial statements.

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 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

15

---



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 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, 2006 was approximately $ 1.7 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.

16

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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

None

Item 8A. CONTROLS AND PROCEDURES

The Company maintains a set of disclosure controls and procedures designed to ensure that information required to
be disclosed by the Company in the reports filed under the Securities Exchange Act, is recorded, processed, summarized and
reported within the time periods specified by the SECs rules and forms. Disclosure controls are also designed with the objective of ensuring that this information is accumulated and communicated to the Companys management, including the
Companys chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Based upon their evaluation as of the end of the period covered by this report, the Companys chief executive
officer and chief financial officer concluded that, the Companys disclosure controls and procedures are not effective to
ensure that informaton required to be included in the Companys periodic SEC filings is recorded, processed, summarized,
and reported within the time periods specified in the SEC rules and forms.

The Companys board of directors was advised by Bagell, Josephs, Levine & Company, L.L.C., the Companys
independent registered public accounting firm, that during their performance of audit procedures for 2006 Bagell, Josephs,
Levine & Company, L.L.C. identified a material weakness as defined in Public Company Accounting Oversight Board
Standard No. 2 in the Companys internal control over financial reporting.

The
  deficiency consisted primarily of inadequate staffing and supervision that could
  lead to the untimely identification and resolution of accounting and disclosure
  matters and failure to perform timely and effective reviews. However, the size
  of the Company prevents us from being able to employ sufficient resources to
  enable us to have adequate segregation of duties within our internal control
  system. Management is required to apply its judgment in evaluating the cost-benefit
  relationship of possible controls and procedures.

Item 8 B. OTHER INFORMATION

None

17

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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, 2006.

|                 |  |     |  |                                                                          
|---------------- |  | --- |  | -------------------------------------------------------------------------
|Name             |  | Age |  | Position                                                                 
|                 |  |     |  |                                                                          
|                
|Robert S. Benou  |  | 72  |  | Chairman, Chief Executive Officer, Chief Financial Officer and
  Director
|Marc R. Benou    |  | 39  |  | President, Chief Operating Officer, Secretary and Director               
|Louis S. Massad  |  | 69  |  | Director                                                                 
|Edward J. Rielly |  | 39  |  | Director                                                                 
|David M. Peison  |  | 39  |  | Director                                                                 
|Thomas Fogg      |  | 69  |  | Officer, Vice President-Engineering                                      

Robert
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
material purchasing and inventory control. 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 new
product development and supervision of sales and marketing. 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.

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.

18

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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 David M. Peison is the Audit
Committees Financial Expert and that he is independent as the term is used
in Item 7(d) (3) (iv) of Schedule 14A under the Securities Exchange Act of
1934, as amended.

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, 2006, all Section 16(a) filing requirements applicable to our
  officers, directors and greater than 10% beneficial owners were complied with
  except that Form 4s for Louis Massad were not timely filed. These Forms
  have since been filed.

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.

19

---



Item 10. EXECUTIVE COMPENSATION

The
following table sets forth the total compensation paid to and accrued by each
executive officer during fiscal 2006.

|                                     |  |                            |                        |        |   |         |    |   |                                 |     |                                                                                 |  |                                          |   |                      |      |  |  |   |  |   |        |    
|------------------------------------ |  | -------------------------- | ---------------------- | ------ | - | ------- | -- | - | ------------------------------- | --- | ------------------------------------------------------------------------------- |  | ---------------------------------------- | - | -------------------- | ---- |  |  | - |  | - | ------ | ---
|Annual Compensation                  |  |                            | Long-Term Compensation |       
|                                     |  |                            |                       
|Name and
  Principal                 |  | Fiscal
  Year-End
  31-Jul |                        | Salary |   | Bonus   |    |   | Restricted
  Stock
  Awards (3) |     | Closing Price
  of Common Stock
  on the Date of the
  Restricted Stock
  Award |  | Securities
  Underlying
  Option/
  SARS |   | Other
  Compensation |     
|                                     |  |                            |                        |        |   |         |    |   |                                 |     |                                                                                 |  |                                          |   |                      |     
|                                    
|Robert Benou, Chairman               |  |                            | 2006                   |        | $ | 341,625 |    | $ | 140,000                         | (1) |                                                                                 |  |                                         |   | $                    |     |  |  |  |  | $ | 18,000 | ***
|Chief Executive Officer,             |  |                            | 2005                   |        | $ | 323,333 |    | $ | 125,000                         |     |                                                                                 |  | 85,000                                   | * | $                    | 3.13 |  |  |  |  | $ | 18,000 | ***
|Chief Financial Officer and Director |  |                            | 2004                   |        | $ | 312,000 | *  | $ |                                |     |                                                                                 |  | 390,000                                  |   | $                    | 4.49 |  |  |  |  | $ | 12,780 | ***
|                                     |  |                            |                        |        |   |         |    |   |                                 |     |                                                                                 |  |                                          |   |                      |      |  |  |   |  |   |        |    
|                                    
|Marc Benou, President                |  |                            | 2006                   |        | $ | 143,625 |    | $ | 80,000                          | (2) |                                                                                 |  |                                         |   | $                    |     |  |  |  |  |   |        |    
|Chief Operating Officer,             |  |                            | 2005                   |        | $ | 111,000 |    | $ | 60,000                          |     |                                                                                 |  | 80,000                                   |   | $                    | 3.13 |  |  |  |  |   |        |    
|Secretary and Director               |  |                            | 2004                   |        | $ | 98,500  | ** | $ |                                |     |                                                                                 |  | 340,000                                  |   | $                    | 4.49 |  |  |  |  |   |        |    
|                                     |  |                            |                        |        |   |         |    |   |                                 |     |                                                                                 |  |                                          |   |                      |      |  |  |   |  |   |        |    
|                                    
|Thomas Fogg                          |  |                            | 2006                   |        | $ | 40,602  |    | $ |                                |     |                                                                                 |  |                                         |   | $                    |     |  |  |  |  |   |        |    
|Vice-President -                     |  |                            | 2005                   |        | $ | 40,602  |    | $ |                                |     |                                                                                 |  | 20,000                                   |   | $                    | 3.13 |  |  |  |  |   |        |    
|Engineering                          |  |                            | 2004                   |        | $ | 40,602  |    | $ |                                |     |                                                                                 |  |                                         |   | $                    |     |  |  |  |  |   |        |    
|                                     |  |                            |                        |        |   |         |    |   |                                 |     |                                                                                 |  |                                          |   |                      |      |  |  |   |  |   |        |    

|                                                                                       
|---------------------------------------------------------------------------------------
|* For the fiscal year
  ended July 31, 2004, Robert Benou forgave his entire salary.   
|                                                                                       
|** For the fiscal year
  ended July 31, 2004, Marc Benou forgave $63,500 of his salary.
|                                                                                       
|*** Other compensation
  consisted of a car allowance.                                 

|    |                                                                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The Company paid Robert
  Benous 2006 bonus by July 31, 2006.                                                                                                                                         
|    |                                                                                                                                                                                                        
|(2) | The Company paid $60,000
  of Marc Benous bonus as of July 31, 2006.The balance of $20,000 was paid in
  August 2006.                                                                                 
|    |                                                                                                                                                                                                        
|(3) | On April 19, 2006, our
  stockholders approved the granting of 450,000 shares of our common stock to
  our directors, officers and employees. As of July 31, 2006, none 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, 2006 was $360,000 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.

