|                                  
|----------------------------------
|UNITED STATES                     
|SECURITIES AND EXCHANGE COMMISSION
|Washington, D.C. 20549            
|                                  
|FORM 10-K                         

|                                                                                              | 
|--------------------------------------------------------------------------------------------- | 
|þ   ANNUAL REPORT
 PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
 EXCHANGE ACT OF 1934    
|                                                                                             
|For
 the Fiscal Year Ended July 31, 2011                                                     
|                                                                                             
|OR                                                                                           
|                                                                                             
|o   TRANSITION
 REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
 EXCHANGE ACT OF 1934

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

|                                                               |  |                          |  |                                        
|-------------------------------------------------------------- |  | ------------------------ |  | ---------------------------------------
|Delaware                                                       |  | 000-08174                |  | 22-1847286                             
|                                                               |  |                          |  |                                        
|(State or other jurisdiction of incorporation or organization) |  | (Commission File Number) |  | (I.R.S. Employer Identification Number)

5 COLUMBIA ROAD, 
SOMERVILLE, NJ 08876 (Address of principal executive offices,
including zip code)

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

Securities registered pursuant to Section
12(b) of the Act: None

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

Common Stock, $0.01 par value

Indicate by check mark whether the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes o No þ

Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post
such files). Yes o No o

Indicate by check mark if disclosure of delinquent
    filers in response to Item 405 of Regulation S-K is not contained herein,
    and will not 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-K or any amendment to this Form 10-K.  Yes o   No o

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

|                         |   |                            |  
|------------------------ | - | -------------------------- | -
|Large
 accelerated filer | o | Accelerated
 filer         | o
|Non-accelerated
 filer   | o | Smaller
 reporting company | þ

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

The aggregate market value of the voting and non-voting
    common equity held by non-affiliates of the registrant on November 15, 2011,
based on a closing price of $.07 was approximately $1,140,750.

As of November 15, 2011, the registrant had 17,569,452
shares of its common stock, par value $0.01, outstanding.

---



CONOLOG CORPORATION
FOR THE FISCAL YEAR ENDED
JULY 31, 2011
INDEX TO REPORT ON FORM 10-K

|                                  |                                                                                                                |    |     
|--------------------------------- | -------------------------------------------------------------------------------------------------------------- | -- | ----
|                                  |                                                                                                                |    | Page
|                                  |                                                                                                                |    |     
|PART I                            |                                                                                                                |    |     
|                                  |                                                                                                                |    |     
|ITEM 1.                           | BUSINESS.                                                                                                      |    | 3   
|ITEM 2.                           | PROPERTIES.                                                                                                    |    | 9   
|ITEM 3.                           | LEGAL PROCEEDINGS.                                                                                             |    | 9   
|ITEM 4.                           | (REMOVED AND RESERVED).                                                                                        |    | 9   
|                                  |                                                                                                                |    |     
|PART II                           |                                                                                                                |    |     
|                                  |                                                                                                                |    |     
|ITEM 5.                           | MARKET FOR REGISTRANTS COMMON EQUITY,
 RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. |    | 10  
|ITEM 6.                           | SELECTED FINANCIAL DATA.                                                                                       |    | 11  
|ITEM 7.                           | MANAGEMENTS DISCUSSION AND ANALYSIS OF
 FINANCIAL CONDITION AND RESULTS OF OPERATIONS.                        |    | 11  
|ITEM 7A.                          | QUANTITATIVE AND QUALITATIVE DISCLOSURES
 ABOUT MARKET RISK.                                                   |    | 22  
|ITEM 8.                           | FINANCIAL STATEMENTS AND SUPPLEMENTARY
 DATA.                                                                  |    | 22  
|ITEM 9.                           | CHANGES IN AND DISAGREEMENTS WITH
 ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.                         |    | 22  
|ITEM 9A.                          | CONTROLS AND PROCEDURES.                                                                                       |    | 22  
|ITEM 9B.                          | OTHER INFORMATION.                                                                                             |    | 24  
|                                  |                                                                                                                |    |     
|PART III                          |                                                                                                                |    |     
|                                  |                                                                                                                |    |     
|ITEM 10.                          | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
 GOVERNANCE.                                                       |    | 24  
|ITEM 11.                          | EXECUTIVE COMPENSATION.                                                                                        |    | 26  
|ITEM 12.                          | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
 OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.               |    | 28  
|ITEM 13.                          | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,
 AND DIRECTOR INDEPENDENCE.                                    |    | 29  
|ITEM 14.                          | PRINCIPAL ACCOUNTING FEES AND SERVICES.                                                                        |    | 30  
|                                  |                                                                                                                |    |     
|PART IV                           |                                                                                                                |    |     
|                                  |                                                                                                                |    |     
|ITEM 15.                          | EXHIBITS, FINANCIAL STATEMENT SCHEDULES.                                                                       |    | 31  
|                                  |                                                                                                                |    |     
|SIGNATURES                        |                                                                                                                | 33
|                                  |                                                                                                                |   
|CONSOLIDATED FINANCIAL STATEMENTS |                                                                                                                | 34

1

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FORWARD
LOOKING STATEMENTS

This Form 10-K and the
documents incorporated by reference in this Form 10-k contain forward-looking
statements that are subject to risks and uncertainties. All statements other
than statements of historical fact contained in this document and the materials
accompanying this document are forward-looking statements.

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

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

Forward-looking
statements are expressly qualified in their entirely by this cautionary
statement. The forward-looking statements included in this document are made as
of the date of this document and we do not undertake any obligation to update
forward-looking statements to reflect new information, subsequent events or
otherwise.

2

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PART I

ITEM 1. BUSINESS.

GENERAL
INFORMATION

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

HISTORY

We were organized in 1968
and were engaged primarily in the design and manufacture 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
(Currently inactive). In August, 2000, Lonogoc Corporation purchased the assets
of Independent Computer Maintenance Corporation, which provided installation,
maintenance, and troubleshooting of computer systems and networks. On October
22, 2002, we entered an agreement to rescind the Asset Purchase Agreement
between us and Independent Computer Maintenance Corporation. Under the
rescission agreement, Conolog and its subsidiary agreed to transfer all assets
previously purchased pursuant to the Asset Purchase Agreement, to the extent
they still exist, to the former seller. The return of the purchase price paid
for the assets was $600,000, $300,000 in cash at closing, a note, which is
secured by a first mortgage on a condominium, for $150,000 bearing an interest
rate of 7.5% of which will be paid over 24 months in equal monthly installments
of $6,750 per month beginning December 2002, and an unsecured note receivable
for $137,350 payable over 10 years beginning December 2004 bearing an interest
rate of 5%. During fiscal 2009, the maker of the note stopped making payments
on this note receivable and the Company reserved $83,100 at July 31, 2009.
During fiscal 2010 the maker of the note made only one payment of $1,610. The
Company filed legal action and a Judgment was granted in favor of the Company.
On March 28, 2011, the Company entered into a settlement agreement with
Independent Computer Maintenance Corporation in which the Company received a
payment of $10,000. This case is now closed.

In March 2004, we ceased
operating our staffing business. The assets of our wholly-owned subsidiary,
Nologoc, Inc.

3

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trading as Atlas Design,
were sold to the subsidiarys Vice President. In consideration of the sale, we
received $34,000 in cash.

PRODUCTS

Since 2004, we have been
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 market and sell our
products to three basic types of customers:

| |    |                                                                           |   |                                      
| | -- | ------------------------------------------------------------------------- | - | -------------------------------------
| | 1) | Military Sales                                                           
| |    |                                                                           |  | Direct contract sales to military    
| |    |                                                                           |  | As subcontractor to systems producers
| |    |                                                                           |  | Foreign governments                  
| |    |                                                                           |   |                                      
| | 2) | Commercial Sales (Under the trade name INIVEN (a
 Division of Conolog))
| |    |                                                                           |  | Direct sales to end-users            
| |    |                                                                           |  | Sales to system assemblers           
| |    |                                                                           |  | Sales to contractors/installers      
| |    |                                                                           |   |                                      
| | 3) | Commercial Sales - As Manufacturing Subcontractor to
 Systems Producers. 

MILITARY
SALES

Military sales are
primarily 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.

4

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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 is installed
in pairs, one unit at each end of the line. Each unit is connected and in
constant communication with the other, as they continuously monitors 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.
| |   |                                                                                                              
| |  | 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

5

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

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

6

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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.

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.

MARKETING
AND SALES

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

COMPETITION

The market for our
products is very competitive. There are several companies engaged in providing
similar services and in manufacturing products similar to those 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 technologically
superior products or offered these products and services at significantly lower
prices than our products. Our significant competitors are SL Industries, ABB
and Siemens.

7

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LARGEST
CUSTOMERS

Our major customers during fiscal 2011 and 2010:

|                        |  |      |           |  |      |       |   |  |   |           |  |  |       |  
|----------------------- |  | ---- | --------- |  | ---- | ----- | - |  | - | --------- |  |  | ----- | -
|                        |  | 2011 |           |  | 2010 |      
|                        |  |      |           |  |      |       |   |  |   |           |  |  |       |  
|Customer 1              |  | $    | 747,457   |  |      | 44.2  | % |  | $ | 133,658   |  |  | 11.3  | %
|Customer 2              |  |      | 453,238   |  |      | 26.8  | % |  |   | 67,555    |  |  | 5.7   | %
|Customer 3              |  |      | 173,092   |  |      | 10.2  | % |  |   | 376,138   |  |  | 31.9  | %
|                        |  |      |           |  |      |       |   |  |   |           |  |  |       |  
|                        |  | $    | 1,373,787 |  |      | 81.2  | % |  | $ | 577,351   |  |  | 49.0  | %
|                        |  |      |           |  |      |       |   |  |   |           |  |  |       |  
|Total Product
 Revenues |  | $    | 1,691,852 |  |      | 100.0 | % |  | $ | 1,178,673 |  |  | 100.0 | %

None of these customers
has or had any material relationship other than purchasing our products.

