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SECURITIES AND EXCHANGE COMMISSIONWashington,
D.C. 20549FORM 10-KSB

Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934

xAnnual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the fiscal year ended July 31, 2007

oTransition Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the transition period from          to

Commission File
Number: 0-8174

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

| |                                                                  |  |                                    | 
| | ---------------------------------------------------------------- |  | ---------------------------------- | 
| | DELAWARE                                                         |  | 22-1847286                         | 
| |                                                                  |  |                                    | 
| | (State or other
 jurisdiction of
 incorporation or organization) |  | (IRS Employer
 Identification No.) | 
| |                                                                  |  |                                    | 
| | 5 Columbia Road, Somerville, NJ                                  |  | 08876                              | 
| |                                                                  |  |                                    | 
| | (Address of principal
 executive office)                         |  | (Zip code)                         | 

Issuers telephone
number, including area code:
(908) 722-8081
Securities registered pursuant to Section 12(b) of the Act:

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

Check whether the Issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.

Yes xNo
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.

The aggregate market value of the voting stock held by
non-affiliates of the Registrant based on the closing sale price of $2.09 on
October 15, 2007 was $9,960,238.

The number of shares outstanding of the Registrants
common stock outstanding, excluding treasury shares, as of October 15, 2007 was
4,765,664.

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TABLE OF CONTENTS

|                                                                                                                     |   
|-------------------------------------------------------------------------------------------------------------------- | --
|PART I                                                                                                               |   
|                                                                                                                     |   
|Item 1. DESCRIPTION OF BUSINESS                                                                                      | 1 
|                                                                                                                     |   
|Item 2. DESCRIPTION OF PROPERTY                                                                                      | 7 
|                                                                                                                     |   
|Item 3. LEGAL PROCEEDINGS                                                                                            | 8 
|                                                                                                                     |   
|Item 4. SUBMISSION OF MATTERS TO A
 VOTE OF SECURITY HOLDERS                                                         | 8 
|                                                                                                                     |   
|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                                                                                         | 16
|                                                                                                                     |   
|Item 8. CHANGES IN AND DISAGREEMENTS
 WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                        | 16
|                                                                                                                     |   
|Item 8A. CONTROLS AND PROCEDURES                                                                                     | 16
|                                                                                                                     |   
|PART III                                                                                                             |   
|                                                                                                                     |   
|Item 9. DIRECTORS, EXECUTIVE
 OFFICERS                                                                               | 17
|                                                                                                                     |   
|Item 10. EXECUTIVE COMPENSATION,
 PROMOTERS AND CONTROL PERSONS: COMPLIANCE WITH SECTION 16 (A) OF THE EXCHANGE
 ACT | 19
|                                                                                                                     |   
|Item 11. SECURITY OWNERSHIP OF
 CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                                             | 20
|                                                                                                                     |   
|Item 12. CERTAIN RELATIONSHIPS AND
 RELATED TRANSACTIONS                                                             | 21
|                                                                                                                     |   
|Item 13. EXHIBITS                                                                                                    | 21
|                                                                                                                     |   
|Item 14. PRINCIPAL ACCOUNTANT FEES
 AND SERVICES                                                                     | 22
|                                                                                                                     |   
|SIGNATURES                                                                                                           | 24

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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 1

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 - DESCRIPTION OF BUSINESS

HISTORY

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.

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

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

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

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

During the year ended July 31, 2001, we formed a
wholly owned subsidiary, Lonogoc Corporation. In August, 2000, Lonogoc
Corporation purchased the assets of Independent Computer Maintenance
Corporation, which provided

1

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installation, maintenance, and troubleshooting of
computer systems and networks. On October 22, 2002, we entered an agreement to
rescind the Asset Purchase Agreement between us and Independent Computer
Maintenance Corporation. Under the rescission agreement, Conolog and its
subsidiary agreed to transfer all assets previously purchased pursuant to the
Asset Purchase Agreement, to the extent they still exist, to the former seller.
The return of the purchase price paid for the assets was $600,000, $300,000 in
cash at closing, a note, which is secured by a first mortgage on a condominium,
for $150,000 bearing an interest rate of 7.5% of which will be paid over 24
months in equal monthly installments of $6,750 per month beginning December
2002, and an unsecured note receivable for $137,350 payable over 10 years
beginning December-2004 bearing an interest rate of 5%.

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

PRODUCTS

We are engaged in the design and manufacture 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 us); (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 us) 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.

PRESENT
STATUS/BUSINESS PRODUCT DESCRIPTION

We are engaged in three basic market segments:

| |    |                                                                           |   |                                      
| | -- | ------------------------------------------------------------------------- | - | -------------------------------------
| | 1) | Commercial Sales (Under the trade name INIVEN (a
 Division of Conolog))
| |    |                                                                           |  | Direct sales to end-users            
| |    |                                                                           |  | Sales to system assemblers           
| |    |                                                                           |  | Sales to contractors/installers      
| |    |                                                                           |   |                                      
| | 2) | Military Sales                                                           
| |    |                                                                           |  | Direct contract sales to military    
| |    |                                                                           |  | As subcontractor to systems producers
| |    |                                                                           |  | Foreign governments                  
| |    |                                                                           |   |                                      

| |    |                                                                                  
| | -- | ---------------------------------------------------------------------------------
| | 3) | Commercial Sales - As Manufacturing Subcontractor
          to Systems Producers.

2

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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.

COMMERCIAL
INIVEN SALES AND PRODUCTS

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

| |    |                                                                                                                                                         
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1) | PTR and PDR Teleprotection Series (Protective Tone
 Relaying Communications Terminal), which includes the PTR- 1000, PTR- 1500
 and PDR-2000.           
| |    |                                                                                                                                                         
| | 2) | Audio Tone & Telemetry Equipment (Audio Tone
 Control, Telemetering and Data Transmission Systems), which includes Series
 98, 68, 40 and GEN-1.
| |    |                                                                                                                                                         
| | 3) | Multiplex Supervisory Control System                                                                                                                    
| |    |                                                                                                                                                         
| | 4) | Communication Link Multihead Fiber Optic Couplers
 and Industrial Grade 1200 Baud Modems.                                                               

PTR AND
PDR TELEPROTECTION SERIES

This product is designed for use exclusively by
electric power generators (electric utilities and co-generators) in order to
protect their transmission and distribution lines. The PTR-1000, by monitoring
the output signal of the transmission equipment in less than one hundredth of a
second protects the transmission and distribution lines.

The PTR-1000 are 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 PDR 2000 is an 8 channel high speed communication
system for use in electric power transmission protection schemes. Unique
features include event recording, on-board and remote programming, and ID (unit
to unit identification on all communications), Packet Forwarding (ability to
forward information such as trips and all events through indirect communication
paths), password protection and multiple communication ports.

The PTR/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 PTR/PDR market is:

| |   |                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------
| |  | New installations; i.e., new transmission lines, new
 distribution segments, for utilities and cogenerators.

3

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| |   |                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------
| |  | Existing
 installations not properly protected, improving efficiency and reducing down
 time.          
| |   |                                                                                                        
| |  | Existing
 installations for upgrading to PTR/PDR technology, again improving efficiency
 and down time.

Sales efforts for the PTR/PDR 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.

In the United
States alone, there are over 500 large entities generating electricity. They
are:

| |   |                                    
| | - | -----------------------------------
| |  | Municipal Systems                  
| |   |                                    
| |  | Cooperative Systems                
| |   |                                    
| |  | Federal, State and District Systems
| |   |                                    
| |  | 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.

Since our line has a distinct mechanical configuration, we designed our
GEN-1 Programmable units and other improvements as replacements for existing units.

4

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Our line of
GEN-1 equipment is extensive and provides the user with the ability to perform
multiple control functions, status
monitoring as well as continuous variable data monitoring, such as a level in a
tank or pressure gauge.

Sales for this line are primarily for the replacement of existing
installations and for expansion of these installations where it
would not be economical to install the latest technology, which would not be
mechanically compatible.

Sales to this market are made in the same manner as the PTR/PDR 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 us
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.

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, we 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 our sales
efforts for it are being conducted through its existing independent
manufacturers sales representatives.

FIBER OPTIC LINK AND DATA MODEM

The expansion
of fiber lines by our customers and their need to switch equipment from phone
lines to fiber prompted us to design and
introduce a fiber-optic-coupler line to interface with the many different fiber
heads. In addition to complete data interface couplers we launched a
series of 1200 Baud Modems (Industrial Grade) for operation under the same
environmental specifications in line with our products.

OUR STRATEGY

Our strategy
is to develop new commercial markets by continuing to develop new products and
enhance existing products to improve both our 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 our customers for more sophisticated and comprehensive products and
services.

5

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MARKETING AND SALES

In general, our products are marketed through telemarketing and
customer contacts by our President and through independent
manufacturing sales representatives and distributors.

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

Our major customers during fiscal 2007 were Bonneville Power Authority
and NIPSCO. Sales to these customers totaled $229,512. 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 dependent upon any single supplier. We
also purchase a number of other electronic components and sub-assemblies from
various suppliers.

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. Consequently, management made a decision to write off a substantial
amount of the military inventory in 2001 and 2002. As a result, we no
longer manufacture 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 our 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.

6

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RESEARCH AND
DEVELOPMENT

New Products  CM-100 platform

In February
2007, we formally 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-100, to operate seamlessly over fiber optics together with
existing substation equipment

During fiscal years 2006 and 2007 we have invested approximately
$376,713 and $372,723, respectively, in product development.

During fiscal years 2003-2004 and 2004-2005, we invested approximately
$93,984 and $177,338, respectively, in product development.

During fiscal year 2001-2002, we invested approximately $800,000 for
product development and amortization of product costs.

During fiscal
2000-2001, we proceeded with the design of the PDR-2000 8 channel digital
transfer trip communications product.
During fiscal 2001-2002 we invested approximately $774,757 to complete its
design of the PDR-2000, eight-channel digital transfer trip communications.

The Company
also developed a new platform for its GEN-1 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 do
not have any registered trademarks. We use the name INIVEN for our commercial
products. We believe that this name 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 name 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, 2007, we employed 15 persons on a full-time basis,
including two in management, two in sales, one clerical, one in accounting, one
in purchasing, five in engineering and quality control and three 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. In the
opinion of management, the space is adequately covered by insurance.