20

---



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, 2006 was $148,000 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 AND MANAGEMENT

The following table sets forth, as of July 31, 2006, 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 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 7,441,353 shares issued and
outstanding.

|                                                                                           |  |                                           |     |                  |       |   |  | 
|------------------------------------------------------------------------------------------ |  | ----------------------------------------- | --- | ---------------- | ----- | - |  | 
|Name and Title                                                                             |  | Amount and Nature of Beneficial Ownership |     | Percent of Class |      
|                                                                                           |  |                                           |     |                  |      
|Robert S. Benou,
  Chairman, Chief Executive Officer, Chief Financial Officer and Director |  | 185,900                                   |     |                  | 2.49  | % | 
|Marc R. Benou,
  President, Chief Operating Officer, Secretary and Director                |  | 229,000                                   |     |                  | 3.07  | % | 
|Thomas Fogg, Vice
  President  Engineering                                                |  | 0                                         |     |                  | *     |   | 
|Louis Massad, Director                                                                     |  | 0                                         |     |                  | *     |   | 
|Edward J. Rielly, Director                                                                 |  | 0                                         |     |                  | *     |   | 
|David M. Peison,
  Director                                                                |  | 20,000                                    |     |                  | *     |   | 
|                                                                                           |  |                                           |     |                  |       |   | 
|All Officers and
  Directors as a Group (6 persons)                                        |  | 434,900                                   |     |                  | 5.84  | % | 
|DKR Soundshore Oasis
  Holding Fund Limited                                                |  | 1,000,000                                 | (1) |                  | 13.43 | % | 
|Barclays Global
  Investors, N.A.                                                          |  | 417,709                                   | (2) |                  | 5.61  | % | 

21

---



* 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. Fischer disclaims 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 principal
business address for Barclays Global Investors, N.A. is 45 Fremont Street, San
Francisco, CA 94105.

Item 12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS

Loan from
officers represent 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. There were no advances made by the officer during the years ended July
31, 2006 and 2005, respectively. A Repayment to an officer in the amount of
$77,427 was made during the fiscal year ended July 31, 2005 for prior years
loans. There was no loan repayment balances due to officers at July 31, 2006.

Item 13. EXHIBITS

|            |                                                                                                                                                                                    
|----------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a)         | Exhibits.                                                                                                                                                                          
|           
|            | Index of Exhibits                                                                                                                                                                  
|            |                                                                                                                                                                                    
|Exhibit No. | Description of Exhibits                                                                                                                                                            
|            |                                                                                                                                                                                    
|3.1         | 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.                  
|            |                                                                                                                                                                                    
|3.1.2       | Certificate of Amendment of Certificate of
  Incorporation incorporated by reference to Exhibit 3.1 to the Registrants
  Current Report on Form 10QSB for April 30, 2006.         

22

---



|      |                                                                                                                                                                                                                                                                                                                                                                       
|----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 B 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 January 19, 2006, among Conolog Corporation and the
  subscribers named therein (4)                                                                                                                                                                                                                                              
|      |                                                                                                                                                                                                                                                                                                                                                                       
|10.5  | Form of
  Warrant (issued by Conolog Corporation pursuant to the January 19, 2006
  Subscription Agreement) (4)                                                                                                                                                                                                                                                       
|      |                                                                                                                                                                                                                                                                                                                                                                       
|10.6  | Form of
  Brokers Warrant (issued by Conolog Corporation pursuant to the January 19,
  2006 Subscription Agreement) (4)                                                                                                                                                                                                                                               
|      |                                                                                                                                                                                                                                                                                                                                                                       
|14.1  | 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*                                                                                                                                                                                                                                                                                                                                         

23

---





---

|                 |     |                                                                                                                                                           
|---------------- | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|* Filed herewith
|                 |    
|                 | (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 February 2, 2006                                              

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
Levine & Company LLC billed the Company in the aggregate amount of $38,600
and $30,000 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, 2006 and 2005, respectively.

Audit-Related Fees

No fees were
billed for the years ended July 31, 2006 and 2005 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, 2006 and 2005 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, Joseph, Levine & Company LLC for the years
ended July 31, 2006 and 2005 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.

24

---



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                                                                                                                                                               
|                                                                                                                                                                                  
|                                                                                                                                                                                   | By: /s/ Robert S. Benou                            
|                                                                                                                                                                                   |                                                     | 
|October 27, 2006                                                                                                                                                                   | Chairman, Chief Executive Officer                  
|                                                                                                                                                                                   |                                                    
|In 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 27, 2006                                                                                                                                                                   | /s/Robert S. Benou                                 
|                                                                                                                                                                                   |                                                    
|                                                                                                                                                                                   | Chairman,
  Chief Executive Officer and            
|                                                                                                                                                                                   | Chief
  Financial Officer                          
|                                                                                                                                                                                   |                                                    
|October 27, 2006                                                                                                                                                                   | /s/Marc R. Benou                                   
|                                                                                                                                                                                   |                                                    
|                                                                                                                                                                                   | President, Chief Operating Officer,
  Secretary and
|                                                                                                                                                                                   | Director                                           
|                                                                                                                                                                                   |                                                    
|October 27, 2006                                                                                                                                                                   | /s/Louis S. Massad                                 
|                                                                                                                                                                                   |                                                    
|                                                                                                                                                                                   | Director                                           
|                                                                                                                                                                                   |                                                    
|October 27, 2006                                                                                                                                                                   | /s/Edward J. Rielly                                
|                                                                                                                                                                                   |                                                    
|                                                                                                                                                                                   | Director                                           
|                                                                                                                                                                                   |                                                    
|October 27, 2006                                                                                                                                                                   | /s/David M. Peison                                 
|                                                                                                                                                                                   |                                                    
|                                                                                                                                                                                   | Director                                           

25

---



Conolog Corporation and Subsidiaries

Consolidated Financial Statements

July 31, 2006 and 2005

---



Annual Report on Form 10-KSB

Item 8, Item 14 (a)(1) and (2)

Consolidated Financial Statements

Years Ended July 31, 2006 and 2005

Conolog Corporation and Subsidiaries

Somerville, New Jersey

---



Form 10-KSB - Item 14 (a) (1) and (2)
Index to the Consolidated Financial Statements
Conolog Corporation and Subsidiaries
July 31, 2006 and 2005

|                                                                                               |                                                                                              |           |          
|---------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------- | --------- | ---------
|                                                                                               |                                                                                              |           | Page     
|                                                                                               |                                                                                              |           |          
|The
  following consolidated financial statements of the registrant are included in
  Item 14: |                                                                                              |          
|                                                                                               |                                                                                              |          
|                                                                                               | Report Of Independent Registered Public Accounting Firm                                      |           | F-1      
|                                                                                               |                                                                                              |           |          
|                                                                                               | Consolidated Balance Sheets as of July 31, 2006 and 2005                                     |           | F-2 - F-3
|                                                                                               |                                                                                              |           |          
|                                                                                               | Consolidated Statements of Operations for the years ended July 31,
  2006 and 2005           |           | F-4      
|                                                                                               |                                                                                              |           |          
|                                                                                               | Consolidated Statements of Stockholders Equity for the years ended
  July 31, 2006 and 2005 |           | F-5      
|                                                                                               |                                                                                              |           |          
|                                                                                               | Consolidated Statements of Cash Flows for the years ended July 31,
  2006 and 2005           |           | F-6 - F-7
|                                                                                               |                                                                                              |           |          
|Notes to Consolidated Financial Statements                                                     |                                                                                              | F-8- F-20

---



BAGELL, JOSEPHS, LEVINE & COMPANY, L.L.C.Certified Public
Accountants

High Ridge Commons
Suites 400-403
200 Haddonfield Berlin Road
Gibbsboro, New Jersey 08026
(856) 346-2828 Fax (856) 346-2882

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors
Conolog Corporation 
Somerville, New Jersey

We have audited the accompanying consolidated balance sheets of
  Conolog Corporation and Subsidiaries (the Company) as of July 31,
  2006 and 2005 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 audits.