As of July 31, 2011 we
had fulfilled all outstanding orders and had no backlog for PDR-2000 systems
and military sales for the fiscal year ended July 31, 2011.

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, Somerville, New Jersey 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

The Company provides a
twelve-year warranty on all commercial products and is required by government
regulation to design and produce military products with a minimum 25-year
operating life in addition to shelf life. The Company, at its option, repairs
or replaces products that are found defective during the warranty period
provided 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.

8

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RESEARCH
AND DEVELOPMENT

New
Products 

GlowWorm
Fiber Optic Detector, an independent standalone product
for detection of fiber optic cable failures without the need to cut the cable,
was introduced in September 2010. The Company has a Patent Pending on this product.
Marketing is being focused on non-traditional Conolog customers and the Company
hopes to begin sales in 2012.

PATENTS
AND TRADEMARKS

We do not have any
patents covering any of our present products. 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. 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, 2011, we
employed 15 people on a full-time basis, including three in management, one in
sales, one clerical, one in purchasing, three in engineering and quality
control and six 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. PROPERTY.

Our principal executive
offices are located at 5 Columbia Road, 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 $6,380. In the opinion of management, the space is
adequately covered by insurance.

ITEM 3. LEGAL PROCEEDINGS.

We are currently not
involved in any litigation that we believe could have a material adverse effect
on our financial condition or results of operations. There is no action, suit,
proceeding, inquiry or investigation before or by any court, public board,
government agency, self-regulatory organization or body pending or, to the
knowledge of the executive officers of our company or any of our subsidiaries,
threatened against or affecting our company, our common stock, any of our
subsidiaries or of our companies or our subsidiaries officers or directors in
their capacities as such, in which an adverse decision could have a material
adverse effect.

ITEM 4 - RESERVED

9

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PART II

ITEM 5. MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES.

(a) Market Information

MARKET PRICE FOR COMMON STOCK

The Companys Common Stock is listed on the OTCQB under the under the
symbol CNLG.PK. The following table sets forth the quarterly high and low
sale prices for our common shares for the last two completed fiscal years and
the subsequent interim periods. The prices set forth below represent
interdealer quotations, without retail markup, markdown or commission and may
not be reflective of actual transactions.

Common Stock

|                  |  |      |      |     |  |      | 
|----------------- |  | ---- | ---- | --- |  | ---- | 
|Fiscal Year
 2011 |  | High |      | Low | 
|                  |  |      |      |     |  |      | 
|First
 Quarter    |  |      | 0.92 |     |  | 0.50 | 
|Second
 Quarter   |  |      | 0.65 |     |  | 0.30 | 
|Third
 Quarter    |  |      | 0.38 |     |  | 0.10 | 
|Fourth
 Quarter   |  |      | 0.12 |     |  | 0.07 | 

Common Stock

|                  |  |      |      |     |  |      | 
|----------------- |  | ---- | ---- | --- |  | ---- | 
|Fiscal Year
 2010 |  | High |      | Low | 
|                  |  |      |      |     |  |      | 
|First
 Quarter    |  |      | 3.24 |     |  | 0.97 | 
|Second
 Quarter   |  |      | 2.75 |     |  | 1.25 | 
|Third
 Quarter    |  |      | 4.72 |     |  | 1.35 | 
|Fourth
 Quarter   |  |      | 1.70 |     |  | 0.65 | 

As of July 31, 2011, the Companys Common Stock was held by approximately
410 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.

(b) Holders

As of July 31, 2011, there are approximately 410 holders of record of
our common stock. This figure does not take into account those shareholders
whose certificates are held in the name of broker-dealers or other nominees.

(c) Dividends

Holders of Common Stock are entitled to receive such dividends as may
be declared by the Board of Directors of the Company. To date, the Company has
neither declared nor paid any dividends on its Common Stock or on its Preferred
A or Preferred B shares. The Company anticipates that no such dividends will be
paid in the foreseeable future. Rather, the Company intends to apply any
earnings, if any, to the expansion and development of its business. Any payment
of cash dividends on any of its securities in the future will be dependent upon
the future earnings of the Company, including its financial condition, capital
requirement and other factors, which the Board of Directors deems relevant.

(d) Securities Authorized for Issuance under
Equity Compensation Plan

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

10

---



|                                                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  |                                                                                |  |                                                                                                                                                    
|----------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------
|Equity Compensation Plan Information                       
|                                                           
|                                                            |  | Number of securities to be
 issued upon exercise of
 outstanding options,
 warrants and rights                                                                                                                                                                                                                                                                                                                                                     |  | Weighted-average exercise 
 price of outstanding options,
 warrants and rights |  | Number of securities
 remaining available for 
 future issuance under equity
 compensation plans 
 (excluding securities 
 reflected in column (a))
|Plan category                                               |  | (a)                                                                                                                                                                                                                                                                                                                                                                                                                                                |  | (b)                                                                            |  | (c)                                                                                                                                                
|                                                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  |                                                                                |  |                                                                                                                                                    
|Equity
 compensation plans approved by security holders     |  | On July 9,
 2002 our stockholders approved our 2002 Stock Option Plan under which up to
 158 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                                                                            |  | 158*                                                                                                                                               
|                                                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  |                                                                                |  |                                                                                                                                                    
|Equity
 compensation plans not approved by security holders |  | N/A                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |                                                                               |  |                                                                                                                                                   
|                                                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  |                                                                                |  |                                                                                                                                                    
|Total                                                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |                                                                               |  | 158                                                                                                                                                
|                                                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  |                                                                                |  |                                                                                                                                                    

*Represents retroactive application of
reverse stock splits.

ITEM 6. SELECTED
FINANCIAL DATA

The Company does not have any significant trends in its financial
condition or results of operations to be disclosed.

ITEM 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.

Statements used in this Form 10-K, in filings
by the Company with the Securities and Exchange Commission (the SEC), in the
Companys press releases or other public or stockholder communications, or made
orally with the approval of an authorized executive officer of the Company that
utilize the words or phrases would be, will allow, intends to, will
likely result, are expected to, will continue, is anticipated,
estimate, project, or similar expressions speaking to anticipated actions,
results or projections in the future speak only as of the date made, are based
on certain assumptions and expectations which may or may not be valid or
actually occur, and which involve various risks and uncertainties. The Company
cautions readers not to place undue

11

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reliance on any such statements and that the
Companys actual results for future periods could differ materially from those
anticipated or projected. Unless otherwise required by applicable law, the
Company does not undertake, and specifically disclaims any obligation, to
update any forward-looking statements to reflect occurrences, developments,
unanticipated events or circumstances after the date of such statement. The
following discussion should be read in conjunction with our consolidated
financial statements and related notes included as part of this report.

Overview

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.

Description of Revenues

We derive operating revenues from the sales of products used in radio
and other transmissions, telephones and telephone exchanges, air and traffic
control, automatic transmission of data for utilities, tele-printing of
transmitted data such as news and stock market information and for use by
electric utilities in monitoring power transmission lines for faults and/or
failures. Our products may be used independently or in combination with other
products to form a system type configuration, whereby our equipment is
pre-assembled in a large cabinet with other equipment in a configuration that
would provide the end user with protection as well as operational status
displays.

Description of Expenses

Our expenses include the following: (i) Costs of revenues, which consists primarily of costs to
manufacture the products we ship, these costs include raw materials, direct
labor, overhead expenses associated with manufacturing and freight shipping
costs; (ii) General and administrative
(G&A) expenses, which consists of compensation and benefits for
all non-manufacturing employees, compensation costs also includes stock-based
awards to employees and directors. Also included in G&A expenses is
professional services for legal, accounting and business consultants, as well
as, rent, depreciation and general corporate expenditures.; and (iii) Selling costs, consisting mainly of
commissions and trade shows expenditures; (iv) Research and Development expenses represent the costs of our
development efforts related to new products; (v) Other income (expense) consist of interest income on cash and
cash equivalents, interest expense consist of interest expense on convertible
debentures. Other expenses consist of change in fair value of derivatives
associated with the convertible debentures, along with amortization of debt
discount and deferred financing fees also associated with the convertible
debentures.