7

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ITEM 3 - LEGAL PROCEEDINGS

Meyers Associates, L.P. v. Conolog Corporation, Supreme Court of the
State of New York, County of New York Index No. 600824/07

On March
13, 2007, Meyers Associates, L.P. commenced an action against Conolog
Corporation, asserting that: (1) Conolog breached a purported
contract it had with Meyers pursuant to which it claims Meyers was to act as
lead underwriter in connection with a Regulation D securities offering for
Conolog, and (2) Conolog misappropriated a purported confidential list of
potential investors. Conolog denies the allegations in the complaint and
intends to vigorously defend against Meyerss claims. On May 4, 2007, Conolog
served its answer to the complaint and discovery demands. While Conolog
believes it has meritorious defenses, at this early stage in the proceedings,
it is not possible to predict the outcome.

ITEM 4 - SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS

The following matters were submitted to a vote of the stockholders at
our 2007 annual meeting of stockholders held on May 15, 2007: (1) a proposal to
elect the five nominees for director named below for terms of one year each;
(2) a proposal to approve the Subscription Agreement between the
Company and nine investors; (3) a proposal to approve the granting of shares to
directors, officers and employees of the Company and (4) a proposal to ratify
the selection of Bagell Josephs Levine
& Company, L.L.C. as our independent auditors for the current fiscal year.
The number of shares of common stock outstanding and eligible to vote as
of the record date of March 3, 2006 was 7,422,847.
Set forth below is the number of votes cast for or withheld with respect to
each nominee for director and the number of votes cast for or against or
abstaining, and if applicable the number of broker non-votes, for the other
matters submitted to a vote of the stockholders at the meeting.

Proposal #1 To
elect the following nominees as our directors for terms of one year each:

|                 |  |     |           |          |  |         | 
|---------------- |  | --- | --------- | -------- |  | ------- | 
|                 |  | For |           | Withheld | 
|                 |  |     |          
|Robert S. Benou  |  |     | 2,395,015 |          |  | 97,359  | 
|Marc R. Benou    |  |     | 2,405,921 |          |  | 86,453  | 
|Louis S. Massad  |  |     | 2,360,676 |          |  | 131,698 | 
|Edward J. Rielly |  |     | 2,399,209 |          |  | 93,165  | 
|David M. Peison  |  |     | 2,399,184 |          |  | 93,190  | 

Proposal #2  To approve the execution of the 2007
Subscription Agreement.

|          |  |         |         |         |  |        | 
|--------- |  | ------- | ------- | ------- |  | ------ | 
|For       |  | Against |         | Abstain | 
|          |  |         |         |         |  |        | 
|2,329,902 |  |         | 151,055 |         |  | 11,417 | 

Proposal # 3  To vote on a proposal to approve the
Companys 2007 Incentive Stock Plan;

|        |  |  |         |  |  |         |  |  |           | 
|------- |  |  | ------- |  |  | ------- |  |  | --------- | 
|For     |  |  | Against |  |  | Abstain |  |  | Not Voted | 
|400,365 |  |  | 43,967  |  |  | 10,866  |  |  | 2,037,176 | 

8

---



Proposal #4  To ratify the selection of Bagell, Josephs,
Levine & Company, L.L.C. as our independent auditors for the fiscal year ending July 31, 2007.

|          |  |         |        |            |  |     | 
|--------- |  | ------- | ------ | ---------- |  | --- | 
|For       |  | Against |        | Abstaining | 
|          |  |         |        |            |  |     | 
|2,404,032 |  |         | 87,498 |            |  | 844 | 

Proposal #5 To act on such other matters as may properly
come before the meeting or any adjourmments.

|          |  |         |         |            |  |        | 
|--------- |  | ------- | ------- | ---------- |  | ------ | 
|For       |  | Against |         | Abstaining | 
|          |  |         |         |            |  |        | 
|2,228,872 |  |         | 182,010 |            |  | 81,492 | 

9

---



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.

|                 |  |              |      |     |   |      | 
|---------------- |  | ------------ | ---- | --- | - | ---- | 
|                 |  | Common Stock |     
|                
|Fiscal
Year 2007 |  | High         |      | Low |  
|                 |  |              |      |     |  
|                 |  |              |      |     |  
|First
 Quarter   |  | $            | 2.52 |     | $ | 1.15 | 
|Second
 Quarter  |  | $            | 5.08 |     | $ | 1.26 | 
|Third
 Quarter   |  | $            | 2.88 |     | $ | 2.15 | 
|Fourth
 Quarter  |  | $            | 2.16 |     | $ | 1.68 | 

|                 |  |              |      |     |   |      | 
|---------------- |  | ------------ | ---- | --- | - | ---- | 
|                 |  | Common Stock |     
|                
|Fiscal
Year 2006 |  | High         |      | Low |  
|                 |  |              |      |     |  
|                 |  |              |      |     |  
|First
 Quarter   |  | $            | 2.13 |     | $ | 0.92 | 
|Second
 Quarter  |  | $            | 1.16 |     | $ | 0.86 | 
|Third
 Quarter   |  | $            | 1.01 |     | $ | 0.81 | 
|Fourth
 Quarter  |  | $            | 0.90 |     | $ | 0.36 | 



---

As of July 31, 2007, the Companys Common Stock was
held by approximately 686 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.

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 issued 
 upon exercise of outstandingoptions, warrants and rights(a)                                                                                                                                                                                                                                                                                                                                                       |  | Weighted average
 exercise price of
 outstanding options,warrants and rights(b) |  | Number of securitiesremaining available for 
 future issuance under 
 equity compensation plans
 (excluding securities 
 reflected in column (a)) 
 (c) | 
|                                                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |                                                                                 |  |                                                                                                                                                         | 
|                                                        
|                                                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |                                                                                 |  |                                                                                                                                                         | 
|Equitycompensation plans approved bysecurity 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                                                                                                                                                 | 
|                                                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |                                                                                 |  |                                                                                                                                                         | 
|                                                        
|                                                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |                                                                                 |  |                                                                                                                                                         | 
|Equitycompensation plansnot approved by security holders |  | N/A                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |                                                                                 |  |                                                                                                                                                         | 
|                                                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |                                                                                 |  |                                                                                                                                                         | 
|                                                        
|                                                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |                                                                                 |  |                                                                                                                                                         | 
|Total                                                    |  | 190,000                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |                                                                                 |  |                                                                                                                                                         | 
|                                                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |                                                                                 |  |                                                                                                                                                         | 
|                                                        

ITEM 6 - MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION

At a Special Meeting of the shareholders held on
August 2, 2006 a proposal to amend the Certificate of Incorporation to give effect to a one-for-six reverse stock split of
the common stock of the Company was approved by the stockholders. The
reverse split was effected on August 4, 2006.

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 as a result of the reverse
split are convertible into 166,667 (the
Note Shares) post split shares of (post l-for-6 stock reverse split) common
stock at a post split conversion price of $7.50, and warrants to
purchase 166,668 shares of (post l-for-6 stock reverse split) common stock at a
post split exercise price of $5.7474 per share (the Conversion Price).
Pursuant to an agreement dated as of September 28, 2006, between the Company
and the selling shareholders who were parties to the January 19, 2006
Subscription Agreement (the Subscribers), the Company reduced the warrant
exercise price of warrants held by the Subscribers to $1.25 so long as such
warrants were exercised by October 31, 2006, after which time the warrant
exercise price would revert to $5.7474, subject to adjustment as provided in
the warrants. Pursuant to an agreement between the Company and First Montauk
Securities Corp. (the placement agent in the private placement with the selling
shareholders who were parties to the January 19, 2006 Subscription Agreement)
the Company reduced the exercise price of warrants issued to First Montauk
Securities Corp. and/or its transferees to $1.25. As of January 31, 2007 all of
the Subscribers and some of the First Montauk Securities Corp. warrants,
amounting to 191,667 warrants were exercised at a conversion price of $1.25 per
share. The Company received a Gross amount
of $239,584 for these warrants.

11

---



As permitted by the January 19,
2006 Subscription Agreement, the Company reduced the Conversion Price to $1.10
per share. Any shares in excess of the Notes Shares will not be
registered under the Securities Act of 1933, as amended, and, therefore, may
not be offered for sale, pledged or hypothecated in the absence of an effective
registration statement or an opinion of counsel reasonably satisfactory to the
Company that such registration is not required.

In January 2007, the Company
reduced the original conversion prices of their outstanding debentures from
$7.50 to $1.10. Subsequent to the reduction in the conversion price the
debt holders exercised their rights to convert. The incremental consideration of the shares issued in the conversion was
valued at $2,705,457 and recorded as induced conversion costs in the
accompanying statement of operations.

In connection with this conversion, the
amortization of deferred loan costs of $174,147 and the amortization of
deferred loan discount of $363,610 were fully written off.

On March 12, 2007 we completed a
private placement of an aggregate of $2,825,000, principal amount, of Convertible Debentures with 8 investors. The
Convertible Debentures are convertible into an aggregate of 1,412,500 shares of
the common stock of the Company.

The Conversion Price of the Convertible Debentures is
$2.00 per share. The investors have also received warrants to purchase an
aggregate of 1,412,500 shares of the Companys common stock at an exercise
price of $2.88 per share, exercisable
beginning at any time on the sooner of September 8, 2007 or the date the
Companys stockholders approves the issuance of the Companys common
stock issuable on conversion of the Convertible Debentures (if such approval is
required by the applicable rules of the Nasdaq) through the fifth anniversary
of the issuance. In addition, the selling agent (including certain of its
employees and affiliates) was granted a warrant to acquire 282,500 shares of
the Companys common stock. The Company received net proceeds of $2,487,500 The
private placement was approved by the
Companys shareholders, as required by applicable Nasdaq rules, on May 15,
2007.

RESULTS OF OPERATIONS

2007 COMPARED to 2006

Product revenue for the fiscal year ended July 31,
2007 totaled $517,705 a decrease of $30,062 from the product revenue reported
for the fiscal year ended July 31, 2006 of $547,767. The Company attributes
this decrease in revenues to delays in
contract awards during the last quarter of the fiscal year. Deliveries on these
delayed contracts are expected to begin in early 2008.

Product cost (Material and
Direct labor) for the fiscal year ended July 31, 2007 amounted to $378,563 or
73.1% of product revenues. Product cost for the fiscal year ended July
31, 2006 amounted to $282,932 or 51.6% of product revenues. The Company
attributes the increase in the current years product cost of $95,631 and
corresponding decrease in the current years Gross Profit of $95,631 (excluding
the write down of obsolete inventory) to the increase in costs to build our new
PDR-2000 system and the CM-100 Communication system (introduced in February 2007). This higher cost was offset by the
continued outsourcing of assemblies and the introduction of assembly standards under ISO-9000.