We conducted our audits 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 audits provide
  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, 2006 and 2005, 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 Accountants
Gibbsboro, New Jersey

October 27, 2006

|           |                                                         
|---------- | --------------------------------------------------------
|MEMBER OF: | AMERICAN INSTITUTE OF
  CERTIFIED PUBLIC ACCOUNTANTS    
|           | NEW JERSEY SOCIETY OF
  CERTIFIED PUBLIC ACCOUNTANTS    
|           | PENNSYLVANIA INSTITUTE OF
  CERTIFIED PUBLIC ACCOUNTANTS

F-1

---



CONOLOG
CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 2006 and 2005

|                                                        |  |      |            |      |   |            |  
|------------------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- | -
|ASSETS                                                  |  |      |            |      |   |            |  
|                                                        |  | 2006 |            | 2005 |  
|                                                        |  |      |            |      |  
|                                                        |  |      |            |      |   |            |  
|Current Assets:                                         |  |      |            |      |   |            |  
|Cash
        and cash equivalents                       |  | $    | 238,137    |      | $ | 1,936,655  |  
|Certificate
        of Deposit                          |  |      | 2,622,812  |      |   | 2,534,417  |  
|Accounts
        receivable - net of allowance          |  |      | 183,622    |      |   | 89,194     |  
|Prepaid
        expenses                                |  |      | 26,376     |      |   | 23,755     |  
|Accounts
        receivable - other                     |  |      | 4,377      |      |   |           |  
|Current
        portion of note receivable              |  |      | 14,864     |      |   | 14,864     |  
|Inventory                                               |  |      | 600,000    |      |   | 900,000    |  
|Other
        current assets                            |  |      | 146,364    |      |   | 252,599    |  
|                                                        |  |      |            |      |   |            |  
|                                                        |  |      |            |      |   |            |  
|Total
        Current Assets                            |  |      | 3,836,552  |      |   | 5,751,484  |  
|                                                        |  |      |            |      |   |            |  
|                                                        |  |      |            |      |   |            |  
|                                                        |  |      |            |      |   |            |  
|Property, Plant and Equipment:                          |  |      |            |      |   |            |  
|Machinery
        and equipment                         |  |      | 1,341,961  |      |   | 1,324,504  |  
|Furniture
        and fixtures                          |  |      | 423,342    |      |   | 423,342    |  
|Automobiles                                             |  |      | 34,097     |      |   | 34,097     |  
|Computer
        software                               |  |      | 147,203    |      |   | 147,203    |  
|Leasehold
        improvements                          |  |      | 30,265     |      |   | 30,265     |  
|                                                        |  |      |            |      |   |            |  
|Total Property, Plant and Equipment                     |  |      | 1,976,868  |      |   | 1,959,411  |  
|Less:
        accumulated depreciation and amortization |  |      | (1,906,895 | )    |   | (1,868,405 | )
|                                                        |  |      |            |      |   |            |  
|Net
        Property, Plant and Equipment               |  |      | 69,973     |      |   | 91,006     |  
|                                                        |  |      |            |      |   |            |  
|                                                        |  |      |            |      |   |            |  
|Other Assets:                                           |  |      |            |      |   |            |  
|Inventory,
        net of current portion               |  |      | 1,123,681  |      |   | 970,212    |  
|Deferred
        financing fees, net of amortization    |  |      | 153,313    |      |   |           |  
|Note
        receivable, net of current portion         |  |      | 110,243    |      |   | 125,106    |  
|                                                        |  |      |            |      |   |            |  
|                                                        |  |      |            |      |   |            |  
|Total
        Other Assets                              |  |      | 1,387,237  |      |   | 1,095,318  |  
|                                                        |  |      |            |      |   |            |  
|                                                        |  |      |            |      |   |            |  
|TOTAL
        ASSETS                                    |  | $    | 5,293,762  |      | $ | 6,937,808  |  
|                                                        |  |      |            |      |   |            |  

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

F-2

---



CONOLOG CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 2006 AND 2005

|                                                                                                                                                                                                     |  |      |             |      |   |             |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | ---- | - | ----------- | -
|LIABILITIES & STOCKHOLDERS EQUITY                                                                                                                                                                   |  |      |             |      |  
|                                                                                                                                                                                                     |  | 2006 |             | 2005 |  
|                                                                                                                                                                                                     |  |      |             |      |  
|                                                                                                                                                                                                     |  |      |             |      |   |             |  
|Current
  Liabilities:                                                                                                                                                                               |  |      |             |      |   |             |  
|Accounts payable                                                                                                                                                                                     |  | $    | 125,843     |      | $ | 46,650      |  
|Accrued expenses                                                                                                                                                                                     |  |      | 60,910      |      |   | 248,643     |  
|Accrued legal fees                                                                                                                                                                                   |  |      |            |      |   | 175,000     |  
|                                                                                                                                                                                                     |  |      |             |      |   |             |  
|Total Current Liabilities                                                                                                                                                                            |  |      | 186,753     |      |   | 470,293     |  
|                                                                                                                                                                                                     |  |      |             |      |   |             |  
|                                                                                                                                                                                                     |  |      |             |      |   |             |  
|Non-Current Liabilities:                                                                                                                                                                             |  |      |             |      |   |             |  
|Convertible Debenture - net of discount of
$ 391,580                                                                                                                                                 |  |      | 858,420     |      |   |            |  
|                                                                                                                                                                                                     |  |      |             |      |   |             |  
|Total Liabilities                                                                                                                                                                                    |  |      | 1,045,173   |      |   | 470,293     |  
|                                                                                                                                                                                                     |  |      |             |      |   |             |  
|                                                                                                                                                                                                     |  |      |             |      |   |             |  
|Stockholders Equity                                                                                                                                                                                 |  |      |             |      |   |             |  
|Preferred stock, par value $.50; Series A;
  4% cumulative; 162,000 shares authorized; 155,000 shares issued and outstanding
  at July 31, 2006 and 2005, respectively.                              |  |      | 77,500      |      |   | 77,500      |  
|Preferred stock, par value $.50; Series B;
  $.90 cumulative; 2,000,000 shares authorized; 1,197 shares issued and
  outstanding  at July 31, 2006 and
  2005, respectively.                         |  |      | 597         |      |   | 597         |  
|Common stock, par value $0.01; 30,000,000
  shares authorized; 7,441,353 and 7,417,847 shares issued and outstanding at July
  31, 2006 and 2005 respectively including 220 shares held in treasury. |  |      | 74,414      |      |   | 74,172      |  
|Contributed capital                                                                                                                                                                                  |  |      | 35,954,019  |      |   | 35,425,721  |  
|Retained (deficit)                                                                                                                                                                                   |  |      | (31,726,207 | )    |   | (28,391,938 | )
|Treasury shares at cost                                                                                                                                                                              |  |      | (131,734    | )    |   | (131,734    | )
|Deferred compensation                                                                                                                                                                                |  |      |            |      |   | (547,750    | )
|Prepaid consulting                                                                                                                                                                                   |  |      |            |      |   | (39,053     | )
|                                                                                                                                                                                                     |  |      |             |      |   |             |  
|                                                                                                                                                                                                     |  |      |             |      |   |             |  
|Total Stockholders Equity                                                                                                                                                                           |  |      | 4,248,589   |      |   | 6,467,515   |  
|                                                                                                                                                                                                     |  |      |             |      |   |             |  
|                                                                                                                                                                                                     |  |      |             |      |   |             |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                           |  | $    | 5,293,762   |      | $ | 6,937,808   |  
|                                                                                                                                                                                                     |  |      |             |      |   |             |  