Results of Operations

Year Ended July 31, 2011 Compared with the
Year Ended July 31, 2010

Operating Revenues:

12

---



The majority of the Companys sales revenue has been generated from
sales of the PDR-2000 Teleprotection products. Our total sales revenue
increased approximately $513,000 or 43.5% for the fiscal year ended July 31,
2011 to $1,692,000, compared to total revenues of approximately $1,179,000 for
the fiscal year ended July 31, 2010. Our PDR-2000 sales increased approximately
$725,500 or 97% over the prior year. The increase in our PDR-2000 sales
revenues was partially offset by sales declines in all of our other lines of
products. PTR-1500 decrease approximately $19,700 or 36% as customers are
switching from old analog technology to digital technology, telemetry sales
decline of approximately $90,350 or 50% due natural rhythm of our markets, we expect
this category to further decline in the coming years, military sales decreased
approximately $93,300 due to a military supply contract being completed in the
beginning of 2011 and cut backs in the governments military spending for 2011.
Spare parts and other sales make up the remaining decrease of approximately
$11,000 as compared to the prior year.

|                                                                                  |  |      |           |              |  |      |   |              |           |          |  |       |   |   |         |   |  |     |  
|--------------------------------------------------------------------------------- |  | ---- | --------- | ------------ |  | ---- | - | ------------ | --------- | -------- |  | ----- | - | - | ------- | - |  | --- | -
|Sales changes by product line for the fiscal years ended July 31,
 2011 and 2010.
|                                                                                 
|Products sold                                                                     |  | 2011 |           | %
 to
 total |  | 2010 |   | %
 to
 total |           | $ change |  | % chg |  
|                                                                                  |  |      |           |              |  |      |   |              |           |          |  |       |  
|                                                                                  |  |      |           |              |  |      |   |              |           |          |  |       |  
|PDR-2000
 digital teleprotection                                                  |  | $    | 1,475,000 |              |  | 87   | % | $            | 749,500   |          |  | 64    | % | $ | 725,500 |   |  | 97  | %
|PTR-1500
 analog teleprotection                                                   |  |      | 35,000    |              |  | 2    | % |              | 54,700    |          |  | 5     | % |   | (19,700 | ) |  | -36 | %
|Telemetry
 equipment                                                              |  |      | 91,000    |              |  | 5    | % |              | 181,350   |          |  | 15    | % |   | (90,350 | ) |  | -50 | %
|Military
 Sales                                                                   |  |      | 77,200    |              |  | 5    | % |              | 170,500   |          |  | 14    | % |   | (93,300 | ) |  | -55 | %
|Spare parts                                                                       |  |      | 6,000     |              |  | 0    | % |              | 24,000    |          |  | 2     | % |   | (18,000 | ) |  | -75 | %
|Freight                                                                           |  |      | 11,952    |              |  | 1    | % |              | 3,923     |          |  | 0     | % |   | 8,029   |   |  | 205 | %
|Discounts                                                                         |  |      | (4,300    | )            |  | 0    | % |              | (5,300    | )        |  | 0     | % |   | 1,000   |   |  | -19 | %
|                                                                                  |  |      |           |              |  |      |   |              |           |          |  |       |   |   |         |   |  |     |  
|Net Sales
 Revenues                                                               |  | $    | 1,691,852 |              |  | 100  | % | $            | 1,178,673 |          |  | 100   | % | $ | 513,179 |   |  | 44  | %
|                                                                                  |  |      |           |              |  |      |   |              |           |          |  |       |   |   |         |   |  |     |  

Cost of Revenue:

Total product cost of goods sold for the fiscal
    year ended July 31, 2011 amounted to approximately $1,175,000 compared to
    approximately $694,600 for the fiscal year ended July 31, 2010, an increase
    of approximately $480,400 or 69.%. The increase in cost of goods sold is
    a result of the following: (a) sales volume increased 44% versus the prior
    year resulting in an expected volume increase in cost of goods of approximately
    $269,400; (b) costs used in material and labor increased slightly but with
    the additional sales volume material and labor associated manufacturing increased
    approximately $236,000; (c) inventory obsolescence expense for the year ended
    July 31, 2011 was $50,000 compared to approximately $75,500
    for fiscal year 2010, a decline of approximately $26,000. This decline in
    the obsolescence expense can be attributed to significant write-down of inventory
    taken in 2010 due to significant quantities of inventory that were purchased
    in prior years and now qualified per the Companys inventory policy
    to be written-off in 2010.

Gross
Profit

The decline in our gross profit percentage of 30.6%
    for the fiscal year ended July 31, 2011, from 41.1% for the fiscal year 2010
    can be attributed to mainly lower sales margins achieved in fiscal year 2011
    versus the prior year for our largest selling item the PDR-2000, the lower
    sales margin for the PDR-2000 was mainly due to one order shipped in the
    second quarter 2011 which had 8% margin versus our normal margin of approximately
    40% to 42% due to securing a contract in a competitive bid. Material costs
    and direct labor costs associated with manufacturing increased slightly but
    the majority of the decline in the gross profit in 2011 was due to sales
pricing.

13

---



Operating Expenses:

General and Administrative:
For the fiscal year ended July 31, 2011, general and administrative expenses
decreased approximately $1,074,000 to $2,685,000 from approximately $3,759,000.
This decrease of approximately 28.6% can mostly be attributed to a reduction in
Employee Stock Compensation Expense of approximately $1,448,000, which was
offset by (a) an increase of approximately $211,000 in Professional Fees due to
the restatement of financial data for the fiscal years ended July 31, 2009 and
July 31, 2010 and, (b) all other costs associated with non-overhead
manufacturing, such as rent, utilities, and telephone increased approximately
$162,000.

Research and Development:
For the fiscal year ended July 31, 2011 research and development costs were
approximately $68,000, a decrease of approximately $72,000 as compared to the
prior year total of approximately $140,000. Our research and development costs
    can mainly be attributed to enhancing the PDR-2000 and GlowWorm products.

Selling Expenses:
For the fiscal year ended July 31, 2011 selling expenses were approximately
$266,000, an increase of approximately $149,000 versus the prior year total of
    approximately $117,000, mainly due to the increase in Commission Expense
    related to increased sales.

Total
Other Income and Expenses:

For the fiscal year ended
July 31, 2011, other income/expense was expense of approximately $1,817,000,
    a decrease of approximately $19,698,000 as compared to the fiscal year ended
    July 31, 2010. This large decrease in other expense is primarily a result
    of recording a derivative liability associated with a subscription agreement
    entered into in fiscal year 2010. The subscription agreement entered into
    on August 3, 2009, had a conversion feature embedded in the Companys
    convertible debt and certain warrants that required the recording of a loss
    on derivative financial instruments in the amount of approximately $18,959,000
    in fiscal year 2010.

Income
Tax Benefit:

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 years ended July 31, 2010 and 2009, the
Company entered into agreements to sell up to $5,594,000 and $4,757,000 of its
unused tax losses. The Company received net proceeds of $284,703 and $376,819
during the fiscal years ended July 31, 2010 and 2009 respectively, related to
the sale and accordingly recorded them as a tax benefit in the year received.
The net tax benefit recorded in the Statement of Operations for 2010 of
$137,131 consists of the proceeds received from the sale of the Companys NJ
NOLs offset by the unrecorded tax provision due to uncertain tax positions of
$135,000. In the fiscal year ended July 31, 2011, the Company did not receive
any proceeds from the sale of its NOLs.

Net
Loss:

The Company recorded a
net loss of approximately $4,323,000 for the fiscal year ended July 31, 2011,
as compared to a net loss of approximately $24,911,000 for fiscal year ended
July 31, 2010. The decrease in net loss of approximately $20,588,000 can mainly
be attributed to noncash transactions related to the subscription agreement
entered into in August 2009, which resulted in a loss on derivative financial
instrument of approximately $18,959,000. For the fiscal year ended July 31,
2011 gross profit increased approximately $33,000, general and administrative
costs were approximately $1,074,000 lower than the prior fiscal year, research
and development was also down versus the prior period in the approximate amount
of $72,000 but selling expense was approximately $149,000 higher. As a result
of the foregoing, the Company reported a net loss applicable to common shares
of ($0.43) basic and diluted loss per share compared to ($5.36) basic and
diluted loss per share for the fiscal year ended July 31, 2010.

Status
of Certain Press Releases Issued:

On January 11, 2011, at
the Annual Meeting of Shareholders of the Company, the Companys shareholders
approved the election of Robert S. Benou, Marc R. Benou, Louis S. Massad,
Edward J. Rielly and David M. Peison as directors to the Companys board of
directors.

14

---



On February 1, 2011, the
Company issued a press release announcing that it had been delisted from the
NASDAQ system and its securities would be traded in the OTC market going
forward.

On February 28, 2011, the
Company issued a press release announcing that it had received advanced orders
in January for its PDR Systems valued at over $302,000. Units valued at
$290,000 were shipped throughout February and March of 2011.

On March 3, 2011, the
Company issued a press release announcing that it had dismissed
WithumSmith+Brown, PC (Withum), and engaged Wolinetz, Lafazan & Company,
CPAs, P.C. (Wolinetz) as the Companys independent registered public
accounting firm. The decision to dismiss Withum and engage Wolinetz was
approved by the audit committee of the Companys board of directors on March 3,
2011.

The report of Withum on
our financial statements for each of the past two fiscal years contained no
adverse opinion or a disclaimer of opinion and was not qualified or modified as
to uncertainty, audit scope or accounting principles, except that, the report
expressed substantial doubt about the Companys ability to continue as a going
concern. During our two most recent fiscal years and through the date of
dismissal, the Company had no disagreements with Withum on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
Withum, would have caused it to make reference to the subject matter of such
disagreements in its report on our financial statements for such periods.

During the Companys two
most recent fiscal years and through the date of the dismissal, there were no
reportable events as defined under Item 304(a)(1)(v) of Regulation S-K adopted
by the SEC.

On April 28, 2011, the
Company issued a press release announcing that it had received advanced orders
in February and March for its PDR Systems valued at over $135,000. Units valued
at $119,500 were shipped throughout March and April of 2011.