For fiscal year ended July 31,
2007 the Company, in compliance with its inventory management policy, expensed $1,256,155
of cost relating to obsolete inventory parts. This compares to $245,326 of
obsolete inventory parts expensed during
the fiscal year July 31, 2006.

Total Operating expenses for
fiscal July 31, 2007 were $3,555,760 an increase of $153,476 from $3,402,284 reported
for fiscal July 31, 2006. The Company attributes this increase loan acquisition
costs.

Other expenses for the fiscal year ended July 31, 2007
included a non-cash expense related to the induced conversion benefit of $2,705,457; a non-cash interest expense related
to conversion of debt for $812,147 and the amortization of fees related
to the conversion of debt for $363,676.

12

---



As a result of the foregoing,
the Company reported a net loss applicable to common shares of $8,121,067 or
$3.11 per share for fiscal 2007, compared to a net loss applicable to common
shares of $3,330,089 or $2.69 per share for fiscal 2006.

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.

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

LIQUIDITY AND CAPITAL RESOURCES

Working capital at July 31, 2007 was $3,628,738
compared to $3,649,799 at year ended July 31, 2006. This decrease in the working capital is attributable
to the reduction of trade accounts payable and accrued expenses.

Accounts receivable have
decreased from $183,622 at July 31, 2006 to $64,768 at July 31, 2007. This
decrease of $118,854 is the result of decreased sales during the 4th
quarter.

The Company expects to meet its
cash requirements for the next twelve months through existing cash balances and
cash generated from operations. In addition, the Company believes that
it can obtain financing from institutional investors
secured by its assets, if necessary.

INFLATION

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

13

---



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 represents components that have been
requisitioned from the warehouse and are being assembled in the assembly areas.
Depending on the configurations required by a customer, products are completed
and tested within 8 to 10 business days. Raw Materials represent components in
their original packaging stored in a secured warehouse area, and may consist,
in part, of Face plates, PC boards, Digital screen assemblies, Guide rails,
Capacitors, Terminals, Power supplies, Process ships, Chassis and racks, Relays,
Keypads and Resistors.

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

Every component, regardless of
age, has been purchased to meet the above criteria and may be used in any and
all above said assemblies. Management believes that this inventory,
which is minimally adequate, is required to implement the Companys commitments
to military requirements for present and delivered orders.

The Company, 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, any balance of the
inventory is classified as non-current.

14

---



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.

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.

15

---



ITEM 7 - FINANCIAL STATEMENTS

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 2007 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 8B - OTHER INFORMATION

None

16

---



PART III

ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS,
PROMOTERS, CONTROL PERSONS;
AND CORPORATE GOVERNANCE 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 17, 2007.

|                 |     |  |                                                                         
|---------------- | --- |  | ------------------------------------------------------------------------
|Name             | Age |  | Position                                                                
|                 |     |  |                                                                         
|Robert S. Benou  | 73  |  | Chairman, Chief Executive Officer, Chief Financial
 Officer and Director
|                 |     |  |                                                                         
|Marc R. Benou    | 39  |  | President, Chief Operating Officer, Secretary and
 Director             
|                 |     |  |                                                                         
|Louis S. Massad  | 70  |  | Director                                                                
|                 |     |  |                                                                         
|Edward J. Rielly | 39  |  | Director                                                                
|                 |     |  |                                                                         
|David M. Peison  | 39  |  | Director                                                                
|                 |     |  |                                                                         
|Thomas Fogg      | 70  |  | Officer, Vice President-Engineering                                     

Robert S, Benou

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 served as a member of the Board of
Directors of eXegenics Inc. from February 2004 to December 2006. 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

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

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

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

17

---



Application Developer with Chubb Corporation. From
1993 to 1998, Mr. Rielly was an Application Developer with the United States
Golf Association. Mr. Rielly is a graduate of Lehigh University and holds a BS
in Computer Science.

Thomas
R. Fogg

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

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 defined under National Association of Securities Dealers
Automated Quotations system.

The Company has a standing Audit Committee, the
members of which are, Louis Massad, Edward J. Rielly and David M. Peison.

Changes in Nominating Procedures

None

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, 2007, 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 David Peison, Edward Rielly and 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.

18

---



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                    |  | FiscalYear-End31-July  |      | Salary |   | Bonus   |  | RestrictedStockAwards(3) |         | Closing Priceof Common
 Stock
 on the Date of
 the
 Restricted
 Stock
 Award |  | SecuritiesUnderlying
 Option/
 SARS |   | OtherCompensation |      | 
|                                      |  |                        |      |        |   |         |  |                          |         |                                                                              |  |                                     |   |                   |      | 
|Robert Benou, Chairman                |  |                        | 2007 |        | $ | 337,300 |  | $                        | 150,000 | (1)                                                                          |  | 144,000                             |   | $                 | 0.41 |  |  |  |  | $ | 18,000 | * | 
|Chief
 Executive Officer,             |  |                        | 2006 |        | $ | 341,625 |  | $                        | 140,000 |                                                                              |  |                                    |   | $                 |     |  |  |  |  | $ | 18,000 | * | 
|Chief Financial Officer and
 Director |  |                        | 2005 |        | $ | 323,333 |  | $                        | 125,000 |                                                                              |  | 85,000                              | * | $                 | 3.13 |  |  |  |  | $ | 18,000 | * | 
|                                      |  |                        |      |        |   |         |  |                          |         |                                                                              |  |                                     |   |                   |      |  |  |   |  |   |        |   | 
|                                      |  |                        |      |        |   |         |  |                          |         |                                                                              |  |                                     |   |                   |      |  |  |   |  |   |        |   | 
|Marc
 Benou, President                |  |                        | 2007 |        | $ | 173,949 |  | $                        | 100,000 | (2)                                                                          |  | 140,000                             |   | $                 | 0.41 |  |  |  |  |   |        |   | 
|Chief Operating Officer,              |  |                        | 2006 |        | $ | 143,625 |  | $                        | 80,000  |                                                                              |  |                                    |   | $                 |     |  |  |  |  |   |        |   | 
|Secretary and Director                |  |                        | 2005 |        | $ | 111,000 |  | $                        | 60,000  |                                                                              |  | 80,000                              |   | $                 | 3.13 |  |  |  |  |   |        |   | 
|                                      |  |                        |      |        |   |         |  |                          |         |                                                                              |  |                                     |   |                   |      |  |  |   |  |   |        |   | 
|                                      |  |                        |      |        |   |         |  |                          |         |                                                                              |  |                                     |   |                   |      |  |  |   |  |   |        |   | 
|Thomas Fogg                           |  |                        | 2007 |        | $ | 40,602  |  | $                        |        |                                                                              |  | 10,000                              |   | $                 | 0.41 |  |  |  |  |   |        |   | 
|Vice-President
 -                     |  |                        | 2006 |        | $ | 40,602  |  | $                        |        |                                                                              |  |                                    |   | $                 |     |  |  |   |  |   |        |   | 
|Engineering                           |  |                        | 2005 |        | $ | 40,602  |  | $                        |        |                                                                              |  | 20,000                              |   | $                 | 3.13 |  |  |  |  |   |        |   | 
|                                      |  |                        |      |        |   |         |  |                          |         |                                                                              |  |                                     |   |                   |      |  |  |   |  |   |        |   | 

* Other compensation consisted of a car allowance.

| |    |                                                                                                                                                                                                    
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | The Company paid Robert Benous 2007 bonus by July
 31, 2007.                                                                                                                                      
| |    |                                                                                                                                                                                                    
| | 2. | The Company paid Marc Benous bonus by July 31,
 2007.                                                                                                                                             
| |    |                                                                                                                                                                                                    
| | 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, 2007, 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, 2007 was $357,300 and
increases by $20,000 annually on June 1st of each year. In addition,
Mr. Benou is entitled to an annual bonus equal to 6% of the Companys annual
income before income tax provision as stated in its annual Form 10-KSB. The
employment agreement also entitles Mr. Benou to the use of an automobile and to
employee benefit plans, such as; life, health, pension, profit sharing and
other plans. Under the employment agreement, employment terminates upon death
or disability of the employee and the employee may be terminated by the Company
for cause.

Mr. Marc Benou is serving under an employment agreement commencing June
1, 1997 and ending May 31, 2002, which pursuant to its terms, renews for
one-year terms until cancelled by either the Company or Mr. Benou. Mr. Benous
annual base salary as of July 31, 2007 was $179,900 and he receives annual
increases of $6,000 on June 1st

19

---



of each year. Mr. Benou is
entitled to an annual bonus equal to 3% of the Companys annual income before
income tax provision as stated in its annual Form 10-KSB. The
employment agreement also entitles Mr. Benou to the use of an automobile and to
employee benefit plans, such as; life, health, pension, profit sharing and
other plans. Under the employment agreement, employment is terminated upon
death or disability of the employee and employee may be terminated by the Company for cause.

ITEM 11 - SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS ANDMANAGEMENT

The following table sets forth, as of July 31, 2007,
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 3,875,542 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 |  |                                             | 329,003 |                     |  | 8.49  | %
|                                                                                          |  |                                             |         |                     |  |       |  
|Marc R. Benou, President, Chief Operating Officer, Secretary and
 Director                |  |                                             | 326,799 |                     |  | 8.43  | %
|                                                                                          |  |                                             |         |                     |  |       |  
|Thomas Fogg, Vice President - Engineering                                                 |  |                                             | 0       |                     |  |       | *
|                                                                                          |  |                                             |         |                     |  |       |  
|Louis Massad, Director                                                                    |  |                                             | 65,000  |                     |  | 1.68  | %
|                                                                                          |  |                                             |         |                     |  |       |  
|Edward J. Rielly, Director                                                                |  |                                             | 65,000  |                     |  | 1.68  | %
|                                                                                          |  |                                             |         |                     |  |       |  
|David M. Peison, Director                                                                 |  |                                             | 43,333  |                     |  | 1.12  | %
|                                                                                          |  |                                             |         |                     |  |       |  
|All Officers and Directors as a Group (6 persons)                                         |  |                                             | 829,135 |                     |  | 21.40 | %
|                                                                                          |  |                                             |         |                     |  |       |  
|* Less than 1%.                                                                           |  |                                             |         |                     |  |       |  

20

---



ITEM 12 - CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS AND DIRECTORS INDEPENENCE

Certain
relationships and Related Transactions

None

Board determination of Independence

Messrs.
Massad, Rielly and Peison are each independent as that term is defined under
the National Association
of Securities Dealers Automated Quotation system.