The
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, 2006 AND 2005

|                                                             |  |      |            |      |   |            |  
|------------------------------------------------------------ |  | ---- | ---------- | ---- | - | ---------- | -
|                                                             |  | 2006 |            | 2005 |  
|                                                             |  |      |            |      |  
|OPERATING
        REVENUES                                   |  |      |            |      |   |            |  
|Product
        revenue                                      |  | $    | 547,767    |      | $ | 549,222    |  
|                                                             |  |      |            |      |   |            |  
|COST
        OF PRODUCT REVENUES                             |  |      |            |      |   |            |  
|Materials
        used for current years production         |  |      | 282,932    |      |   | 494,605    |  
|Write
        down of obsolete inventory parts               |  |      | 245,326    |      |   |           |  
|                                                             |  |      |            |      |   |            |  
|Total Cost of Product Revenues                               |  |      | 528,258    |      |   | 494,605    |  
|                                                             |  |      |            |      |   |            |  
|GROSS
        PROFIT                                         |  |      | 19,509     |      |   | 54,617     |  
|                                                             |  |      |            |      |   |            |  
|                                                             |  |      |            |      |   |            |  
|OPERATING
        EXPENSES                                   |  |      |            |      |   |            |  
|General
        and administrative costs                     |  |      | 2,159,037  |      |   | 2,498,039  |  
|Professional
        fees                                    |  |      | 552,434    |      |   | 374,292    |  
|Selling
        and trade shows                              |  |      | 314,100    |      |   | 274,503    |  
|Research and development                                     |  |      | 376,713    |      |   | 177,338    |  
|                                                             |  |      |            |      |   |            |  
|Total
        Operating Expenses                             |  |      | 3,402,284  |      |   | 3,324,172  |  
|                                                             |  |      |            |      |   |            |  
|                                                             |  |      |            |      |   |            |  
|LOSS
        BEFORE OTHER INCOME (EXPENSE)                   |  |      | (3,382,775 | )    |   | (3,269,555 | )
|                                                             |  |      |            |      |   |            |  
|                                                             |  |      |            |      |   |            |  
|OTHER
        INCOME (EXPENSE)                               |  |      |            |      |   |            |  
|Interest
        income                                      |  |      | 135,841    |      |   | 58,154     |  
|Interest
        (expense)                                   |  |      | (83,680    | )    |   | (23,371    | )
|Other
        income                                         |  |      | 525        |      |   | 720        |  
|                                                             |  |      |            |      |   |            |  
|Total
        Other Income                                   |  |      | 52,686     |      |   | 35,503     |  
|                                                             |  |      |            |      |   |            |  
|                                                             |  |      |            |      |   |            |  
|LOSS
        FROM OPERATIONS BEFORE INCOME TAX BENEFIT       |  |      | (3,330,089 | )    |   | (3,234,052 | )
|Benefit
        from income taxes                            |  |      |           |      |   | 246,723    |  
|                                                             |  |      |            |      |   |            |  
|                                                             |  |      |            |      |   |            |  
|NET
        LOSS APPLICABLE TO COMMON SHARES                 |  | $    | (3,330,089 | )    | $ | (2,987,329 | )
|                                                             |  |      |            |      |   |            |  
|                                                             |  |      |            |      |   |            |  
|NET
        LOSS PER COMMON SHARE                            |  | $    | (0.45      | )    | $ | (0.59      | )
|                                                             |  |      |            |      |   |            |  
|                                                             |  |      |            |      |   |            |  
|WEIGHTED AVERAGE NUMBER
        OF COMMON SHARES OUTSTANDING |  |      | 7,425,822  |      |   | 5,024,671  |  
|                                                             |  |      |            |      |   |            |  