LIQUIDITY
AND CAPITAL RESOURCES

We have had recurring
losses from operations and used cash from operation in the amount of
approximately $1,056,000 and $1,637,000 for the years ended July 31, 2011 and
2010, respectively. At July 31, 2011, the Company had cash and equivalents of
$7,907. On August 13, 2010, an event of default occurred on our outstanding
convertible debentures. The Company received a waiver from the note holders and
the debentures were converted entirely before January 31, 2011.

At July 31, 2011, the
Company had total current assets of approximately $900,000 and total current
liabilities of approximately $1,666,000, resulting in working capital deficit
of approximately $766,000 compared to working capital of approximately
$1,508,000 at year ended July 31, 2010. The Companys current assets consists
of $7,907 in cash and cash equivalent, approximately $476,000 in accounts
receivable, $389,000 in inventory and approximately $26,000 in prepaid expenses
and other current assets. Accounts receivable increased from approximately
$68,000 at July 31, 2010 to approximately $476,000 at July 31, 2011, resulting
from a sales increase of approximately $513,000 for the fiscal year ended July
31, 2011 and the timing of collections.

The Company entered into
subscription agreements, as amended, with 14 accredited investors for the
issuance and sale of an aggregate of 5,114,072 shares in the Companys common
stock, par value $.01 per share for an aggregate purchase price of $0.10 per
share. On October 6, 2011, the Company received proceeds of $511,407 from the
subscribers in connection with the Private Placement. The Company intends to
use the proceeds of the placement for general corporate purposes, including
general and administrative expenses.

Cash expenditures have
exceeded revenues for the prior year and Management expects this consumption of
cash to continue into next year. Our operations have been and will continue to
be funded from existing cash balances and private placements of equity funding.
During our fiscal year ended July 31, 2011, we have raised $100,000 from the
sale of common stock and $316,350 from loans made to the company by Robert
Benou. Mr. Benou has received repayments totaling $60,000 during the fiscal
year ended July 31, 2011. We are dependent on improved operating results and
raising additional funds over the next twelve month period. There are no
assurances that we will be able

15

---



to raise additional
funding. In the event that we are unable to generate sufficient cash flow or
receive proceeds from offerings of debt or equity securities, the Company may
be forced to curtail or cease it activities and/or operations.

OPERATING
ACTIVITIES

Net cash used in
operating activities was approximately $1,056,000 for the fiscal year ended
July 31, 2011, as compared to approximately $1,637,000 net cash used in
operating activities for the fiscal year ended July 31, 2010, a decrease of
approximately $581,000. This decrease in use of cash can be attributed to: (a)
cash generated from operational activity decreased approximately $786,000 from
the prior year, (b) accounts receivable increased due to the timing of
collections, creating a use of cash of approximately $620,000, (c) offsetting
these increase in use of cash was reduction of inventory which generated
approximately $776,000 in cash, (d) increase in accounts payable and accrued
expenses over the prior year resulted in an increase of cash of approximately
$1,013,000, and (e) prepaid expense also decrease generating approximately
$260,000 in cash.

INVESTING
ACTIVITIES

Net
cash used in investing activities for the fiscal year ended July 31, 2011 was
approximately $5,900 for the purchase of manufacturing equipment. For the
fiscal year ended July 31, 2010 net cash used investing activities was approximately $23,000
also for the purchase of equipment.

FINANCING
ACTIVITIES

Net
cash provided from financing activities was approximately $356,000 for the
fiscal year ended July 31, 2011, as compared to approximately $2,345,000
provided in the same twelve month period in 2010. In the fiscal year ended July
31, 2011 the Company received proceeds of $100,000 from sale of common stock
and $316,350 from loans from a Company officer. Repayments of $60,000 were made
against the loans during the fiscal year ended July 31, 2011. For the twelve
months ended July 31, 2010, the Company received $2,000,000 related to the
issuance of convertible debentures and $635,070 related to the excising of
warrants and incurred $291,507 in expense associated with the loan debentures.

On August 3, 2009, the
Company entered into a Subscription Agreement pursuant to which it sold a
$500,000 convertible debenture on August 3, 2009 and a $500,000 debenture on
September 24, 2009. (collectively, the August 2009 Debentures). The
initial interest rate of the August 2009 Debentures is 4% per annum and upon
the shareholder Approval the interest rate will be 8% per annum. The August 2009
Debentures have maturity dates of 15 months from their closing dates. Interest
shall accrue from the closing date and shall be payable quarterly, in arrears,
commencing six months after the closing date. The August 2009 debentures are
convertible into shares of the Companys common stock at a conversion price
of $0.78 per share.

Commencing six months
after the closing date, the Conversion Price shall be adjusted to the lesser of
the $0.78 or 75% of the lowest three closing bid prices for the Companys
common stock for the ten days prior to when the August 2009 Debenture is
converted.

In connection with the
August 2009 Debentures, the Company issued Class A and Class B warrants. The
Class A warrants provide the holder with the option to purchase 2,564,102
shares of the Companys common stock at an exercise price $1.12 per share. The
Class A warrants are exercisable for a period beginning on August 3, 2009 and
terminate on August 3, 2014. Additionally, the 40,000 Class B Warrants issued
entitles the holder until July 3, 2012, to purchase up to $4,000,000 of
principal amount of the Companys 8% notes on the same terms as the August 2009
Debentures. Upon the exercise of the Class B Warrants, the holder of the Class
B Warrant will be issued two Class C Warrants for each share of the Companys
common stock that would be issued on the exercise date of the Class B Warrant
assuming the full conversion of the notes issued on such date. The Class C
warrants entitle the warrant holder to purchase 10,256,408 shares of the
Companys Common Stock with and exercise price equal to the lesser of 105 % of
the closing bid price of the Companys common stock or the exercise price of
the Class A Warrants. For each $100,000 principal of notes purchased pursuant
to the Class B Warrants, the holder will surrender 1,000 Class B Warrants.

16

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

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

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

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

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

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

On June 18, 2010, the
Company entered into an amendment with the holders of its outstanding
convertible debentures and warrants. Pursuant to the amendments, the parties
agreed to the following: (i) remove the above provision which allowed for an
adjustment to the conversion price of the debentures or exercise price of the
debentures, (ii) the conversion feature of the February 2010 Debentures were
adjusted to a fixed conversion price $0.60, (iii) all future Class C Common
Stock Purchase Warrants issued upon exercise of the Class B Common warrants
shall have an exercise price of $0.50 per share, (iv) the exercise price of the
outstanding Class C warrants shall be adjusted to $0.50 per share, (v) the
exercise price of the outstanding selling agent warrants shall be adjusted to
$0.60 per share.

As a result, of the June
18, 2010 amendments the embedded conversion features of the debentures and the
warrants were considered indexed to the Companys stock. Accordingly, the
outstanding derivative liabilities were reclassified to additional paid in
capital at their fair value on June 18, 2010 with the change in fair value
being recorded in the consolidated statement of operation.

After the accounting for
the embedded derivatives, induced conversion costs, interest expense,
amortization of debt discounts and amortization of deferred financing fees the
above financing transactions increased our net loss by $21,514,072. The
$21,514,072 had no effect on the Companys cash flow. Through the accounting
for induced conversion costs, exercise of warrants, conversions of convertible
debt and the reclassification of derivative liabilities the above financing
transactions increased our additional paid in capital by $23,998,405.

17

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On December 1, 2010, the
Company reduced the conversion price on its February 2010 debentures from $0.60
to $0.30. As a result of the reduction in the conversion price, an aggregate
$1,000,000 of the February 2010 Debentures and $63,790 of accrued interest were
converted in shares of common stock. The Company recognized an induced
conversion cost of $649,147 related to these conversions

On December 8, 2010, the
Company reduced the exercise price of its outstanding Class C Warrants from
$0.50 to $0.10. As a result of the reduction of the exercise price the Company
recognized additional interest expense in the amount of $65,253.

At various times during
the fiscal year ended July 31, 2011, $1,000,000 of convertible debt and $63,790
of accrued interest was converted into 3,562,999 shares of common stock.

INFLATION

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

CRITICAL
ACCOUNTING POLICIES

The Companys
consolidated financial statements have been prepared in conformity with
generally accepted accounting principles in the United States of America, which
require management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities, at the date of the financial statements and reported amount of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. Management uses its best judgment in valuing these
estimates and may, as warranted, solicit external professional advice and other
assumptions believed to be reasonable. The following critical accounting
policies, some of which are impacted significantly by judgments, assumptions
and estimates, affect the Companys consolidated financial statements.

USE
OF ESTIMATES

The preparation of
financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. The estimates and assumptions made by management as based
upon available current information, historical experience and other factors
that are believed to be reasonable under the circumstances. The estimates and
assumptions made by management involve risks and uncertainties which could
cause reported amounts to differ materially from actual future results. If
managements estimates and assumptions are inaccurate, the Companys reported
amounts and disclosures of contingent assets and liabilities could be
materially and adversely affected. Management considers its reserve for
inventory and accounting for derivative liabilities to be significant
estimates.

REVENUE
RECOGNITION

Revenue is recorded in
accordance with the guidance of the SECs Staff Accounting Bulletin (SAB) No.
104, which supersedes SAB No. 101. Revenue from product sales are recognized at
the time of shipment (when title has passed) upon fulfillment of acceptance
terms; products are not sold on a conditional basis. Therefore, when delivery
has occurred the sale is complete as long as the collection of the resulting
receivable is probable.