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-l (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-l (File No. 2-31302).                                                                                                                                                                                
| |             |                                                                                                                                                                                                                                                                                                                                                                  
| | 3.1.2       | Certificate of Amendment of
 Certificate of Incorporation incorporated by reference to Exhibit 4 to
 the Registrants Current Report on Form 8-K for July 1971.                                                                                                                                                                                                  
| |             |                                                                                                                                                                                                                                                                                                                                                                  
| | 3.1.3       | Certificate of Ownership and
 Merger with respect to the merger of Data Sciences (Maryland) into the
 Registrant and the change of Registrants name from Data Sciences
 Incorporated to DSI Systems, Inc. - incorporated by reference to
 Exhibit 3.03(a)to the Registrants Registration Statement on Form S-l (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-l (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)                                                                                                                                                                                                                                                                                                             
| |             |                                                                                                                                                                                                                                                                                                                                                                  
| | 4.2         | Form of common Stock Purchase
 Warrant, dated January 19, 2006 (2)                                                                                                                                                                                                                                                                                               
| |             |                                                                                                                                                                                                                                                                                                                                                                  
| | 4.3         | Form of Convertible Note, dated January 19, 2006 (2)                                                                                                                                                                                                                                                                                                             

21

---



| |      |                                                                                                                       
| | ---- | ----------------------------------------------------------------------------------------------------------------------
| | 4.4  | Form of Common Stock Purchase
 Warrant, dated March 12, 2007 (3)                                                      
| |      |                                                                                                                       
| | 4.5  | Form of Convertible Note,
 dated March 12, 2007 (3)                                                                   
| |      |                                                                                                                       
| | 4.6  | Form of Brokers Common Stock
 Purchase Warrant, dated March 12, 2007 (3)                                             
| |      |                                                                                                                       
| | 10.1 | Employment Agreement dated
 June 1, 1997 between Robert Benou and Conolog Corporation (4)                             
| |      |                                                                                                                       
| | 10.2 | Employment Agreement dated
 June 1, 1997 between Marc Benou and Conolog Corporation (4)                               
| |      |                                                                                                                       
| | 10.3 | Conolog Corporation 2002 Stock
 Option Plan (5)                                                                       
| |      |                                                                                                                       
| | 10.4 | Subscription Agreement dated
 as of January 19, 2006, among Conolog Corporation and the subscribers named
 therein (2)
| |      |                                                                                                                       
| | 10.5 | Form of Selling Agent
 Agreement, dated as of January 18, 2006 (2)                                                    
| |      |                                                                                                                       
| | 10.6 | Subscription Agreement dated
 as of March 12, 2007 (3).                                                               
| |      |                                                                                                                       
| | 10.7 | Form of Selling Agent
 Agreement, dated as of February 27, 2007 (3)                                                   
| |      |                                                                                                                       
| | 14.1 | Code of Ethics(6)                                                                                                     
| |      |                                                                                                                       
| | 21.1 | List of Subsidiaries*                                                                                                 
| |      |                                                                                                                       
| | 31.1 | Rule 13a-14a/15d-14a
 Certification of Robert Benou (PRINCIPAL EXECUTIVE OFFICER AND
 PRINCIPAL FINANCIAL OFFICER)*   
| |      |                                                                                                                       
| | 32.1 | Section 1350 Certification of
 Robert Benou (PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER)*            

| |     |                                                                                                                                                           
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| |    
| | *   | Filed herewith                                                                                                                                            
| |     |                                                                                                                                                           
| | (1) | Incorporated by reference to Registrants
 Registration Statement on Form S-l (File No. 33- 92424).                                                       
| |     |                                                                                                                                                           
| | (2) | Incorporated by reference to Registrants
 Report on Form 8-K filed on January 25, 2006.                                                                  
| |     |                                                                                                                                                           
| | (3) | Incorporated by reference to
 Registrants Report on Form 8-K filed on March 14, 2007                                                                     
| |     |                                                                                                                                                           
| | (4) | Incorporated by reference to the Registrants
 Registration Statement on Form S-l (File No. 0- 8174) as filed on September 12, 1997.                      
| |     |                                                                                                                                                           
| | (5) | 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.  
| |     |                                                                                                                                                           
| | (6) | Incorporated by reference to
 Registrants Annual Report on Form 10-KSB for the fiscal year ended July 31, 2003, filed with the SEC on
 November 14, 2003.

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 $40,000 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, 2007 and 2006, respectively.

22

---



Audit-Related Fees

No fees were billed for the years
ended July 31, 2007 and 2006 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, 2007
and 2006 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, 2007 and 2006 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.

23

---



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 29, 2007 | 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 29, 2007 | /s/Robert S. Benou                                              
|                 |                                                                 
|                 | Chairman, Chief Executive
 Officer and 
 Chief Financial Officer
|                 |                                                                 
|October 29, 2007 | /s/Marc R. Benou                                                
|                 |                                                                 
|                 | President, Chief Operating
 Officer, Secretary and 
 Director   
|                 |                                                                 
|October 29, 2007 | /s/Louis S. Massad                                              
|                 |                                                                 
|                 | Director                                                        
|                 |                                                                 
|October 29, 2007 | /s/Edward J. Rielly                                             
|                 |                                                                 
|                 | Director                                                        
|                 |                                                                 
|October 29, 2007 | /s/David M. Peison                                              
|                 |                                                                 
|                 | Director                                                        

24

---



Conolog Corporation and Subsidiaries

Consolidated Financial Statements

July 31, 2007 and 2006

---



Annual Report on Form 10-KSB

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

Consolidated Financial Statements

July 31, 2007 and 2006

Conolog Corporation and Subsidiaries

Somerville, New Jersey

---



Form 10-KSB - Item 14 (a) (1) and (2)Index to the Consolidated Financial StatementsConolog Corporation
and SubsidiariesJuly
31, 2007 and 2006

|                                                                                            |  |          
|------------------------------------------------------------------------------------------- |  | ---------
|                                                                                            |  | Page     
|                                                                                            |  |          
|The following consolidated financial statements of the registrant are
 included in Item 14: |  |          
|                                                                                            |  |          
|Report Of Independent Registered Public Accounting
 Firm                                    |  | F-l      
|                                                                                            |  |          
|Consolidated Balance Sheets as
 of July 31, 2007 and 2006                                   |  | F-2 - F-3
|                                                                                            |  |          
|Consolidated Statement of
 Operations for the years ended July 31, 2007 and 2006            |  | F-4      
|                                                                                            |  |          
|Consolidated Statement of Stockholders
 Equity for the years ended July 31, 2007
 and 2006 |  | F-5      
|                                                                                            |  |          
|Consolidated Statements of Cash
 Flows for the years ended July 31, 2007 and 2006           |  | 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) 346-2882REPORT 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, 2007 and 2006 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 audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company is not required
to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. Our audits included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the Companys internal
control over financial reporting. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.

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, 2007 and 2006, 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 8, 2007



F-1

---



CONOLOG
CORPORATION AND SUBSIDIAARIESCONSOLIDATED BALANCE
SHEETS
JULY 31, 2007 AND 2006

|                                             |  |      |            |      |   |            |  
|-------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- | -
|                                             |  | 2007 |            | 2006 |  
|                                             |  |      |            |      |  
|ASSETS                                       |  |      |            |      |   |            |  
|Current
  Assets:                            |  |      |            |      |   |            |  
|Cash and cash equivalents                    |  | $    | 687,011    |      | $ | 238,137    |  
|Certificate of deposit                       |  |      | 2,037,330  |      |   | 2,622,812  |  
|Accounts receivable - net of allowance       |  |      | 64,768     |      |   | 183,622    |  
|Prepaid expenses                             |  |      | 2,320      |      |   | 26,376     |  
|Accounts receivable - other                  |  |      |           |      |   | 4,377      |  
|Current portion of note receivable           |  |      | 14,864     |      |   | 14,864     |  
|Inventory                                    |  |      | 538,854    |      |   | 600,000    |  
|Other current assets                         |  |      | 445,136    |      |   | 146,364    |  
|                                             |  |      |            |      |   |            |  
|                                             |  |      |            |      |   |            |  
|Total
  Current Assets                       |  |      | 3,790,283  |      |   | 3,836,552  |  
|                                             |  |      |            |      |   |            |  
|Property, plant and equipment:               |  |      |            |      |   |            |  
|Machinery and equipment                      |  |      | 1,357,053  |      |   | 1,341,961  |  
|Furniture and fixtures                       |  |      | 429,765    |      |   | 423,342    |  
|Automobiles                                  |  |      | 34,097     |      |   | 34,097     |  
|Computer software                            |  |      | 209,380    |      |   | 147,203    |  
|Leasehold improvements                       |  |      | 30,265     |      |   | 30,265     |  
|                                             |  |      |            |      |   |            |  
|Total property, plant and equipment          |  |      | 2,060,560  |      |   | 1,976,868  |  
|Less: accumulated depreciation               |  |      | (1,927,725 | )    |   | (1,906,895 | )
|                                             |  |      |            |      |   |            |  
|Net Property, Plant and Equipment            |  |      | 132,835    |      |   | 69,973     |  
|                                             |  |      |            |      |   |            |  
|                                             |  |      |            |      |   |            |  
|Other Assets:                                |  |      |            |      |   |            |  
|Inventory, net of current portion            |  |      |           |      |   | 1,123,681  |  
|Deferred financing fees, net of
amortization |  |      | 799,770    |      |   | 153,313    |  
|Note receivable, net of current portion      |  |      | 94,140     |      |   | 110,243    |  
|                                             |  |      |            |      |   |            |  
|                                             |  |      |            |      |   |            |  
|Total Other Assets                           |  |      | 893,910    |      |   | 1,387,237  |  
|                                             |  |      |            |      |   |            |  
|                                             |  |      |            |      |   |            |  
|TOTAL
  ASSETS                               |  | $    | 4,817,028  |      | $ | 5,293,762  |  
|                                             |  |      |            |      |   |            |  

The accompanying notes are an integral part of the consolidated
financial statements
F-2