The
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, 2006 AND 2005                

|                                                            |  |                   |         |                   |   |              |  |             |       |           |   |          |  |          |             |          |          |           |   |               |            |              |   |            |   |        |             |       |   |          |   |   |            |   |   |          |   |   |            |  
|----------------------------------------------------------- |  | ----------------- | ------- | ----------------- | - | ------------ |  | ----------- | ----- | --------- | - | -------- |  | -------- | ----------- | -------- | -------- | --------- | - | ------------- | ---------- | ------------ | - | ---------- | - | ------ | ----------- | ----- | - | -------- | - | - | ---------- | - | - | -------- | - | - | ---------- | -
|                                                            |  | Series A          |         | Series B          |   |              |  |             |       |           |   |          |  |          | Contributed |          | Retained |           |   |               |            |              |   |            |   |        |             | Total |  
|                                                            |  | Preferred
  Stock |         | Preferred
  Stock |   | Common Stock |  | Contributed |       | Capital - |   | Earnings |  | Treasury |             | Deferred |          | Prepaid   |   | Stockholders |           
|                                                            |  | Shares            |         | Amount            |   | Shares       |  | Amount      |       | Shares    |   | Amount   |  | Capital  |             | Warrants |          | (Deficit) |   | Stock         |            | Compensation |   | Consulting |   | Equity |            
|                                                            |  |                   |         |                   |   |              |  |             |       |           |   |          |  |          |             |          |          |           |   |               |            |              |   |            |   |        |            
|                                                            |  |                   |         |                   |   |              |  |             |       |           |   |          |  |          |             |          |          |           |   |               |            |              |   |            |   |        |             |       |   |          |   |   |            |   |   |          |   |   |            |  
|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 | ) | $ | 1,945,107  |  
|                                                            |  |                   |         |                   |   |              |  |             |       |           |   |          |  |          |             |          |          |           |   |               |            |              |   |            |   |        |             |       |   |          |   |   |            |   |   |          |   |   |            |  
|                                                            |  |                   |         |                   |   |              |  |             |       |           |   |          |  |          |             |          |          |           |   |               |            |              |   |            |   |        |             |       |   |          |   |   |            |   |   |          |   |   |            |  
|Conversion of debt                                          |  |                   |        |                   |   |             |  |             |      |           |   |         |  |          | 1,032,076   |          |          | 10,321    |   |               | 1,083,679  |              |   |           |   |        |            |       |   |         |   |   |           |   |   |         |   |   | 1,094,000  |  
|Common shares issued for cash                               |  |                   |        |                   |   |             |  |             |      |           |   |         |  |          | 2,569,355   |          |          | 25,686    |   |               | 3,049,649  |              |   |           |   |        |            |       |   |         |   |   |           |   |   |         |   |   | 3,075,335  |  
|Costs directly related to stock subscriptions               |  |                   |        |                   |   |             |  |             |      |           |   |         |  |          |            |          |          |          |   |               | (1,093,781 | )            |   |           |   |        |            |       |   |         |   |   |           |   |   |         |   |   | (1,093,781 | )
|Warrants issued for common stock shares                     |  |                   |        |                   |   |             |  |             |      |           |   |         |  |          |            |          |          |          |   |               | (1,187,928 | )            |   | 3,857,593  |   |        |            |       |   |         |   |   |           |   |   |         |   |   | 2,669,665  |  
|Warrants converted to common stock shares                   |  |                   |        |                   |   |             |  |             |      |           |   |         |  |          | 470,000     |          |          | 4,700     |   |               | 2,391,501  |              |   | (1,599,401 | ) |        |            |       |   |         |   |   |           |   |   |         |   |   | 796,800    |  
|Shares issued for services to be provided                   |  |                   |        |                   |   |             |  |             |      |           |   |         |  |          | 117,000     |          |          | 1,170     |   |               | 333,181    |              |   |           |   |        |            |       |   |         |   |   |           |   |   | (334,351 | ) |   |           |  
|Amortization of consultant services                         |  |                   |        |                   |   |             |  |             |      |           |   |         |  |          |            |          |          |          |   |               |           |              |   |           |   |        |            |       |   |         |   |   |           |   |   | 419,968  |   |   | 419,968    |  
|Common 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    |   |   |         |   |   | 547,750    |  
|Exchange 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  | ) | $ | 6,467,515  |  
|                                                            |  |                   |         |                   |   |              |  |             |       |           |   |          |  |          |             |          |          |           |   |               |            |              |   |            |   |        |             |       |   |          |   |   |            |   |   |          |   |   |            |  
|                                                            |  |                   |         |                   |   |              |  |             |       |           |   |          |  |          |             |          |          |           |   |               |            |              |   |            |   |        |             |       |   |          |   |   |            |   |   |          |   |   |            |  
|Original Discount on Convertible Debenture                  |  |                   |        |                   |   |             |  |             |      |           |   |         |  |          |            |          |          |          |   |               | 482,710    |              |   |           |   |        |            |       |   |         |   |   |           |   |   |         |   |   | 482,710    |  
|Shares issued for services to be provided                   |  |                   |        |                   |   |             |  |             |      |           |   |         |  |          | 50,000      |          |          | 500       |   |               | 41,150     |              |   |           |   |        |            |       |   |         |   |   |           |   |   |         |   |   | 41,650     |  
|Amortization of consultant services                         |  |                   |        |                   |   |             |  |             |      |           |   |         |  |          |            |          |          |          |   |               |           |              |   |           |   |        |            |       |   |         |   |   |           |   |   | 39,053   |   |   | 39,053     |  
|Amortization officers, directors and employee
compensation  |  |                   |        |                   |   |             |  |             |      |           |   |         |  |          |            |          |          |          |   |               |           |              |   |           |   |        |            |       |   |         |   |   | 547,750    |   |   |         |   |   | 547,750    |  
|Exchange lots / escheatment                                 |  |                   |        |                   |   |             |  |             |      |           |   |         |  |          | (26,494     | )        |          | (258      | ) |               | 258        |              |   |           |   |        |            |       |   |         |   |   |           |   |   |         |   |   |           |  
|Net loss for the Year                                       |  |                   |        |                   |   |             |  |             |      |           |   |         |  |          |            |          |          |          |   |               |           |              |   |           |   |        | (3,330,089  | )     |   |         |   |   |           |   |   |         |   |   | (3,330,089 | )
|Dividends                                                   |  |                   |        |                   |   |             |  |             |      |           |   |         |  |          |            |          |          |          |   |               | 4,180      |              |   |           |   |        | (4,180      | )     |   |         |   |   |           |   |   |         |   |   |           |  
|                                                            |  |                   |         |                   |   |              |  |             |       |           |   |          |  |          |             |          |          |           |   |               |            |              |   |            |   |        |             |       |   |          |   |   |            |   |   |          |   |   |            |  
|Balance at July 31, 2006                                    |  |                   | 155,000 |                   | $ | 77,500       |  |             | 1,197 |           | $ | 597      |  |          | 7,441,353   |          | $        | 74,414    |   | $             | 32,096,426 |              | $ | 3,857,593  |   | $      | (31,726,207 | )     | $ | (131,734 | ) | $ |           |   | $ |         |   | $ | 4,248,589  |  
|                                                            |  |                   |         |                   |   |              |  |             |       |           |   |          |  |          |             |          |          |           |   |               |            |              |   |            |   |        |             |       |   |          |   |   |            |   |   |          |   |   |            |  

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

F-5

---



CONOLOG CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JULY 31, 2006 AND 2005

|                                                                                 |  |      |            |      |   |            |  
|-------------------------------------------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- | -
|                                                                                 |  | 2006 |            | 2005 |  
|                                                                                 |  |      |            |      |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                             |  |      |            |      |   |            |  
|Net loss from continuing operations                                              |  | $    | (3,330,089 | )    | $ | (2,987,329 | )
|Adjustments to reconcile net loss to net
  cash (used in) continuing operations: |  |      |            |      |   |            |  
|Depreciation                                                                     |  |      | 38,490     |      |   | 50,530     |  
|Amortization of deferred compensation                                            |  |      | 547,750    |      |   | 547,750    |  
|Amortization of prepaid consulting expense                                       |  |      | 39,053     |      |   | 419,968    |  
|Shares issued for services                                                       |  |      | 41,650     |      |   |           |  
|Amortization of discount on debenture                                            |  |      | 91,130     |      |   |           |  
|Amortization of deferred financing fees                                          |  |      | 21,902     |      |   |           |  
|Write down of obsolete inventory                                                 |  |      | 245,326    |      |   |           |  
|Gain on sale of equipment                                                        |  |      |           |      |   | (400       | )
|Changes in assets and liabilities                                                |  |      |            |      |   |            |  
|(Increase) decrease in accounts receivable                                       |  |      | (94,428    | )    |   | 58,977     |  
|(Increase) in
        accounts receivable - other                                |  |      | (4,377     | )    |   |           |  
|(Increase) in
        prepaid expenses                                           |  |      | (2,621     | )    |   |           |  
|(Increase) Decrease in inventories                                               |  |      | (98,795    | )    |   | 54,205     |  
|(Increase) decrease in other current assets                                      |  |      | 106,235    |      |   | (232,255   | )
|Increase (decrease) in accounts payable                                          |  |      | 79,193     |      |   | (162,925   | )
|Increase (decrease) in accrued expenses and
  other liabilities                  |  |      | (362,734   | )    |   | 270,047    |  
|                                                                                 |  |      |            |      |   |            |  
|Net cash (used in) continuing operations                                         |  |      | (2,682,315 | )    |   | (1,981,432 | )
|                                                                                 |  |      |            |      |   |            |  
|                                                                                 |  |      |            |      |   |            |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                             |  |      |            |      |   |            |  
|Proceeds from sale of equipment                                                  |  |      |           |      |   | 400        |  
|Purchase of equipment and leasehold
  improvements                               |  |      | (17,457    | )    |   | (46,926    | )
|Purchase of certificate
        of deposit                                       |  |      | (2,622,812 | )    |   | (2,534,417 | )
|Redemption of
        certificate of deposit                                     |  |      | 2,534,417  |      |   |           |  
|                                                                                 |  |      |            |      |   |            |  
|Net cash (used in) investing
activities                                          |  |      | (105,852   | )    |   | (2,580,943 | )
|                                                                                 |  |      |            |      |   |            |  
|                                                                                 |  |      |            |      |   |            |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                             |  |      |            |      |   |            |  
|Repayment of loan from officer                                                   |  |      |           |      |   | (77,427    | )
|Proceeds from issuance of convertible
  debenture                                |  |      | 1,250,000  |      |   |           |  
|(Increase) in deferred financing fees                                            |  |      | (175,215   | )    |   |           |  
|Proceeds from issuance of stock, net of
  issuance costs                         |  |      |           |      |   | 4,651,219  |  
|Proceeds from issuance of stock and
  warrants                                   |  |      |           |      |   | 796,800    |  
|Proceeds from note receivable                                                    |  |      | 14,864     |      |   | 8,670      |  
|                                                                                 |  |      |            |      |   |            |  
|Net cash provided by financing
activities                                        |  |      | 1,089,649  |      |   | 5,379,262  |  
|                                                                                 |  |      |            |      |   |            |  