RECEIVABLES
AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

The preparation of
financial statements requires our management to make estimates and assumptions
relating to the collectability of our accounts receivable. Management
specifically analyzes historical bad debts, customer credit worthiness, current
economic trends and changes in our customer payment terms when evaluating the
adequacy of the allowance for doubtful accounts. The Company has a
concentration risk in trade accounts receivable with significant sales to the
government and local agencies. The credit evaluation process has mitigated the
credit risk,

18

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such losses have been
minimal, and within management expectations.

INVENTORY
VALUATIONS, COMPONENTS AND AGING

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

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

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

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

WARRANTY

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

INCOME
TAXES

The Company follows the
authoritative guidance for accounting for income taxes. Deferred income taxes
are determined using the asset and liability method. Under this method,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. A valuation allowance is recorded when the
expected recognition of a deferred tax asset is considered to be unlikely. The
guidance also requires that the Company determine whether it is more likely
than not that a tax position will not be sustained upon examination by the
appropriate taxing authority. If a tax position does not meet the more likely
than not recognition criterion, the guidance requires that the tax position be
measured at the largest amount of benefit greater than 50 percent not likely of
being sustained upon ultimate settlement. Based on the Companys evaluation,
management has concluded that there are significant uncertain tax positions
requiring recognition in the consolidated financial statements with respect to
the sale of the Companys New Jersey Net Operating Loss Carryovers. In the
event the

19

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Company receives an
assessment for interest and/or penalties by major tax jurisdiction it would be
classified in the financial statements as general and administrative expense.
See note 6, Income Taxes.

DERIVATIVE
LIABILITY

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

STOCK
BASED COMPENSATION

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

FAIR
VALUE OF FINANCIAL INSTRUMENTS

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

FAIR
VALUE MEASUREMENTS

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

|          |                                                                                                                                                                                                                                                                                                                                    
|--------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Level 1  | Quoted prices in active markets for identical assets
 or liabilities.                                                                                                                                                                                                                                                              
|          |                                                                                                                                                                                                                                                                                                                                    
|Level 2  | Inputs other than Level 1 that are observable,
 either directly or indirectly, such as quoted prices for similar assets or
 liabilities; quoted prices in markets that are not active; or other inputs
 that are observable or corroborated by observable market data or
 substantially the full term of the assets or liabilities.
|          |                                                                                                                                                                                                                                                                                                                                    
|Level 3  | Unobservable inputs that are supported by little or
 no market activity and that are significant to the value of the assets or
 liabilities.                                                                                                                                                                                       

DEBT
DISCOUNT

The Company follows the
authoritative guidance for accounting for debt discount and valuation of
detachable warrants the Company recognized the value of detachable warrants
issued in conjunction with issuance of the secured convertible Debenture notes.
The Company valued the warrants using the Black-Scholes pricing model. The
Company recorded the warrant relative fair value as an increase to additional
paid-in capital and discount against the related debt. The discount attributed
to the value of the warrants is amortized over the term of the underlying debt
using the effective interest method.

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RECENT ACCOUNTING PRONOUNCEMENTS

In May 2011, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-04, which updated the guidance
in ASC Topic 820, Fair Value Measurement.The amendments in this ASU generally represent clarifications of Topic 820, but
also include some instances where a particular principle or requirement for measuring fair value or disclosing information about
fair value measurements has changed. This update results in common principles and requirements for measuring fair value and for
disclosing information about fair value measurements in accordance with U.S. GAAP and International Financial Reporting Standards.
The amendments in this ASU are to be applied prospectively. For public entities, the amendments are effective for interim and annual
periods beginning after December 15, 2011, and early application is not permitted. ASU 2011-04 is not expected to have a material
impact on the Company’s financial position or results of operations

In December 2010, the Financial Accounting
Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-29, “Business Combinations (ASC Topic 805): Disclosure
of Supplementary Pro Forma Information for Business Combinations.” The amendments in this ASU affect any public entity as
defined by ASC Topic 805 that enters into business combinations that are material on an individual or aggregate basis. The amendments
in this ASU specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings
of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning
of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include
a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination
included in the reported pro forma revenue and earnings. The amendments are effective prospectively for business combinations for
which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15,
2010. Early adoption is permitted. The Company does not expect adoption of ASU 2010-29 to have a material impact on the Company’s
results of operations or financial condition.

In December 2010, the FASB issued ASU
2010-28, “Intangibles - Goodwill and Other (ASC Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting
Units with Zero or Negative Carrying Amounts.” The amendments in this ASU modify Step 1 of the goodwill impairment test for
reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the
goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely
than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating
that an impairment may exist. The qualitative factors are consistent with the existing guidance and examples, which require that
goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would
more likely than not reduce the fair value of a reporting unit below its carrying amount. For public entities, the amendments in
this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption
is not permitted. The Company does not expect the adoption of ASU 2010-28 to have a material impact on the Company’s results
of operations or financial condition.

In April 2010, the FASB issued ASU 2010-17,
Revenue Recognition — Milestone Method(“ASU 2010-17”). ASU 2010-17 provides guidance on the criteria
that should be met for determining whether the milestone method of revenue recognition is appropriate. A vendor can recognize consideration
that is contingent upon achievement of a milestone in its entirety as revenue in the period in which the milestone is achieved
only if the milestone meets all criteria to be considered substantive. The following criteria must be met for a milestone to be
considered substantive. The consideration earned by achieving the milestone should (i) be commensurate with either the level of
effort required to achieve the milestone or the enhancement of the value of the item delivered as a result of a specific outcome
resulting from the vendor’s performance to achieve the milestone; (ii) be related solely to past performance; and (iii) be
reasonable relative to all deliverables and payment terms in the arrangement. No bifurcation of an individual milestone is allowed
and there can be more than one milestone in an arrangement. Accordingly, an arrangement may contain both substantive and non-substantive
milestones. ASU 2010-17 is effective on a prospective basis for milestones achieved in fiscal years, and interim periods within
those years, beginning on or after June 15, 2010. Management evaluated the potential impact of ASU 2010-17 and does not expect
its adoption to have a material effect on the Company’s results of operations or financial condition.

In January 2010, the FASB issued ASU
2010-06, Improving Disclosures about Fair Value Measurements. ASU 2010-06 amends ASC 820 to require a number of additional
disclosures regarding fair value measurements. The amended guidance requires entities to disclose the amounts of significant transfers
between Level 1 and Level 2 of the fair value hierarchy and the reasons for these transfers, the reasons for any transfers
in or out of Level 3, and information in the reconciliation of recurring Level 3 measurements about purchases, sales,
issuances and settlements on a gross basis. The ASU also clarifies the requirements for entities to disclose information about
both the valuation techniques and inputs used in estimating Level 2 and Level 3 fair value measurements. The amended
guidance is effective for interim and annual financial periods beginning after December 15, 2009. The adoption of ASU 2010-06
did not have a significant effect on the Company’s financial statements.

In October 2009, the FASB issued guidance
on multiple deliverable revenue arrangements which eliminates the residual method of allocation and requires the relative selling
price method when allocating deliverables of a multiple-deliverable revenue arrangement. The determination of the selling price
for each deliverable requires the use of a hierarchy designed to maximize the use of available objective evidence including, vendor
specific objective evidence, third party evidence of selling price, or estimated selling price. This guidance is effective prospectively
for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, and must be adopted
in the same period using the same transition method. If adoption is elected in a period other than the beginning of a fiscal year,
the amendments in these standards must be applied retrospectively to the beginning of the fiscal year. Full retrospective application
of these amendments to prior fiscal years is optional. Early adoption of these standards may be elected. The adoption of this guidance
did not have a significant impact on the Company’s consolidated financial statements.

Management does not believe that any
other recently issued, but not currently effective, accounting standards, if
    currently adopted, would have a material effect on the accompanying consolidated
    financial statements.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We do not hold any derivative instruments and do not engage in any
hedging activities.

ITEM
8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The financial statements of Conolog Corporation,
    together with notes and the Independent Registered Public Accountants Reports,
    begin on page F-1, immediately after the signature page.

ITEM 9. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

On
July 23, 2010 the Company engaged Withum Smith+Brown, PC (Withum) to serve as
the Companys independent registered public accounting firm. On March 3, 2011,
Conolog Corporation (the Company), dismissed Withum Smith+Brown, PC
(Withum), and engaged Wolinetz, Lafazan & Company, P.C. (Wolinetz) as
the Companys independent registered public accounting firm. The decision to
dismiss Withum and engage Wolinetz was approved by the audit committee of the
Companys board of directors on March 3, 2011.

The
report of Withum on our financial statements for each of the past two fiscal
years contained no adverse opinion or a disclaimer of opinion and was not
qualified or modified as to uncertainty, audit scope or accounting principles,
except that, the report expressed substantial doubt about the Companys ability
to continue as a going concern.

During
our two most recent fiscal years and through the date of dismissal, the Company
had no disagreements with Withum on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure,
which disagreements, if not resolved to the satisfaction of Withum, would have
caused it to make reference to the subject matter of such disagreements in its
report on our financial statements for such periods.

During
the Companys two most recent fiscal years and through the date of the
dismissal, there were no reportable events as defined under Item 304(a)(1)(v)
of Regulation S-K adopted by the SEC.