---



CONOLOG CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 2007 AND 2006

|                                                                                                                                                                                                         |  |      |             |      |   |             |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | ---- | - | ----------- | -
|                                                                                                                                                                                                         |  | 2007 |             | 2006 |  
|                                                                                                                                                                                                         |  |      |             |      |  
|LIABILITIES AND STOCKHOLDERS
  EQUITY                                                                                                                                                                   |  |      |             |      |   |             |  
|Current
  Liabilities:                                                                                                                                                                                   |  |      |             |      |   |             |  
|Accounts payable                                                                                                                                                                                         |  | $    | 134,112     |      | $ | 125,843     |  
|Accrued expenses                                                                                                                                                                                         |  |      | 27,433      |      |   | 60,910      |  
|                                                                                                                                                                                                         |  |      |             |      |   |             |  
|Total Current Liabilities                                                                                                                                                                                |  |      | 161,545     |      |   | 186,753     |  
|                                                                                                                                                                                                         |  |      |             |      |   |             |  
|                                                                                                                                                                                                         |  |      |             |      |   |             |  
|Non-Current Liabilities:                                                                                                                                                                                 |  |      |             |      |   |             |  
|Convertible Debenture - net of discount                                                                                                                                                                  |  |      | 1,226,605   |      |   | 858,420     |  
|                                                                                                                                                                                                         |  |      |             |      |   |             |  
|Total
  Liabilities                                                                                                                                                                                      |  |      | 1,388,150   |      |   | 1,045,173   |  
|                                                                                                                                                                                                         |  |      |             |      |   |             |  
|                                                                                                                                                                                                         |  |      |             |      |   |             |  
|Stockholders Equity                                                                                                                                                                                     |  |      |             |      |   |             |  
|Preferred stock,
  par value $.50; Series A; 4% cumulative; 162,000 shares authorized; 155,000
  shares issued and  outstanding at July 31, 2007 and 2006,
  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, 2007 and 2006, respectively.                               |  |      | 597         |      |   | 597         |  
|Common stock,
  par value $0.01; 30,000,000 shares authorized; 3,875,542 and 1,246,261 shares
  issued and outstanding at  July 31,
  2007 and 2006 respectively including 220 shares  held in treasury. |  |      | 38,756      |      |   | 12,462      |  
|Contributed capital                                                                                                                                                                                      |  |      | 44,736,087  |      |   | 36,015,971  |  
|Accumulated deficit                                                                                                                                                                                      |  |      | (39,852,328 | )    |   | (31,726,207 | )
|Treasury shares at cost                                                                                                                                                                                  |  |      | (131,734    | )    |   | (131,734    | )
|Deferred compensation                                                                                                                                                                                    |  |      | (1,319,400  | )    |   |            |  
|Prepaid consulting                                                                                                                                                                                       |  |      | (120,600    | )    |   |            |  
|                                                                                                                                                                                                         |  |      |             |      |   |             |  
|                                                                                                                                                                                                         |  |      |             |      |   |             |  
|Total Stockholders Equity                                                                                                                                                                               |  |      | 3,428,878   |      |   | 4,248,589   |  
|                                                                                                                                                                                                         |  |      |             |      |   |             |  
|                                                                                                                                                                                                         |  |      |             |      |   |             |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                               |  | $    | 4,817,028   |      | $ | 5,293,762   |  
|                                                                                                                                                                                                         |  |      |             |      |   |             |  

The accompanying notes are an integral part of the consolidated
financial statements.
F-3

---



CONOLOG
CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF
OPERATIONS
FOR THE YEARS ENDED JULY 31, 2007 AND
2006

|                                                         |  |      |            |      |   |            |  
|-------------------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- | -
|                                                         |  | 2007 |            | 2006 |  
|                                                         |  |      |            |      |  
|OPERATING
  REVENUES                                     |  |      |            |      |   |            |  
|Product revenue                                          |  | $    | 517,705    |      | $ | 547,767    |  
|                                                         |  |      |            |      |   |            |  
|COST OF PRODUCT REVENUES                                 |  |      |            |      |   |            |  
|Materials used for current years
production             |  |      | 378,563    |      |   | 282,932    |  
|Write down of obsolete inventory parts                   |  |      | 1,256,155  |      |   | 245,326    |  
|                                                         |  |      |            |      |   |            |  
|Total Cost of Product Revenues                           |  |      | 1,634,718  |      |   | 528,258    |  
|                                                         |  |      |            |      |   |            |  
|GROSS
  PROFIT (LOSS)                                    |  |      | (1,117,013 | )    |   | 19,509     |  
|                                                         |  |      |            |      |   |            |  
|OPERATING
  EXPENSES                                     |  |      |            |      |   |            |  
|General and administrative costs                         |  |      | 2,778,507  |      |   | 2,159,037  |  
|Professional fees                                        |  |      | 252,850    |      |   | 552,434    |  
|Selling and trade shows                                  |  |      | 151,680    |      |   | 314,100    |  
|Research and development                                 |  |      | 372,723    |      |   | 376,713    |  
|                                                         |  |      |            |      |   |            |  
|Total Operating Expenses                                 |  |      | 3,555,760  |      |   | 3,402,284  |  
|                                                         |  |      |            |      |   |            |  
|LOSS BEFORE OTHER INCOME (EXPENSE)                       |  |      | (4,672,773 | )    |   | (3,382,775 | )
|                                                         |  |      |            |      |   |            |  
|OTHER
  INCOME (EXPENSE)                                 |  |      |            |      |   |            |  
|Induced conversion cost                                  |  |      | (2,705,457 | )    |   |           |  
|Interest income                                          |  |      | 141,390    |      |   | 135,841    |  
|Interest expense                                         |  |      |           |      |   | (83,680    | )
|Amortization of deferred loan discount                   |  |      | (812,147   | )    |   |           |  
|Amortization of deferred loan cost                       |  |      | (363,676   | )    |   |           |  
|Other Income                                             |  |      |           |      |   | 525        |  
|                                                         |  |      |            |      |   |            |  
|Total Other Income (Expense)                             |  |      | (3,739,890 | )    |   | 52,686     |  
|                                                         |  |      |            |      |   |            |  
|LOSS FROM OPERATIONS BEFORE INCOME TAX BENEFIT           |  |      | (8,412,663 | )    |   | (3,330,089 | )
|Benefit from income taxes                                |  |      | 291,596    |      |   |           |  
|                                                         |  |      |            |      |   |            |  
|                                                         |  |      |            |      |   |            |  
|NET
  LOSS                                               |  | $    | (8,121,067 | )    | $ | (3,330,089 | )
|Preferred stock dividends                                |  |      | (4,180     | )    |   | (4,180     | )
|NET LOSS APPLICABLE TO COMMON SHARES                     |  | $    | (8,125,247 | )    | $ | (3,334,269 | )
|                                                         |  |      |            |      |   |            |  
|                                                         |  |      |            |      |   |            |  
|NET
  LOSS PER BASIC AND DILUTED COMMON SHARE            |  | $    | (3.11      | )    | $ | (2.69      | )
|                                                         |  |      |            |      |   |            |  
|                                                         |  |      |            |      |   |            |  
|WEIGHTED
  AVERAGE NUMBER OF COMMON SHARES
  OUTSTANDING |  |      | 2,614,042  |      |   | 1,237,637  |  
|                                                         |  |      |            |      |   |            |  

The accompanying notes are an integral part of the consolidated
financial statements.
F-4

---



CONOLOG
CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENT OF
CHANGES IN STOCKHOLDER EQUITY
FOR THE YEARS ENDED JULY 31, 2007 AND
2006

|                                                                         |  |                 |         |                 |   |              |  |             |       |          |   |             |  |          |            |          |   |           |   |               |            |              |   |            |  |        |             |   |   |          |   |   |            |   |   |          |   |   |            |  
|------------------------------------------------------------------------ |  | --------------- | ------- | --------------- | - | ------------ |  | ----------- | ----- | -------- | - | ----------- |  | -------- | ---------- | -------- | - | --------- | - | ------------- | ---------- | ------------ | - | ---------- |  | ------ | ----------- | - | - | -------- | - | - | ---------- | - | - | -------- | - | - | ---------- | -
|                                                                         |  | SeriesA         |         | SeriesB         |   |              |  |             |       |          |   | Contributed |  |          |            |          |   |           |   |               |            | Total        |  
|                                                                         |  | Preferred Stock |         | Preferred Stock |   | Common Stock |  | Contributed |       | Capital- |   | Accumulated |  | Treasury |            | Deferred |   | Prepaid   |   | Stockholders |           
|                                                                        
|                                                                         |  | Shares          |         | Amount          |   | Shares       |  | Amount      |       | Shares   |   | Amount      |  | Capital  |            | Warrants |   | (Deficit) |   | Stock         |            | Compensation |   | Consulting |  | Equity |            
|                                                                         |  |                 |         |                 |   |              |  |             |       |          |   |             |  |          |            |          |   |           |   |               |            |              |   |            |  |        |            
|                                                                         |  |                 |         |                 |   |              |  |             |       |          |   |             |  |          |            |          |   |           |   |               |            |              |   |            |  |        |            
|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 andemployee
  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      | ) |   |         |   |   |           |   |   |         |   |   |           |  
|Retroactive common stock reverseal                                       |  |                 |         |                 |   |              |  |             |       |          |   |             |  |          | (6,195,092 | )        |   | (61,952   | ) |               | 61,952     |              |   |            |  |        |             |   |   |          |   |   |            |   |   |          |   |   |            |  
|                                                                         |  |                 |         |                 |   |              |  |             |       |          |   |             |  |          |            |          |   |           |   |               |            |              |   |            |  |        |             |   |   |          |   |   |            |   |   |          |   |   |            |  
|Balance at July 31, 2006                                                 |  |                 | 155,000 |                 | $ | 77,500       |  |             | 1,197 |          | $ | 597         |  |          | 1,246,261  |          | $ | 12,462    |   | $             | 32,158,378 |              | $ | 3,857,593  |  | $      | (31,726,207 | ) | $ | (131,734 | ) | $ |           |   | $ |         |   | $ | 4,248,589  |  
|                                                                         |  |                 |         |                 |   |              |  |             |       |          |   |             |  |          |            |          |   |           |   |               |            |              |   |            |  |        |             |   |   |          |   |   |            |   |   |          |   |   |            |  
|                                                                        
|Conversion of common stock warrants                                      |  |                 |         |                 |   |              |  |             |       |          |   |             |  |          | 191,667    |          |   | 1,917     |   |               | 237,667    |              |   |            |  |        |             |   |   |          |   |   |            |   |   |          |   |   | 239,584    |  
|Conversion of convertible debenture                                      |  |                 |         |                 |   |              |  |             |       |          |   |             |  |          | 1,136,364  |          |   | 11,364    |   |               | 1,238,637  |              |   |            |  |        |             |   |   |          |   |   |            |   |   |          |   |   | 1,250,001  |  
|Shares issued for services provided                                      |  |                 |         |                 |   |              |  |             |       |          |   |             |  |          | 52,000     |          |   | 520       |   |               | 93,080     |              |   |            |  |        |             |   |   |          |   |   |            |   |   | (93,600  | ) |   |           |  
|Shares issued for services to be provided                                |  |                 |         |                 |   |              |  |             |       |          |   |             |  |          | 66,250     |          |   | 663       |   |               | 77,588     |              |   |            |  |        |             |   |   |          |   |   |            |   |   | (27,000  | ) |   | 51,251     |  
|Induced conversion cost                                                  |  |                 |         |                 |   |              |  |             |       |          |   |             |  |          |            |          |   |           |   |               | 2,705,457  |              |   |            |  |        |             |   |   |          |   |   |            |   |   |          |   |   | 2,705,457  |  
|Value of warrants assigned to Convertible Debenture                      |  |                 |         |                 |   |              |  |             |       |          |   |             |  |          |            |          |   |           |   |               | 2,691,595  |              |   |            |  |        |             |   |   |          |   |   |            |   |   |          |   |   | 2,691,595  |  
|Common shares issued to officers,directors and
employees for fiscal 2006 |  |                 |         |                 |   |              |  |             |       |          |   |             |  |          | 450,000    |          |   | 4,500     |   |               | 180,000    |              |   |            |  |        |             |   |   |          |   |   | (184,500   | ) |   |          |   |   |           |  
|Common shares issued to officers,directors and
employees for fiscal 2007 |  |                 |         |                 |   |              |  |             |       |          |   |             |  |          | 733,000    |          |   | 7,330     |   |               | 1,312,070  |              |   |            |  |        |             |   |   |          |   |   | (1,319,400 | ) |   |          |   |   |           |  
|Disgorgement                                                             |  |                 |         |                 |   |              |  |             |       |          |   |             |  |          |            |          |   |           |   |               | 184,022    |              |   |            |  |        |             |   |   |          |   |   |            |   |   |          |   |   | 184,022    |  
|Amortization officers, directors andemployee
  compensation              |  |                 |         |                 |   |              |  |             |       |          |   |             |  |          |            |          |   |           |   |               |            |              |   |            |  |        |             |   |   |          |   |   | 184,500    |   |   |          |   |   | 184,500    |  
|Exchange lots / escheatment                                              |  |                 |         |                 |   |              |  |             |       |          |   |             |  |          |            |          |   |           |   |               |            |              |   |            |  |        | (872        | ) |   |          |   |   |            |   |   |          |   |   | (872       | )
|Net loss for the Year                                                    |  |                 |         |                 |   |              |  |             |       |          |   |             |  |          |            |          |   |           |   |               |            |              |   |            |  |        | (8,121,067  | ) |   |          |   |   |            |   |   |          |   |   | (8,121,069 | )
|Dividends                                                                |  |                 |         |                 |   |              |  |             |       |          |   |             |  |          |            |          |   |           |   |               |            |              |   |            |  |        | (4,180      | ) |   |          |   |   |            |   |   |          |   |   | (4,180     | )
|                                                                         |  |                 |         |                 |   |              |  |             |       |          |   |             |  |          |            |          |   |           |   |               |            |              |   |            |  |        |             |   |   |          |   |   |            |   |   |          |   |   |            |  
|Balance at July
  31, 2007                                               |  |                 | 155,000 |                 | $ | 77,500       |  |             | 1,197 |          | $ | 597         |  |          | 3,875,542  |          | $ | 38,756    |   | $             | 40,878,494 |              | $ | 3,857,593  |  | $      | (39,852,326 | ) | $ | (131,734 | ) | $ | (1,319,400 | ) | $ | (120,600 | ) | $ | 3,428,878  |  
|                                                                         |  |                 |         |                 |   |              |  |             |       |          |   |             |  |          |            |          |   |           |   |               |            |              |   |            |  |        |             |   |   |          |   |   |            |   |   |          |   |   |            |  