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

F-6

---



Conolog
Corporation
  Consolidated Statements of Cash Flows
For the Years Ended July 31, 2006 and 2005

- Continued

|                                                       |  |      |            |      |   |           | 
|------------------------------------------------------ |  | ---- | ---------- | ---- | - | --------- | 
|                                                       |  | 2006 |            | 2005 |  
|                                                       |  |      |            |      |  
|NET INCREASE (DECREASE) IN CASH AND CASH
  EQUIVALENTS |  |      | (1,698,518 | )    |   | 816,887   | 
|                                                       |  |      |            |      |   |           | 
|CASH AND CASH EQUIVALENTS - BEGINNING OF
  YEAR        |  |      | 1,936,655  |      |   | 1,119,768 | 
|                                                       |  |      |            |      |   |           | 
|                                                       |  |      |            |      |   |           | 
|CASH AND CASH EQUIVALENTS - END OF YEAR                |  | $    | 238,137    |      | $ | 1,936,655 | 
|                                                       |  |      |            |      |   |           | 
|                                                       |  |      |            |      |   |           | 
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW
  INFORMATION:    |  |      |            |      |   |           | 
|CASH PAID DURING THE YEAR FOR:                         |  |      |            |      |   |           | 
|Interest expense                                       |  | $    | 27,740     |      | $ | 23,371    | 
|                                                       |  |      |            |      |   |           | 
|SUPPLEMENTAL DISCLOSURE OF NONCASH
  ACTIVITIES:       |  |      |            |      |   |           | 
|Debt converted to equity                               |  | $    |           |      | $ | 1,094,000 | 
|                                                       |  |      |            |      |   |           | 
|Common stock issued for services to be
  provided      |  | $    | 41,650     |      | $ | 334,350   | 
|                                                       |  |      |            |      |   |           | 
|Common 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 SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2006 AND 2005

|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1- | NATURE OF ORGANIZATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        | Conolog Corporation (the Company)
        is in the business of design, manufacturing and distribution of small
        electronic and electromagnetic components and subassemblies for use in
        telephone, radio and microwave transmissions and reception and other communication
        areas. The Companys products are used for transceiving various quantities,
        data and protective relaying functions in industrial, utility and other
        markets. The Companys customers include primarily industrial customers,
        which include power companies, and various branches of the military.
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|NOTE 2- | SUMMARY OF SIGNIFICANT ACCOUNTING
        POLICIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        | Principles of Consolidation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        | The consolidated financial statements include
        the accounts of Conolog Corporation and its wholly owned subsidiaries.
        All significant intercompany balances and transactions have been eliminated.                                                                                                                                                                                                                                                                                                                                                                                                            
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        | Cash and Equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        | For the purpose of the statements of cash
        flows, cash equivalents include time deposits, certificates of deposit
        and all highly liquid debt instruments with original maturities of three
        months or less. The Company maintains cash and cash equivalents balances
        at financial institutions and are insured by the Federal Deposit Insurance
        Corporation up to $100,000. At times during the year, balances in certain
        bank accounts may exceed the FDIC insured limits.                                                                                                    
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        | Certificates of Deposit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        | At July 31, 2006 and 2005, the Company had
        one year certificates of deposit totaling $2,622,812 and $2,534,417, with
        interest at a rate of 4.18% and 3.25% and maturing March 2006 and August
        2006, respectively.                                                                                                                                                                                                                                                                                                                                                                                    
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        | Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        | Inventories are valued at the lower of
        cost (determined on a first-in, first-out basis) or market.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        | Accounts Receivable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        | Accounts Receivable are recorded at net
        realizable value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        | 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 upon
        factors surrounding the credit risk of specific customers, historical
        trends and other information.                                                                                                                                                                                                                                                                                                 

F-8

---



CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 2006 AND 2005

|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2- | SUMMARY
  OF SIGNIFICANT ACCOUNTING POLICIES                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        | (CONTINUED)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        | Property, Plant and
  Equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        | Property, 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 (3 to 7 years) of the assets.
  Depreciation and amortization was $38,490 and $50,530 for the years ended
  July 31, 2006 and 2005, respectively. Repairs and maintenance expenditures
  which do not extend the useful lives of the related assets are expensed as
  incurred. 
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        | Research and Development                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        | Research and Development
  costs incurred in the development of the Companys CM-100 Platform system,
  and directly charged to expense amounted to $376,713 during fiscal year July
  31,2006. Research and Development costs directly charged to expense were
  $177,338 for the year ended July 31, 2005.                                                                                                                                                                                       
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        | Revenue Recognition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        | Revenue is recorded in
  accordance with the guidance of the SECs Staff Accounting Bulletin (SAB) No.
  104, which supersedes SAB No. 101. Revenue from product sales are recognized
  at the time of shipment (when title and risks and rewards of ownership have
  passed) upon fulfillment of acceptance terms; products are not sold on a
  conditional basis. Therefore, when delivery has occurred the sale is complete
  as long as the collection of the resulting receivable is probable.
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        | Advertising Costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        | Advertising costs are
  charged to operations when incurred. Advertising expense was $1,380 and
  $7,301 for the years ended July 31, 2006 and 2005, respectively.                                                                                                                                                                                                                                                                                                                                 
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        | Shipping and Handling
  Costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        | Shipping and handling costs
  are expensed as incurred and amounted to $23,416 and $25,627 for the years
  ended July 31, 2006 and 2005, respectively.                                                                                                                                                                                                                                                                                                                                             