ITEM 9A CONTROLS
AND PROCEDURES

Evaluation of Disclosure Controls and
Procedures

In connection with the preparation of the Companys Annual Report on
Form 10-K, an evaluation was carried out by our management, with participation
of our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures, as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (Exchange
Act) as of the end of the period covered by this report. Disclosure controls
and procedures are designed to ensure that information required to be disclosed
in reports filed and submitted under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified, and that such
information is accumulated and communicated to management, included the Chief
Executive Officer and Chief Financial Officer, to allow timely decisions
regarding required disclosure.

During evaluation of disclosure controls and procedures as of the end
of the period covered by this report, conducted as part of the Companys annual
audit and preparation of our annual financial statements, several material
weaknesses were identified. As a result of the material weaknesses, described
more fully below, our Chief Executive Officer and Chief Financial Officer
concluded that, as of July 31, 2011, the Companys disclosure controls and
procedures were ineffective.

The Company instituted and is continuing to implement corrective
actions with respect to the deficiencies in our disclosure controls and
procedures.

Managements Annual Report on Internal
Control over Financial Reporting

Management is responsible for establishing and maintaining adequate
internal control over financial reporting, as defined in Rules 13a-15(f) under
the Exchange Act. The Companys internal control over financial reporting is a

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process designed to provide reasonable assurance regarding the
reliability of the Companys financial reporting and the preparation of
consolidated financial statements for external purposes in accordance with
accounting principles generally accepted in the United States of America.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness in future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.

Management has conducted, with the participation of the Chief Executive
Officer and Chief Financial Officer, an evaluation of the effectiveness of the
Companys internal control over financial reporting as of the end of the period
covered by this report. Managements assessment of internal control over
financial reporting was conducted using the criteria set forth inInternal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).

A material weakness is a deficiency, or combination of deficiencies, in
internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the Companys annual or interim
financial statements will not be prevented or detected on a timely basis. Based
on managements assessment of internal control over financial reporting,
management believes as of July 31, 2011, the Companys internal control over
financial reporting was not effective due to the following material weaknesses:

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

Remediation of Material Weaknesses in
Internal Control over Financial Reporting

The Company has commenced efforts to address the material weaknesses in
its internal control over financial reporting and its control environment
through the following actions:

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

The Company believes that the consolidated financial statements fairly
present, in all material respects, the Companys consolidated balance sheets as
of July 31, 2011 and 2010 and the related consolidated statements of
operations, stockholders equity, and cash flows for the years ended July 31,
2011 and 2010, in conformity with generally accepted accounting principles,
notwithstanding the material weaknesses we identified.

Changes in Internal Control over Financial
Reporting

Other than described above, there have been no changes in the Companys
internal control over financial reporting during the most recently completed
fiscal year ended July 31, 2011, that have materially affected or are
reasonably likely to materially affect the Companys internal control over
financial reporting.

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Inherent Limitations on Effectiveness of
Controls

Our Management, including our Chief Executive Officer and Chief
Financial Officer, does not expect that our disclosure controls and procedures
or our internal controls will prevent all errors and all fraud. A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect that there are resources
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected.

ITEM 9B - OTHER
INFORMATION

None.

PART III

ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

The following table and biographical summaries set forth information,
including principal occupation and business experience, about our directors and
executive officers at [October 26, 2011]:

|                  |  |    |     |                               |          |                |  |                               
|----------------- |  | -- | --- | ----------------------------- | -------- | -------------- |  | ------------------------------
|NAME              |  |    | AGE |                               | POSITION |                |  | OFFICER
 AND/OR DIRECTOR SINCE
|                  |  |    |     |                               |          |                |  |                               
|                 
|Robert S.
 Benou  |  | 76 |     | Chairman,
 CEO, CFO, Director |          | February
 1968
|Marc R.
 Benou    |  | 42 |     | President                     |          | March 1995    
|Louis S.
 Massas  |  | 74 |     | Director                      |          | April 1995    
|Edward J.
 Reilly |  | 42 |     | Director                      |          | January 1998  
|David M.
 Peison  |  | 42 |     | Director                      |          | October 2004  
|Michael Horn      |  | 58 |     | Director                      |          | August 2011   

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/turnkey 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. Mr. Benous
experience as the Companys chief executive officer led to the conclusion that
Mr. Benou should serve on the Board of Directors, given the Companys business
and structure.

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

24

---



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. Mr. Benous experience as the
Companys president and chief operating officer led to the conclusion that Mr.
Benou should serve on the Board of Directors, given the Companys business and
structure.

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. Mr. Massads business management and financial experience
and knowledge led to the conclusion that Mr. Massad should serve on the Board
of Directors, given the Companys business and structure.

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 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. Mr. Riellys technical experience and knowledge led to the
conclusion that Mr. Rielly should serve on the Board of Directors, given the
Companys business and structure.

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. Mr. Peisons business management and financial experience and
knowledge led to the conclusion that Mr. Peison should serve on the Board of
Directors, given the Companys business and structure

Michael
Horn,

Michael Horn has been a Director of the Company since August 2011. Mr. Horn has over 30 years of experience in
Information Technology senior management. Mr. Horn has served as the Managing
and Operating Partner of VAR Direction LLC, Inc., a management and financial
consulting firm, from 2002 through the present. Mr. Horn served as Chief Executive Officer of AccountMate Software,
Division of Softline, N.A., a publisher of accounting software, from 2001 to
2002. From 1980 through 2001, Mr. Horn was the Chief Executive Officer of MIBAR
Computer Services, a value added reseller and developer of software.

Board of
Directors

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 any time by the Board, until the meeting of
directors immediately following the annual meeting of stockholders and until
their successors are appointed and qualified.

Board Leadership Structure and Role in Risk
Oversight

25

---



Although we have not adopted a formal policy on whether the Chairman
and Chief Executive Officer positions should be separate or combined, we have
traditionally determined that it is in the best interests of the Company and
its shareholders to combine these roles. Mr. Robert Benou has served as our
Chairman since May 2001. Due to the small size of the Company, we believe it is
currently most effective to have the Chairman and Chief Executive Officer
positions combined.

Family Relationships

Our Chief Executive Officer, Robert S. Benou is the father of our
President, Marc R. Benou. There are no other family relationships among our
directors, executive officers, or persons nominated or chosen by the Company to
become directors or executive officers.

Audit Committee

The Companys Board of Directors has determined that David M. Peison is
the Audit Committees Financial Expert and that he is independent as 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 the Companys directors,
executive officers and persons who beneficially own 10% or more of a class of
securities registered under Section 12 of the Exchange Act to file reports of
beneficial ownership and changes in beneficial ownership with the SEC.
Directors, executive officers and greater than 10% stockholders are required by
the rules and regulations of the SEC to furnish the Company with copies of all
reports filed by them in compliance with Section 16(a).

Based solely on our review of certain reports filed with the Securities
and Exchange Commission pursuant to Section 16(a) of the Securities Exchange
Act of 1934, as amended, the reports required to be filed with respect to
transactions in our common stock during the fiscal year ended July 31, 2011,
were timely.

Code of Ethics

The Corporation has adopted a Code of Ethics. This Code is publicly
available on the Companys internet website www.conolog.com.

ITEM 11-
EXECUTIVE COMPENSATION

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

26

---



|                                   |  |                     |  |                        |         |         |   |                     |  |                             |   |                                        |  |              |  |       |   |  |   |   |  |   |        |  
|---------------------------------- |  | ------------------- |  | ---------------------- | ------- | ------- | - | ------------------- |  | --------------------------- | - | -------------------------------------- |  | ------------ |  | ----- | - |  | - | - |  | - | ------ | -
|                                   |  |                     |  | Long Term Compensation |        
|                                   |  | Annual Compensation |  | Awards                 |         | Payouts |  
|Name
 and Principal
 Position      |  | Year                |  | Salary                 |         | Bonus   |   | Other Annual
 Comp. |  | Restricted 
 Stock 
 Awards |   | Securities 
 Underlying
 Options /SARs |  | LTIP Payouts |  | Other |  
|Robert Benou                       |  | 2011                |  | $                      | 439,167 |         | $ |                    |  | $                           |  |                                        |  |             |  | $     |  |  | $ |  |  | $ | 12,000 | *
|Chief Executive Officer            |  |                     |  |                        |         |         |   |                     |  |                             |   |                                        |  |              |  |       |   |  |   |   |  |   |        |  
|Chief Financial Officer,
 Director |  | 2010                |  | $                      | 259,749 |         | $ |                    |  | $                           |  |                                        |  | 403,200      |  | $     |  |  | $ |  |  | $ | 28,000 | *
|                                   |  |                     |  |                        |         |         |   |                     |  |                             |   |                                        |  |              |  |       |   |  |   |   |  |   |        |  
|                                   |  | 2009                |  | $                      | 110,833 |         | $ |                    |  | $                           |  |                                        |  |             |  | $     |  |  | $ |  |  | $ | 16,000 | *
|                                   |  |                     |  |                        |         |         |   |                     |  |                             |   |                                        |  |              |  |       |   |  |   |   |  |   |        |  
|Mark Benou                         |  | 2011                |  | $                      | 252,200 |         | $ |                    |  | $                           |  |                                        |  |             |  | $     |  |  | $ |  |  | $ |       |  
|President, COO, Secretary,         |  |                     |  |                        |         |         |   |                     |  |                             |   |                                        |  |              |  |       |   |  |   |   |  |   |        |  
|Director                           |  |                     |  |                        |         |         |   |                     |  |                             |   |                                        |  |              |  |       |   |  |   |   |  |   |        |  
|                                   |  | 2010                |  | $                      | 238,200 |         | $ |                    |  | $                           |  |                                        |  | 403,200      |  | $     |  |  | $ |  |  | $ |       |  
|                                   |  |                     |  |                        |         |         |   |                     |  |                             |   |                                        |  |              |  |       |   |  |   |   |  |   |        |  
|                                   |  | 2009                |  | $                      | 208,516 |         | $ |                    |  | $                           |  |                                        |  |             |  | $     |  |  | $ |  |  | $ |       |  