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, 2007 AND 2006

|                                                                                 |  |      |            |      |   |            |  
|-------------------------------------------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- | -
|                                                                                 |  | 2007 |            | 2006 |  
|                                                                                 |  |      |            |      |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                             |  |      |            |      |   |            |  
|Net loss                                                                         |  | $    | (8,121,067 | )    | $ | (3,330,089 | )
|Adjustments
  to reconcile net loss to net cash (used in) continuing operations: |  |      |            |      |   |            |  
|Depreciation                                                                     |  |      | 20,831     |      |   | 38,490     |  
|Amortization of deferred compensation                                            |  |      | 184,500    |      |   | 547,750    |  
|Amortization of prepaid consulting
expense                                       |  |      | 51,251     |      |   | 39,053     |  
|Induced conversion cost                                                          |  |      | 2,705,457  |      |   |           |  
|Shares issued for services                                                       |  |      |           |      |   | 41,650     |  
|Amortization of discount on debenture                                            |  |      | 812,147    |      |   | 91,130     |  
|Amortization of deferred financing fees                                          |  |      | 363,676    |      |   | 21,902     |  
|Write down of obsolete inventroy                                                 |  |      | 1,256,155  |      |   | 245,326    |  
|                                                                                 |  |      |            |      |   |            |  
|Changes in assets and liabilities                                                |  |      |            |      |   |            |  
|(Increase) decrease in accounts
receivable                                       |  |      | 118,854    |      |   | (94,428    | )
|(Increase) decrease in accounts receivable -
other                               |  |      | 4,377      |      |   | (4,377     | )
|(Increase) decreasse in prepaid expenses                                         |  |      | 24,056     |      |   | (2,621     | )
|(Increase) in inventories                                                        |  |      | (71,329    | )    |   | (98,795    | )
|(Increase) decrease in other current
assets                                      |  |      | (298,772   | )    |   | 106,235    |  
|Increase in accounts payable                                                     |  |      | 3,220      |      |   | 79,193     |  
|(Decrease) in accrued expenses and other
liabilities                             |  |      | (33,479    | )    |   | (362,734   | )
|                                                                                 |  |      |            |      |   |            |  
|Net
  cash used in continuing operations                                         |  |      | (2,980,123 | )    |   | (2,682,315 | )
|                                                                                 |  |      |            |      |   |            |  
|                                                                                 |  |      |            |      |   |            |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                             |  |      |            |      |   |            |  
|Purchase of certificate of deposit                                               |  |      | (2,445,877 | )    |   | (2,622,812 | )
|Redemption of certificate of deposit                                             |  |      | 3,031,359  |      |   | 2,534,417  |  
|Purchase of equipment and leasehold
improvements                                 |  |      | (83,693    | )    |   | (17,457    | )
|                                                                                 |  |      |            |      |   |            |  
|Net cash provided by (used in) investing
activities                              |  |      | 501,789    |      |   | (105,852   | )
|                                                                                 |  |      |            |      |   |            |  
|                                                                                 |  |      |            |      |   |            |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                             |  |      |            |      |   |            |  
|Proceeds from Convertible Debenture                                              |  |      | 2,487,500  |      |   | 1,250,000  |  
|Proceeds from disgorgement                                                       |  |      | 184,022    |      |   |           |  
|Increase in deferred loan closing costs                                          |  |      |           |      |   | (175,215   | )
|Proceeds from issuance of stock and
warrants                                     |  |      | 239,584    |      |   |           |  
|Proceeds from note receivable                                                    |  |      | 16,102     |      |   | 14,864     |  
|                                                                                 |  |      |            |      |   |            |  
|Net
  cash provided by financing activities                                      |  |      | 2,927,208  |      |   | 1,089,649  |  
|                                                                                 |  |      |            |      |   |            |  

The accompanying notes are an integral part of the consolidated
financial statements.
F-6

---



CONOLOG CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JULY 31, 2007 AND 2006

Continued-

|                                                     |  |   |           |  |   |            | 
|---------------------------------------------------- |  | - | --------- |  | - | ---------- | -
|NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS |  |   | 448,874   |  |   | (1,698,518 | )
|                                                     |  |   |           |  |   |            |  
|CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR        |  |   | 238,137   |  |   | 1,936,655  |  
|                                                     |  |   |           |  |   |            |  
|                                                     |  |   |           |  |   |            |  
|CASH AND CASH EQUIVALENTS - END OF YEAR              |  | $ | 687,011   |  | $ | 238,137    |  
|                                                     |  |   |           |  |   |            |  
|                                                     |  |   |           |  |   |            |  
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:    |  |   |           |  |   |            |  
|CASH PAID DURING THE YEAR FOR:                       |  |   |           |  |   |            |  
|Interest expense                                     |  | $ |          |  | $ | 27,740     |  
|                                                     |  |   |           |  |   |            |  
|Income Taxes                                         |  | $ |          |  | $ |           |  
|                                                     |  |   |           |  |   |            |  
|SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:       |  |   |           |  |   |            |  
|                                                    
|Warrants assigned to convertible
debentures          |  | $ | 2,691,595 |  | $ |           |  
|                                                     |  |   |           |  |   |            |  
|Debt converted to equity                             |  | $ | 1,250,000 |  | $ |           |  
|                                                     |  |   |           |  |   |            |  
|Common stock issued for services to be
provided      |  | $ | 120,600   |  | $ | 41,650     |  
|                                                     |  |   |           |  |   |            |  
|Common stock issued for services                     |  | $ | 51,250    |  |   |            |  
|                                                     |  |   |           |  |   |            |  
|                                                     |  |   |           |  |   |            |  
|Common stock
  issued for deferred compensation      |  | $ | 1,319,400 |  | $ |           |  
|                                                     |  |   |           |  |   |            |  

The accompanying notes are an integral part of the consolidated
financial statements.
F-7

---



CONOLOG
CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2007 AND 2006

|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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.                                                                                                                                                                                         
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        | The Company formed a
 wholly owned Subsidiary, Nologoc Corporation. In September 1998, Nologoc
 Corporation purchased the assets of Atlas Design, Incorporated. In January,
 2001, Nologoc Corporation purchased the assets of Prime Time Staffing,
 Incorporated and Professional Temp Solutions Incorporated. Atlas Design,
 Prime Time Staffing and Professional Temp Solutions provide short-term and
 long-term qualified engineering and technical staff, as well as human
 resource consulting to various industries. In March 2004 the Company ceased
 operating its staffing business. The assets of the Companys wholly-owned
 subsidiary, Nologoc, Inc. trading as Atlas Design, were sold to the Companys
 vice-president of operations of Atlas Design.
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|NOTE 2- | SUMMARY
 OF SIGNIFICANT ACCOUNTING 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 twelve months or less. The Company maintains cash and cash
 equivalents balances at financial institutions and are insured by the Federal
 Deposit Insurance Corporation up to $250,000. At times during the year,
 balances in certain bank accounts may exceed the FDIC insured limits.                                                                                                                                                                                                                                                                                      
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        | Certificates
 of Deposits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        | At July 31, 2007 and 2006,
 the Company had two, one six month and one nine month, certificates of
 deposit totaling $2,037,330 and $2,622,812, with interest at a rate of 5.3%
 and 4.18% and maturing September 2007 and December 2007, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        | Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        | Inventories are valued at
 the lower of cost (determined on a first-in, first-out basis) or market.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        | Property, Plant and Equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        | Property, plant and
 equipment are carried at cost, less allowances for depreciation. Depreciation
 is computed by the straight-line method over the estimated useful lives of
 the assets. Depreciation was $20,831 and $38,490 for the years ended July 31,
 2007 and 2006, respectively. Repairs and maintenance expenditures which do
 not extend the useful lives of the related assets are expensed as incurred.                                                                                                                                                                                                                                                                                                                                                