F-9

---



CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 2006 AND 2005

|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2- | SUMMARY OF SIGNIFICANT ACCOUNTING
        POLICIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        | (CONTINUED)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|        | Securities Issued for Services                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|        | The 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 Instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|        | The 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 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.                  
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|        | Loss Per Share of Common Stock                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|        | Loss 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 7,425,822 and 5,024,671 for 2006 and 2005
        respectively. The effect of assuming the exchange of Series A Preferred
        Stock and Series B Preferred Stock in 2006 and 2005 would be anti-dilutive.
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|        | Reclassifications                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|        | Certain amounts for the year ended July 31, 2005 have been reclassified
        to conform to the presentation of the July 31, 2006 amounts. The reclassifications
        have no effect on the net loss for the year ended July 31, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

F-10

---



CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 2006 AND 2005

|        |                                                                                                         
|------- | --------------------------------------------------------------------------------------------------------
|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 is a reconciliation of the computation for basic and diluted EPS:                       
|        |                                                                                                         

|                                                       |  |              |            |              |   |            |  
|------------------------------------------------------ |  | ------------ | ---------- | ------------ | - | ---------- | -
|                                                       |  | July 31,2006 |            | July 31,2005 |  
|                                                       |  |              |            |              |  
|                                                      
|Net Loss                                               |  | $            | (3,330,089 | )            | $ | (2,987,329 | )
|                                                       |  |              |            |              |  
|                                                       |  |              |            |              |   |            |  
|Weighted-average common shares outstanding
  (Basic)   |  |              | 7,425,822  |              |   | 5,024,671  |  
|                                                       |  |              |            |              |   |            |  
|Weighted-average common stock equivalents:             |  |              |            |              |   |            |  
|Stock options                                          |  |              |           |              |   |           |  
|Warrants                                               |  |              |           |              |   |           |  
|                                                       |  |              |            |              |   |            |  
|Weighted-average common shares outstanding
  (Diluted) |  |              | 7,425,822  |              |   | 5,024,671  |  
|                                                       |  |              |            |              |   |            |  

F-11

---



CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 2006 AND 2005

|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2- | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|        | (CONTINUED)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        | Use of
  Estimates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        | The
  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 Pronouncements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        | On 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, 2006 AND 2005

|        |                                                       
|------- | ------------------------------------------------------
|NOTE 3- | INVENTORY                                             
|        |                                                       
|        | Inventory
  consisted of the following as of July 31,:

|                 |  |      |           |      |   |           | 
|---------------- |  | ---- | --------- | ---- | - | --------- | 
|                 |  | 2006 |           | 2005 |  
|                 |  |      |           |      |  
|                
|Finished
  Goods |  | $    | 207,932   |      | $ | 454,377   | 
|Work-in-process  |  |      | 1,710     |      |   | 10,448    | 
|Raw
  materials  |  |      | 1,514,039 |      |   | 1,405,387 | 
|                 |  |      |           |      |   |           | 
|                 |  | $    | 1,723,681 |      | $ | 1,870,212 | 
|                 |  |      |           |      |   |           | 

|         |                                                                                                                                                                                                                                                                                                                                                                                                                              
|-------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|         | Inventory of
  $1,123,681 was classified as non-current. Only the amount the Company expects
  to realize in the next operating cycle has been classified as current.                                                                                                                                                                                                                                                        
|         |                                                                                                                                                                                                                                                                                                                                                                                                                              
|NOTE 4 - | DEFERRED FINANCING FEES                                                                                                                                                                                                                                                                                                                                                                                                      
|         |                                                                                                                                                                                                                                                                                                                                                                                                                              
|         | The Company
  has recorded deferred financing fees of $175,215, equal to the fair market
  value of warrants issued in conjunction with the convertible bond debentures.
  These deferred financing fees will be amortized over the life of the loans.
  Amortization expense for these fees for the year ended July 31, 2006 was
  $21,902.                                                                                 
|         |                                                                                                                                                                                                                                                                                                                                                                                                                              
|NOTE 5 - | NOTE RECEIVABLE                                                                                                                                                                                                                                                                                                                                                                                                              
|         |                                                                                                                                                                                                                                                                                                                                                                                                                              
|         | The company entered into an Agreement to Rescind Asset Purchase
        Agreement, dated October 22, 2002. This Agreement requires the repayment
        $148,640.32, consisting of principal and interest accrued to July 31,
        2004. Payments of $1,606.89 (principal of 41,238.68 and interest at 5%
        of $368.22) begin December 30, 2004 and will continue monthly until the
        full balance is repaid.
|         |                                                                                                                                                                                                                                                                                                                                                                                                                              
|NOTE 6-  | RENTAL COMMITMENTS                                                                                                                                                                                                                                                                                                                                                                                                           
|         |                                                                                                                                                                                                                                                                                                                                                                                                                              
|         | Total rental
  expense for operating leases of the Company amounted to approximately $55,680
  and $55,680 during the years ended July 31, 2006 and 2005, 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, 2006 AND 2005

|        |                                                          
|------- | ---------------------------------------------------------
|NOTE 7- | INCOME TAXES                                             
|        |                                                          
|        | The income
  tax (benefit) is comprised of the following:

|                       |  | July 31, |  
|---------------------- |  | -------- | -
|                       |  | 2006     |  
|                       |  |          |  
|                      
|Current
  Income Taxes |  | $        | 
|Federal                |  |          | 
|State                  |  |          | 
|                       |  |          |  
|                       |  | $        | 
|                       |  |          |  

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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, 2005, the Company
  entered into an agreement under which it sold a portion of its NOL carryover.
  The total proceeds of this transaction are recorded as a benefit in the
  accompanying financial statements. The remaining unsold portion of this NOL
  of  $146,364 is recorded on the
  balance sheet as Other Current Assets.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Deferred
  taxes are recognized for temporary differences between the bases of assets
  and liabilities for financial statement and income tax purposes, and net
  operating losses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | The
  temporary differences causing deferred tax benefits are primarily due to net
  operating loss carry forwards. The Company has established a valuation
  allowance at the full value of the deferred tax asset.                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | At July 31,
  2006 and 2005, the Company has net operating loss carryforwards for federal
  and state income tax purposes of approximately $39,000,000 and $32,860,000
  respectively, which is available to offset future Federal and State taxable
  income through 2026.                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | There was no
  provision for income taxes for the year ended July 31, 2006 and July 31,
  2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

F-14

---



CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 2006 AND 2005

|                            |  |      |             |      |   |            |  
|--------------------------- |  | ---- | ----------- | ---- | - | ---------- | -
|                            |  | 2006 |             | 2005 |  
|                            |  |      |             |      |  
|Deferred
  tax asset        |  | $    | 10,107,718  |      | $ | 8,516,400  |  
|Less:
  Valuation allowance |  |      | (10,107,718 | )    |   | (8,516,400 | )
|                            |  |      |             |      |   |            |  
|                            |  | $    |            |      | $ |           |  
|                            |  |      |             |      |   |            |  

|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 8- | PROFIT SHARING PLAN                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|        | The 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, 2006 and 2005.                                                                                                                                                                                                                                      
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|        | 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 $163,407 and $160,542 for the fiscal years ended July 31, 2006
  and 2005 respectively.                                                                                                                                                                             
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|NOTE 9- | STOCKHOLDERS EQUITY                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|        | The Series A
  Preferred Stock provides 4% cumulative dividends, which were $114,583 ($0.74
  per share) in arrears at July 31, 2006. 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
  $37,776 ($31.56 per share) in arrears at July 31, 2006. In addition, each
  share of Series B Preferred Stock is convertible into .005 of one share of
  Common Stock.                                                                                                                                                                                                                                                          
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|        | 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