| |   |              
| | - | -------------
| | * | Car allowance

|             |  |                                                                  |  |                                                                    |  |                                                                                               |  |                          |  |                      |  |                                                              |  |                                                                   |  |                                                                                                        |  |                                                                                                                     | 
|------------ |  | ---------------------------------------------------------------- |  | ------------------------------------------------------------------ |  | --------------------------------------------------------------------------------------------- |  | ------------------------ |  | -------------------- |  | ------------------------------------------------------------ |  | ----------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------ |  | ------------------------------------------------------------------------------------------------------------------- | 
|Name         |  | Option
 Awards                                                   |  | Stock
 Awards                                                      | 
|             |  |                                                                  |  |                                                                    | 
|             |  | Number
 ofSecuritiesUnderlyingUnexercisedOptions
 (#)Exercisable |  | Number
 ofSecuritiesUnderlyingUnexercisedOptions
 (#)Unexercisable |  | EquityIncentivePlan
 Awards:Number
 ofSecuritiesUnderlying
 ofUnexercisedUnearnedOptions
 (#) |  | OptionExercisePrice
 ($) |  | OptionExpirationDate |  | Number
 ofShares
 orUnits
 ofStock
 ThatHave
 NotVested
 (#) |  | MarketValue
 ofShares
 orUnits
 ofStock
 ThatHave
 NotVested
 ($) |  | EquityIncentivePlan
 Awards:Number
 ofUnearnedShares,Units
 orOther
 RightsThat
 HaveNot
 Vested 
 (#) |  | EquityIncentivePlan
 Awards:Market
 orPayoutValue
 ofUnearnedShares,Units
 orOther
 RightsThat
 HaveNot
 Vested ($) | 
|             |  |                                                                  |  |                                                                    |  |                                                                                               |  |                          |  |                      |  |                                                              |  |                                                                   |  |                                                                                                        |  |                                                                                                                     | 
|            
|Robert Benou |  | 0                                                                |  | 0                                                                  |  | 0                                                                                             |  | 0                        |  | 0                    |  | 0                                                            |  | 0                                                                 |  | 0                                                                                                      |  | 0                                                                                                                   | 
|             |  |                                                                  |  |                                                                    |  |                                                                                               |  |                          |  |                      |  |                                                              |  |                                                                   |  |                                                                                                        |  |                                                                                                                     | 
|             |  |                                                                  |  |                                                                    |  |                                                                                               |  |                          |  |                      |  |                                                              |  |                                                                   |  |                                                                                                        |  |                                                                                                                     | 
|             |  |                                                                  |  |                                                                    |  |                                                                                               |  |                          |  |                      |  |                                                              |  |                                                                   |  |                                                                                                        |  |                                                                                                                     | 
|Marc Benou   |  | 0                                                                |  | 0                                                                  |  | 0                                                                                             |  | 0                        |  | 0                    |  | 0                                                            |  | 0                                                                 |  | 0                                                                                                      |  | 0                                                                                                                   | 

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, 2011 was $450,000 ((a) actual 2011 salary
drawn was $0, (b) $105,000 has been forgiven by Mr. Benou and he does not hold
the Company liable for this amount, (c) $334,167 has been accrued for potential
payment in the future). Mr. Benous
annual base salary increases by $20,000 annually on January 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-K. 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,

27

---



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, 2011 was $260,200 ((a) actual 2011 salary
    drawn was $63,842, (b) $19,208 has been forgiven by Mr. Benou and he does
    not hold the Company liable for this amount, (c) $169,150 has been accrued
    for potential payment in the future). He receives annual increases of
$6,000 on January 1st of each year. Mr. Benou is entitled to an
annual bonus equal to 3% of the Companys annual income before income
tax provision as stated in its annual Form 10-K. 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.

COMPENSATION OF DIRECTORS

No director of the Company receives any cash compensation for their
services as such, but directors may receive stock options pursuant to the
Companys stock option plan and grants of the Companys common stock.
Currently, the Company has three directors who are not employees, Messrs. Louis
Massad, David Peison and Edward Rielly. No cash or stock compensation has been
granted to any director during the year ended July 31, 2011.

RISK MANAGEMENT

The Company does not believe risks arising from its compensation
policies and practices for its employees are reasonably likely to have a
material adverse effect on the Company.

ITEM 12 -
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth, as of July 31, 2011, 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 the 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. 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.

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 at July 31, 2011 is based on 12,
455,380 shares issued and outstanding.

28

---



|                             |  |                                                                  |  |                           |  |                                        |       |   | 
|---------------------------- |  | ---------------------------------------------------------------- |  | ------------------------- |  | -------------------------------------- | ----- | - | 
|Name and Address (1)         |  | Beneficial
 Relationship to Company                              |  | Outstanding
 Common Stock |  | Percentage of
 Ownership Common
 Stock |      
|                             |  |                                                                  |  |                           |  |                                        |      
|                             |  |                                                                  |  |                           |  |                                        |       |   | 
|Robert S
 Benou,             |  | CEO, Chairman, 
 Chief Financial, 
 Officer, Director            |  | 720,027                   |  |                                        | 5.78  | % | 
|                             |  |                                                                  |  |                           |  |                                        |       |   | 
|Marc R.
 Benou               |  | President, Chief 
 Operating Officer, 
 Secretary and 
 Director |  | 471,250                   |  |                                        | 3.78  | % | 
|                             |  |                                                                  |  |                           |  |                                        |       |   | 
|Louis
 Massasd               |  | Director                                                         |  | 37,500                    |  |                                        | 0.30  | % | 
|                             |  |                                                                  |  |                           |  |                                        |       |   | 
|Edward J.
 Reilly            |  | Director                                                         |  |                          |  |                                        |      |   | 
|                             |  |                                                                  |  |                           |  |                                        |       |   | 
|David M.
 Peison             |  | Director                                                         |  | 64,250                    |  |                                        | 0.52  | % | 
|                             |  |                                                                  |  |                           |  |                                        |       |   | 
|Michael Horn                 |  | Director                                                         |  |                          |  |                                        |      |   | 
|                             |  |                                                                  |  |                           |  |                                        |       |   | 
|Officers and Directors Total |  | 6                                                                |  | 1,293,027                 |  |                                        | 10.38 | % | 

| |     |                                                                                                                                                  
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Unless otherwise indicated, the address of each beneficial owner
 listed above is C/O Conolog Corporation 5 Columbia Road, Somerville, NJ
 08876.

Preferred Stock

|                             |  |                                                               |  |                              |  |                                                | 
|---------------------------- |  | ------------------------------------------------------------- |  | ---------------------------- |  | ---------------------------------------------- | 
|Name                         |  | Beneficial
 Relationship toCompany                            |  | Outstanding
 Preferred Stock |  | Percentage of
 Ownership of
 Preferred 
 Stock | 
|                             |  |                                                               |  |                              |  |                                                | 
|                             |  |                                                               |  |                              |  |                                                | 
|Robert S
 Benou,             |  | CEO, Chairman, 
 Chief Financial, 
 Officer, Director         |  |                             |  |                                               | 
|                             |  |                                                               |  |                              |  |                                                | 
|Marc R.
 Benou               |  | President, Chief 
 Operating Officer, 
 Secretary andDirector |  |                             |  |                                               | 
|                             |  |                                                               |  |                              |  |                                                | 
|Louis
 Massasd               |  | Director                                                      |  |                             |  |                                               | 
|                             |  |                                                               |  |                              |  |                                                | 
|Edward J.
 Reilly            |  | Director                                                      |  |                             |  |                                               | 
|                             |  |                                                               |  |                              |  |                                                | 
|David M.
 Peison             |  | Director                                                      |  |                             |  |                                               | 
|                             |  |                                                               |  |                              |  |                                                | 
|Michael Horn                 |  | Director                                                      |  |                             |  |                                               | 
|                             |  |                                                               |  |                              |  |                                                | 
|Officers and Directors Total |  | 6                                                             |  |                             |  |                                               | 

ITEM 13 - CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTORS INDEPENENCE

Certain relationships and Related Transactions

Marc Benou, President, Chief Operating Officer, Secretary and Director
is the son of Robert Benou, Chairman, Chief Executive Officer, Chief Financial
Officer and Director.

Board determination of Independence

29

---



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

ITEM 14 -
PRINCIPAL ACCOUNTANT FEES AND SERVICES

Audit Fee

WithumSmith+Brown, PC billed the Company in the
    aggregate amount of $397,475 for professional services rendered for their
    audit of our annual financial statements for the fiscal year ended July 31,
    2010, the restatement of the financial statements for fiscal year ended July
    31, 2009, including the opening balances as of August 1, 2008 and restatement
    of unaudited quarterly financial statements for the fiscal year ended July
    31, 2010 and 2009, also included was their review of the financial statements
    included in our Form 10-Q for the period ended October 31, 2010. Wolinetz,
    Lafazan & Company,
    PC billed the Company in the aggregate amount of $45,088 for professional
    services rendered for their audit of our annual financial statements for
    the fiscal year ended July 31, 2011 and their review of the financial statements
    included in our Forms 10-Q for the periods ended January 31, 2011 and April
    30, 2011.