F-8

---



CONOLOG
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2007 AND 2006

|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2- | SUMMARY
 OF SIGNIFICANT ACCOUNTING POLICIES(CONTINUED)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|        | Research and Development                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|        | Research and Development costs are expensed as
 incurred. Research and Development costs were $372,723 and $376,713 for the
 years ended July 31, 2007 and 2006 respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|        | 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 / Public Relations
 Costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|        | Advertising/Public Relations costs are charged to
 operations when incurred. These expenses were $42,978 and $87,380 for the
 years ended July 31, 2007 and 2006, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|        | Shipping and Handling Costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|        | Shipping and handling costs are expensed as incurred
 and amounted to $14,891 and $23,416 for the years ended July 31, 2007 and
 2006, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|        | 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 earnings per share available to
 common shareholders. The number of weighted average shares used in the
 computations were 2,614,042 and 1,237,637 for 2007 and 2006 respectively. The
 effect of assuming the exchange of Series A Preferred Stock and Series B
 Preferred Stock in 2007 and 2006 would be anti-dilutive.

F-9

---



CONOLOG
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2007 AND 2006

|        |                                                                                                                                                                                                                                                                                                                                                                                       
|------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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, 2007 would be anti-dilutive. The
 following transactions occurred after July 31, 2007, which, had they taken
 place during fiscal 2007, would have changed the number of shares used in the
 computations of earnings per share: (1) $285,563 in debentures were converted
 into 203,973 common stock shares;
|        |                                                                                                                                                                                                                                                                                                                                                                                       
|        | The following is a
 reconciliation of the computation for basic and diluted EPS:                                                                                                                                                                                                                                                                                                      

|                                                      |  |                |            |                |   |            |  
|----------------------------------------------------- |  | -------------- | ---------- | -------------- | - | ---------- | -
|                                                      |  | July 31,
 2007 |            | July 31,
 2006 |  
|                                                      |  |                |            |                |  
|Net Loss                                              |  | $              | (8,121,067 | )              | $ | (3,330,089 | )
|                                                      |  |                |            |                |   |            |  
|Weighted-average common
 shares outstanding (Basic)   |  |                | 2,614,042  |                |   | 1,237,637  |  
|Weighted-average common
 stock equivalents:           |  |                |            |                |   |            |  
|Stock options                                         |  |                |           |                |   |           |  
|Warrants                                              |  |                |           |                |   |           |  
|                                                      |  |                |            |                |   |            |  
|Weighted-average common
 shares outstanding (Diluted) |  |                | 2,614,042  |                |   | 1,237,637  |  
|                                                      |  |                |            |                |   |            |  

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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

F-10

---



CONOLOG
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2007 AND 2006

|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2- | SUMMARY OF SIGNIFICANT ACCOUNTING
 POLICIES(CONTINUED)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|        | 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.
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|        | In February 2006, the FASB issued SFAS No. 155,
 Accounting for Certain Hybrid Financial Instruments, an amendment to FASB
 Statement No. 133 and 140. The Company does not expect SFAS 155 to have a
 material impact on its results or financial statements                                                                                                                                                                                                                                                                                                                                         
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|        | In March 2006, the FASB issued SFAS No. 156,
 Accounting for Servicing of Financial Assets, an amendment of FASB Statement
 No. 140, requiring an entity to recognize a servicing asset or liability.
 The Company believes this SFAS is not applicable to current operations.                                                                                                                                                                                                                                                                                                                        
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|        | In September 2006, the FASB issued Statement of
 Financial Accounting Standards No. 157, Fair Value Measurements. FAS 157 is
 effective for financial statements issued for fiscal years beginning after
 November 15, 2007. The Company does not expect SFAS 157 to have a material
 impact on its results or financial statements                                                                                                                                                                                                                                                                     
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|        | In September 2006, the Securities and Exchange
 Commission issued Staff Accounting Bulletin No. 108, Quantifying
 Misstatements. SAB 108 is effective for financial statements issued for
 fiscal years beginning after November 15, 2007. The Company does not expect
 SAB 108 to have a material impact on its results or financial statements                                                                                                                                                                                                                                                      
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|        | The FASB also issued in September 2006 Statement of
 Financial Accounting Standards No. 158, employers Accounting for Defined
 Benefit Pension and other Postretirement Plans. This Standard requires
 recognition of the funded status of a benefit plan in the statement of
 financial position. The Company does not expect FAS 158 to have a material
 impact on its results or financial statements                                                                                                                                                                                               
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|        | In June 2006, the FASB issued Interpretation No.48,
 Accounting for Uncertainty in Income Taxes  an interpretation of FASB
 Statement No. 109. The adoption of FIN 48 is not expected to have a material
 impact on the Companys consolidated financial position and results of
 operations.                                                                                                                                                                                                                                                                                                        

F-11

---



CONOLOG
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2007 AND
2006

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

|                |  |      |         |      |   |           | 
|--------------- |  | ---- | ------- | ---- | - | --------- | 
|                |  | 2007 |         | 2006 |  
|                |  |      |         |      |  
|               
|Finished
 Goods |  | $    | 205,638 |      | $ | 207,932   | 
|Work-in-process |  |      | 22,350  |      |   | 1,710     | 
|Raw
 materials  |  |      | 310,866 |      |   | 1,514,039 | 
|                |  |      |         |      |   |           | 
|                |  | $    | 538,854 |      | $ | 1,723,681 | 
|                |  |      |         |      |   |           | 

|        |                                                                                                                                                                                                                                                                                                                                                                                  
|------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 4- | RENTAL COMMITMENTS                                                                                                                                                                                                                                                                                                                                                               
|        |                                                                                                                                                                                                                                                                                                                                                                                  
|        | Total
 rental expense for all operating leases of the Company amounted to
 approximately $55,680 and $55,680 during the years ended July 31, 2007 and
 2006, respectively. The Company currently leases its facilities on a month-to-month
 basis.                                                                                                                               
|        |                                                                                                                                                                                                                                                                                                                                                                                  
|NOTE 5- | DEFERRED FINANCING FEES                                                                                                                                                                                                                                                                                                                                                          
|        |                                                                                                                                                                                                                                                                                                                                                                                  
|        | The
 Company has deferred financing fees of $ 799,770 and $153,313 for July 31,
 2007 and 2006, respectively. These deferred financing fees will be amortized
 over the life of the loans. Amortization expense for these fees for the
 years ended July 31, 2007 and 2006 were $363,676 and $21,902 respectively.                                                               
|        |                                                                                                                                                                                                                                                                                                                                                                                  
|NOTE 6- | DEFERRED COMPENSATION                                                                                                                                                                                                                                                                                                                                                            
|        |                                                                                                                                                                                                                                                                                                                                                                                  
|        | Pursuant
 to the Corporation 2007 Stock Incentive Plan, 733,000 common shares of
 Company stock were issued to current Officers, Directors and
 Employees. These shares were recorded at a value of $1,319,400 and will be
 expensed during the July 31, 2008 fiscal year.                                                                                                       
|        |                                                                                                                                                                                                                                                                                                                                                                                  
|NOTE 7- | NOTE RECEIVABLE                                                                                                                                                                                                                                                                                                                                                                  
|        |                                                                                                                                                                                                                                                                                                                                                                                  
|        | The
 Company entered into an Agreement to Rescind Asset Purchase Agreement, dated
 October 22, 2002. This Agreement requires the repayment of $148,640, consisting
 of principal and interest accrued to July 31, 2004. Payments of $6,607
 (principal of $1,239 and interest at 5% of $368) begin December 30, 2004 and
 will continue monthly until the full balance is repaid.

F-12

---



CONOLOG
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2007 AND
2006

|        |                                                         
|------- | --------------------------------------------------------
|NOTE 8- | INCOME TAXES                                            
|        |                                                         
|        | The
 income tax (benefit) is comprised of the following:

|                      |  |           |          |      |   |   | 
|--------------------- |  | --------- | -------- | ---- | - | - | 
|                      |  | July
 31, |         
|                      |  | 2007      |          | 2006 |  
|                      |  |           |          |      |  
|                     
|Current
 Income Taxes |  | $         |         |      | $ |  | 
|Federal               |  |           |         |      |   |  | 
|State                 |  |           | (291,596 | )    |   |  | 
|                      |  |           |          |      |   |   | 
|                      |  | $         | (291,596 | )    | $ |  | 
|                      |  |           |          |      |   |   | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 amounting to $445,136 ($219,190 for tax year July 31, 2006 and
 $225,946 for tax year July 31, 2005) 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, 2007 and 2006, the Company has net operating loss carryforwards for
federal and state income tax (Book) purposes of approximately $47,000,000 and
$39,000,000 respectively, which is available to offset future Federal and State
taxable income through 2027.