F-15

---



CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 2006 AND 2005

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | On January
  19, 2006, pursuant to a Subscription Agreement, the Company sold and issued
  to three Subscribers Convertible Notes having an aggregate principal balance
  of $1,250,000 which are convertible into 1,000,000 shares of common stock at
  a conversion price of $1.25 per share, and warrants to purchase 1,000,000
  shares of common stock at a price of $0.9579 per share. The Warrants are
  exercisable as of April 19, 2006 and terminate on the fifth year anniversary
  date. Interest payable on these notes accrues at a rate of 5% per annum. The
  convertible notes and warrants have been recorded in compliance with APB-14.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | The
  $1,250,000 of proceeds attributed to the Convertible Debenture are recorded
  based upon their relative fair value. The value assigned to the warrants of $401,363
  has been recorded as a discount to the convertible debenture. Additionally,
  the warrants valued at $0.9579 per share represents a Beneficial Conversion
  feature calculated at their intrinsic value and amounted to $46,157. This
  beneficial conversion feature has been recorded as a discount to the
  convertible debenture. This aggregate discount to the debt of $447,520 will
  be amortized over the life of the debt using the effective interest method.       

F-16

---



CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 2006 AND 2005

|        |                                                             
|------- | ------------------------------------------------------------
|NOTE 9- | STOCKHOLDERS EQUITY (CONTINUED)                            
|        |                                                             
|        | A summary of
  the Companys warrant activity is as follows:

| |                             |  |                            |           |                              |   |       | 
| | --------------------------- |  | -------------------------- | --------- | ---------------------------- | - | ----- | 
| |                             |  | Year Ended
  July 31, 2006 |          
| |                             |  |                            |          
| |                             |  | NumberofWarrants           |           | WeightedaverageExerciseprice |  
| |                             |  |                            |           |                              |  
| | Balance at
  July 31, 2004  |  |                            | 470,000   |                              | $ | 1.69  | 
| | Exercised
  September 2004  |  |                            | (270,000  | )                            |   | 1.59  | 
| | Issued February
  2005      |  |                            | 958,549   |                              |   | 1.25  | 
| | Exercised
  February 2005   |  |                            | (200,000  | )                            |   | 1.84  | 
| | Issued July
  2005          |  |                            | 1,440,000 |                              |   | 1.69  | 
| |                             |  |                            |           |                              |   |       | 
| | Balance at
  July 31, 2005  |  |                            | 2,398,549 |                              |   | 1.28  | 
| | Issued
        January 2006 |  |                            | 1,200,000 |                              |   | .9579 | 
| |                             |  |                            |           |                              |   |       | 
| | Balance at
  July 31, 2006  |  |                            | 3,598,549 |                              | $ | 1.17  | 
| |                             |  |                            |           |                              |   |       | 

|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 10- | CONVERTIBLE DEBENTURES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|         | On 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-17

---



CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 2006 AND 2005

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Pursuant to
  a Subscription Agreement, dated January 19, 2006, the Company sold and issued
  to three Subscribers Convertible Notes having an aggregate principal balance
  of $ 1,250,000 which are convertible into 1,000,000 shares of common stock at
  a conversion price of $ 1.25 per share, and warrants to purchase 1,000,000
  shares of common stock at a price of $ 0.9579 per share. Interest payable on
  these notes accrues at a rate of 5% per annum. The convertible notes and
  warrants have been recorded in compliance with APB-14.                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | The
  $1,250,000 of proceeds attributed to the Convertible Debenture are recorded
  based upon their relative fair value. The value assigned to the warrants of
  $401,363 has been recorded as a discount to the convertible debenture.
  Additionally, the warrants valued at $0.9579 per share represents a
  Beneficial Conversion feature calculated at their intrinsic value and
  amounted to $46,157. This beneficial conversion feature has been recorded as
  a discount to the convertible debenture. This aggregate discount (deferred
  loan cost) to the debt of $447,520 will be amortized over the life of the debt
  using the effective interest method.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Amortizing payments of the outstanding principal amount of this
        Note shall commence on the 24th month anniversary by the payment
        of cash or by the conversion into Common Stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | The schedule
  below represents principal amortization for the next 4 years under the Note
  agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

|                                        |  |   |           |         | 
|--------------------------------------- |  | - | --------- | ------- | 
|For
  the Twelve months ending July 31,
|2007                                    |  |   | $         |        | 
|2008                                    |  |   |           | 312,498 | 
|2009                                    |  |   |           | 625,000 | 
|2010                                    |  |   |           | 312,502 | 
|                                        |  |   |           |        
|Total
  Long term debt                  |  | $ | 1,250,000 |        
|                                        |  |   |           |        

|         |                                                                                                      
|-------- | -----------------------------------------------------------------------------------------------------
|NOTE 11- | MAJOR CUSTOMERS                                                                                      
|         |                                                                                                      
|         | The
  following summarizes sales to major customers (each 10% or more of net sales)
  by the Company:

F-18

---



CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 2006 AND 2005

| |            |  |                            |         |                        |   |                       |      |   |  | 
| | ---------- |  | -------------------------- | ------- | ---------------------- | - | --------------------- | ---- | - |  | 
| | Year Ended |  | Sales to Major
  Customers |         | Number of 
  Customers |   | Percentage of
  Total |     
| |            |  |                            |         |                        |   |                       |     
| | 2006       |  | $                          | 158,437 |                        | 2 |                       | 29.6 | % | 
| | 2005       |  | $                          | 342,271 |                        | 2 |                       | 62.0 | % | 

|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 12- | STOCK OPTION PLAN                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|         | 2002 Stock Option Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|         | On April 23,
  2002, the Board of Directors of the Company adopted the 2002 Stock Option
  Plan (the 2002 Plan). Under the 2002 Plan, the Company may grant up to
  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, 2006, there had been no shares granted under the 2002
  Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|NOTE 13- | SECURITIES ISSUED FOR SERVICES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|         | During fiscal year ended July 31, 2006, the Company issued 50,000 shares of common stock
to various consultants for services. These services were performed in fiscal year 2006 and expensed
at their fair value of consideration received at the date of the agreement
in accordance with EITF 00-18 Accounting Recognition for Certain Transactions
Involving Equity Instruments Granted to Other Than Employees.

      During fiscal year July 31, 2005, the Company issued 417,000 shares
        of common stock to various consultants for services. Of these, 37,500
        shares issued were for services that extend into the future and were amortized
        against invoices billed by the consultants for actual services rendered
        in fiscal year 2006. The remaining were expensed at the fair value of
        consideration received during fiscal year 2005.                                                                                                                                                                                                                   

F-19

---



CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 2006 AND 2005

|         |                                                                                                                                                                                                                                                                                                                                                                                          
|-------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 14- | SUBSEQUENT EVENTS                                                                                                                                                                                                                                                                                                                                                                        
|         |                                                                                                                                                                                                                                                                                                                                                                                          
|         | At a Special
  Meeting of Shareholders held on August 2, 2006 a proposal was approved
  amending the Corporations Certificate of Incorporation to effect a
  one-for-six reverse split of the Corporations Common Stock. The number of
  shares outstanding before the date of change (August 4, 2006) was 7,468,003.
  The number of shares outstanding after this date was 1,244,668.

F-20

---