There
was no provision for income taxes for the year ended July 31, 2007 and July 31,
2006.

|           |  |      |             |      |   |             |  
|---------- |  | ---- | ----------- | ---- | - | ----------- | -
|           |  | 2007 |             | 2006 |  
|           |  |      |             |      |   |             |  
|Deferred   |  |      |             |      |   |             |  
|tax
 asset |  | $    | 12,181,093  |      | $ | 10,107,718  |  
|           |  |      |             |      |   |             |  
|Less:      |  |      |             |      |   |             |  
|Valuation  |  |      |             |      |   |             |  
|allowance  |  | $    | (12,181,093 | )    | $ | (10,107,718 | )
|           |  |      |             |      |   |             |  
|           |  |      |             |      |   |             |  

F-13

---



CONOLOG
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2007 AND
2006

|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 9-  | 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, 2007 and 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|         | The Plan also provides an employee savings provision
 (401(k) plan whereby eligible participating employees may elect to
 contribute up to the maximum allowed under the IRS code to an investment
 trust. For tax year 2007 this maximum allowable deferred contribution was
 $15,000 ($20,000 for employee over age 59 1⁄2).The Company made matching
 contributions to the plan of $183,549 and $163,407 for the fiscal years ended
 July 31, 2007 and 2006 respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|NOTE 10- | STOCKHOLDERS EQUITY                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|         | The Series A Preferred Stock provides 4% cumulative
 dividends, which were $117,683 ($0.76 per share) in arrears at July 31, 2007.
 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 $38,856 ($32.46 per share) in
 arrears at July 31, 2007. In addition, each share of Series B Preferred Stock
 is convertible into .005 of one share of Common Stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|         | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|         | At a Special Meeting of the shareholders held on
 August 2, 2006 a proposal to amend the Certificate of Incorporation to give
 effect to a one-for-six reverse stock split of the common stock of the
 Company was approved by the stockholders. The reverse split was effected on August 4, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|        
|         | 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 as a result of the
 reverse split are convertible into 166,667 (the Note Shares) post split
 shares of (post 1-for-6 stock reverse split) common stock at a post split
 conversion price of $7.50, and warrants to purchase 166,668 shares of (post
 l-for-6 stock reverse split) common stock at a post split exercise price of $5.7474
 per share (the Conversion Price). Pursuant to an agreement dated as of
 September 28, 2006, between the Company and the selling shareholders who were
 parties to the January 19, 2006 Subscription Agreement (the Subscribers),
 the Company reduced the warrant exercise price of warrants held by the
 Subscribers to $1.25 so long as such warrants were exercised by October 31,
 2006, after which time the warrant exercise price would revert to $5.7474,
 subject to adjustment as provided in the warrants. Pursuant to an agreement
 between the Company and First Montauk Securities Corp. (the placement agent
 in the private placement with the

F-14

---



CONOLOG
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2007 AND 2006

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | selling shareholders who were parties to the January
 19, 2006 Subscription Agreement) the Company reduced the exercise price of
 warrants issued to First Montauk Securities Corp. and/or its transferees to
 $1.25. As of January 31, 2007 all of the Subscribers and some of the First
 Montauk Securities Corp. warrants, amounting to 191,667 warrants were
 exercised at a conversion price of $1.25 per share. The Company received a
 Gross amount of $239,584 for these warrants.                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | As permitted by the January 19, 2006 Subscription
 Agreement, on November 30th, the Company reduced the Conversion
 Price to $1.10 per share. Any shares in excess of the Notes Shares will not
 be registered under the Securities Act of 1933, as amended, and, therefore,
 may not be offered for sale, pledged or hypothecated in the absence of an
 effective registration statement or an opinion of counsel reasonably
 satisfactory to the Company that such registration is not required.                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | In January 2007, the Company reduced the original
 conversion prices of their outstanding debentures from $7.50 to $1.10.
 Subsequent to the reduction in the conversion price the debt holders
 exercised their rights to convert. The incremental consideration of the
 shares issued in the conversion was valued at $2,705,457 and recorded as
 induced conversion costs in the accompanying statement of operations.                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | In connection with this conversion, the amortization
 of deferred loan costs of $174,147 and the amortization of deferred loan
 discount of $363,610 were fully written off.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | On March 12, 2007 a private placement of an
 aggregate of $2,825,000, principal amount, of Convertible Debentures was
 placed with 8 investors. The Convertible Debentures, subject to stockholder
 approval as required by any applicable Nasdaq rules, the Convertible
 Debentures are convertible into an aggregate of 1,412,500 shares of the
 common stock of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | The Conversion Price of the Convertible Debentures
 is $2.00 per share. The investors have also received warrants to purchase an
 aggregate of 1,412,500 shares of the Companys common stock at an exercise
 price of $2.88 per share, exercisable beginning at any time on the sooner of
 September 8, 2007 or the date the Companys stockholders approves the
 issuance of the Companys common stock issuable on conversion of the
 Convertible Debentures (if such approval is required by the applicable rules
 of the Nasdaq) through the fifth anniversary of the issuance. In addition,
 the selling agent (including certain of its employees and affiliates) was
 granted a warrant to acquire 282,500 shares of the Companys common stock.
 The Company received net proceeds of $2,487,500

F-15

---



CONOLOG
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2007 AND
2006

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

|                         |  |                   |            |                        |                          |                                 |  |   |       | 
|------------------------ |  | ----------------- | ---------- | ---------------------- | ------------------------ | ------------------------------- |  | - | ----- | 
|                         |  |                   |            |                        | Year
Ended July 31, 2007 |                                 |  |   |      
|                         |  |                   |            |                        |                          |                                 |  |   |      
|                         |  | Number ofWarrants |            | Post1 Í 6Reverse split |                          | Weighted average Exercise Price | 
|                         |  |                   |            |                        |                          |                                 | 
|Balance at July 31, 2004 |  |                   | 470,000    |                        |                          |                                 |  | $ | 1.69  | 
|Exercised September 2004 |  |                   | (270,000   | )                      |                          |                                 |  | $ | 1.59  | 
|                         |  |                   |            |                        |                          |                                 |  |   |       | 
|                         |  |                   | 200,000    |                        |                          | 33,333                          |  | $ | 10.14 | 
|Issued February 2005     |  |                   | 958,549    |                        |                          |                                 |  | $ | 1.25  | 
|Exercised February 2005  |  |                   | (200,000   | )                      |                          |                                 |  | $ | 1.84  | 
|                         |  |                   |            |                        |                          |                                 |  |   |       | 
|                         |  |                   | 758,549    |                        |                          | 126,425                         |  | $ | 7.50  | 
|Issued July 2005         |  |                   | 1,440,000  |                        |                          | 240,000                         |  | $ | 10.14 | 
|Issued January 2006      |  |                   | 1,200,000  |                        |                          |                                 |  | $ | 0.96  | 
|Exercised February 2007  |  |                   | (1,191,667 | )                      |                          | 8,333                           |  | $ | 1.25  | 
|Issued March 2007        |  |                   |           |                        |                          | 1,695,000                       |  | $ | 2.88  | 
|                         |  |                   |            |                        |                          |                                 |  |   |       | 
|Balance July 31, 2007    |  |                   |            |                        |                          | 2,103,091                       |  | $ | 4.09  | 
|                         |  |                   |            |                        |                          |                                 |  |   |       | 

|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|-------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 11- | CONVERTIBLE DEBENTURES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|         | On
 March 12, 2007 a private placement of an aggregate of $2,825,000, principal
 amount, of Convertible Debentures was placed with 8 investors. The
 Convertible Debentures, subject to stockholder approval as required by any
 applicable Nasdaq rules, the Convertible Debentures are convertible into an
 aggregate of 1,412,500 shares of the common stock of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                          
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|         | The
 Conversion Price of the Convertible Debentures is $2.00 per share. The
 investors have also received warrants to purchase an aggregate of 1,412,500 shares of
 the Companys common stock at an exercise price of $2.88 per share,
 exercisable beginning at any time on the sooner of September 8, 2007 or the
 date the Companys stockholders approves the issuance of the Companys common
 stock issuable on conversion of the Convertible Debentures (if such
 approval is required by the applicable rules of the Nasdaq) through the fifth
 anniversary of the issuance. In addition, the selling agent (including certain of its
 employees and affiliates) was granted a warrant to acquire 282,500 shares of
 the Companys common stock. The Company received net proceeds of $2,487,500

F-16

---



CONOLOG
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2007 AND 2006

|         |                                                                                                    
|-------- | ---------------------------------------------------------------------------------------------------
|NOTE 12- | MAJOR CUSTOMERS                                                                                    
|         |                                                                                                    
|         | The
 following summarizes sales to major customers (each 10% or more of net sales)
 by the Company:

|           |  |                         |         |                    |  |                    |  |      |   | 
|---------- |  | ----------------------- | ------- | ------------------ |  | ------------------ |  | ---- | - | 
|Year Ended |  | Sales to MajorCustomers |         | Number ofCustomers |  | Percentage ofTotal | 
|           |  |                         |         |                    |  |                    | 
|2007       |  | $                       | 229,512 |                    |  | 2                  |  | 44.3 | % | 
|2006       |  | $                       | 158,437 |                    |  | 2                  |  | 29.6 | % | 

|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 13- | 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 14- | SECURITIES ISSUED FOR SERVICES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|        
|         | During
 fiscal year July 31, 2007, the Company issued 118,250 shares of common stock
 to various consultants for services. Of these, 66,250 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 2008. The
 remaining were expensed at the fair value of consideration received during
 fiscal year 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|         | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

F-17

---



CONOLOG
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2007 AND 2006

|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 15- | CONTINGENCIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|         | On March 13, 2007, Meyers Associates, L.P. commenced
 an action against Conolog Corporation, asserting that: (1) Conolog breached a
 purported contract it had with Meyers pursuant to which it claims Meyers was
 to act as lead underwriter in connection with a Regulation D securities
 offering for Conolog, and (2) Conolog misappropriated a purported
 confidential list of potential investors. Conolog denies the allegations in
 the complaint and intends to vigorously defend against Meyerss claims. On
 May 4, 2007, Conolog served its answer to the complaint and discovery
 demands. While Conolog believes it has meritorious defenses, at this early stage
 in the proceedings, it is not possible to predict the outcome or determine an
 amount of liability, if any.                                                                                                                      
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|NOTE 16- | SUBSEQUENT
 EVENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|         | On September 7, 2007, The Company has reduced the
 exercise price of the warrants issued in connection with the Subscription
 Agreement, dated March 12, 2007 (the Subscription Agreement), from $2.88
 per share to $1.40 per share. As a result of the reduction of the warrant
 exercise price, pursuant to Section 12 (b) of the Subscription Agreement, the
 conversion price of the Convertible Notes issued in connection with the
 Subscription Agreement is now $1.40 per share. Any shares in excess of the
 shares that already have been registered for sale on conversion of the Notes
 will not be registered under the Securities Act of 1933, as amended, and,
 therefore, may not be offered for sale, pledged or hypothecated in the
 absence of an effective registration statement or an opinion of counsel
 reasonably satisfactory to the Company that such registration is not
 required.
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|         | As a result of the above reductions in exercise and
 conversion prices, as of October 15, 2007 investors have converted $1,246,171
 of debt for 890,123 common stock shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|         | On October 25, 2007, The company entered into a
 subscription agreement with a number of investors for the private placement
 of up to 953,000 shares of common stock and warrants to purchase common
 stock. The gross receipts from this private placement of the shares and
 warrants were expected to be approximately $1,334,200 and net proceeds of
 approximately $1,160,000 after deducting expected closing costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

F-18

---