Audit-Related Fees

No fees were billed during the years ended July 31, 2011 and 2010 for
assurance and related services by either WithumSmith+Brown, PC or Wolinetz,
Lafazan & Company, PC 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 during the years ended July 31, 2011 and 2010 for
tax compliance, tax advice, or tax planning services by either
WithumSmith+Brown, PC or Wolinetz, Lafazan & Company, PC 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 WithumSmith+Brown, PC or
Wolinetz, Lafazan & Company, PC during the years ended July 31, 2011 and
2010 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.

30

---



PART IV

ITEM 15  EXHIBITS

|Exhibit
      No. | Description
      of Exhibits                                                                                                                                                                                                                                 
|----------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                  |                                                                                                                                                                                                                                                               
|3.1               | Certificate of Incorporation** -                                                                                                                                                                                                                              
|                  |                                                                                                                                                                                                                                                               
|3.1.1             | Certificate of Amendment of Certificate
      of Incorporation - **                                                                                                                                                                                           
|                  |                                                                                                                                                                                                                                                               
|3.1.2             | Certificate of Amendment of Certificate
      of Incorporation of DSI Systems, Inc. **                                                                                                                                                                        
|                  |                                                                                                                                                                                                                                                               
|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.”**                               
|                  |                                                                                                                                                                                                                                                               
|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.**     
|                  |                                                                                                                                                                                                                                                               
|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.**     
|                  |                                                                                                                                                                                                                                                               
|3.1.6             | Certificate of Ownership and Merger of Conolog
      Corporation (New Jersey) by DSI Systems, Inc.**                                                                                                                                                          
|                  |                                                                                                                                                                                                                                                               
|3.1.7             | Certificate of Amendment of Certificate
      of Incorporation.**                                                                                                                                                                                             
|                  |                                                                                                                                                                                                                                                               
|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               | Promissory Note in the amount of $65,000,
      issued by Conolog Corporation in favor of Robert Benou (incorporated  by
      reference to exhibit 4.1 of the Registrants Current Report on Form 8-K
      filed with the Commission on August 4, 2011)      
|                  |                                                                                                                                                                                                                                                               
|4.2               | Promissory
        Note in the amount of $191,350, issued by Conolog Corporation in favor
        of Robert Benou (incorporated by reference to exhibit 4.1 of the Registrants
        Current Report on Form 8-K filed with the Commission on August 4, 2011)

31

---



|Exhibit
      No. | Description
      of Exhibits                                                                                                                                                                                                                                    
|----------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                  |                                                                                                                                                                                                                                                                  
|10.1              | Employment
        Agreement dated June 1, 1997 between Robert Benou and Conolog Corporation
        (incorporated by reference to Exhibit 10.1 of the Registrants Annual
        Report on Form 10-K filed with the  Commission on November 30, 2010).          
|                  |                                                                                                                                                                                                                                                                  
|10.1.1            | Amendment Employment Agreement dated February
      18, 1999 between Robert Benou and Conolog Corporation (incorporated by
      reference to Exhibit 10.1.1 of the Registrants Annual Report on Form 10-K
      filed with the Commission on November 30, 2010).
|                  |                                                                                                                                                                                                                                                                  
|10.2              | Employment Agreement dated June 1, 1997
      between Marc Benou and Conolog Corporation (incorporated by reference to
      the Registrant’s Registration Statement on Form S-1 (File No. 0-8174)
      as filed with the Commission on September 12, 1997).    
|                  |                                                                                                                                                                                                                                                                  
|10.3              | Securities Purchase Agreement by and between
      the Company and Robert Benou (incorporated by
      reference to Exhibit 99.1 of the Registrants Current Report on Form 10-K
    filed with the Commission on January 6, 2011).                               
|                  |                                                                                                                                                                                                                                                                  
|10.4              | Director Agreement, dated August 12, 2011,
      by and between the Company and Mr. Michael Horn (incorporated by reference
      to Exhibit 10.1 of the Registrants Current Report on Form 8-K filed with
      the Commission on August 17, 2011).             
|                  |                                                                                                                                                                                                                                                                  
|10.5              | Form of Subscription Agreement by and  among
      Conolog Corporation and the subscribers named therein (incorporated by
      reference to Exhibit 10.1 of the Registrants Current Report on Form 8-K
      filed with the Commission on October 12, 2011).    
|                  |                                                                                                                                                                                                                                                                  
|10.6              | Amendment to Subscription Agreement by and
      among Conolog Corporation and the subscribers named therein (incorporated
      by reference to Exhibit 10.2 of the Registrants Current Report on Form
      8-K filed with the Commission on October 12, 2011).
|                  |                                                                                                                                                                                                                                                                  
|14.1              | Code of Ethics (incorporated by reference
      to Registrant’s Annual Report on Form 10-KSB for the fiscal year
      ended July 31, 2003, filed with the Commission on November 14, 2003)                                                                      
|                  |                                                                                                                                                                                                                                                                  
|23.1              | Incorporated
        by reference to the Registrants Registration Statements on Forms S-8
        filed on May 25, 2007, July 8, 2008 and February 1, 2010.                                                                                                      
|                  |                                                                                                                                                                                                                                                                  
|23.2              | Consent of WithumSmith+Brown, PC*                                                                                                                                                                                                                                
|                  |                                                                                                                                                                                                                                                                  
|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                                                                                                                                                                                                                                                   
|**                | Incorporated by reference to the Registrant’s
      Statement on Form SB-2 filed with the Securities and Exchange on February
      18, 2005.                                                                                                                    

32

---



SIGNATURES

In accordance
with Section 13 or 15(d) of the Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.

Conolog Corporation

|                   |                                    |                     
|------------------ | ---------------------------------- | --------------------
|                   |                                   
|                   | By:                                | /s/
 Robert S. Benou
|                   |                                    |                     
|                   |                                   
|November 15,
 2011 | Chairman,
 Chief Executive Officer
|                   | Chief
 Financial Officer          

In accordance
with the Exchange Act of 1934, this report has been signed below by the
following persons, on behalf of the registrant and in the capacities and on the
dates indicated.

|                   |                                                             | 
|------------------ | ----------------------------------------------------------- | 
|November 15,
 2011 | /s/Robert S.
 Benou                                        
|                   |                                                            
|                   |                                                             | 
|                   | Chairman,
 Chief Executive Officer and                     
|                   | Chief Financial
 Officer                                   
|                   |                                                             | 
|November 15,
 2011 | /s/Marc R.
 Benou                                          
|                   |                                                            
|                   |                                                            
|                   | President,
 Chief Operating Officer, Secretary and Director
|                   |                                                            
|November 15,
 2011 | /s/Louis S.
 Massad                                        
|                   |                                                            
|                   |                                                            
|                   | Director                                                   
|                   |                                                            
|November 15,
 2011 | /s/Edward J.
 Rielly                                       
|                   |                                                            
|                   | Director                                                   
|                   |                                                            
|November 15,
 2011 | /s/David M.
 Peison                                        
|                   |                                                            
|                   | Director                                                   

|                   |                   | 
|------------------ | ----------------- | 
|November 15,
 2011 | /s/ Michael
 Horn
|                   |                  
|                   |                  
|                   | Director         

33

---



PART F/S

INDEX TO
FINANCIAL STATEMENTS

AUDITED FINANCIAL STATEMENTS

|                                                                                                      |  |    
|----------------------------------------------------------------------------------------------------- |  | ---
|Reports of Independent Registered Public
       Accounting Firms                                      |  | F-1
|                                                                                                      |  |    
|Consolidated Balance Sheets At July 31, 2011 and 2010                                                 |  | F-2
|                                                                                                      |  |    
|Consolidated Statements of Operations for the years ended July 31,
 2011 and 2010                     |  | F-3
|                                                                                                      |  |    
|Consolidated Statement of Changes in Stockholders Equity for the
 years ended July 31, 2011 and 2010 |  | F-4
|                                                                                                      |  |    
|Consolidated Statements of Cash Flows for the years ended July 31,
 2011 and 2010                     |  | F-5
|                                                                                                      |  |    
|Notes to Financial Statements                                                                         |  | F-6

34

---



REPORTS OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS





REPORT
    OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





Board
  of Directors and Stockholders

Conolog
  Corporation and Subsidiaries



We
  have audited the accompanying consolidated balance sheet of Conolog Corporation
  and Subsidiaries (“the Company”) as of July 31, 2011 and the related
  consolidated statements of operations, stockholders’ equity (deficiency)
  and cash flows for the year then ended. These financial statements are the
  responsibility of the Company’s management. Our responsibility is to
  express an opinion on these financial statements based on our audit.



We
  conducted our audit in accordance with the standards of the Public Company
  Accounting Oversight Board (United States). Those standards require that we
  plan and perform the audit to obtain reasonable assurance about whether the
  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 audit 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. Accordingly, we express no such opinion. Also, an audit
  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 financial statement presentation. We believe that our audit provides
  a reasonable basis for our opinion.



In
  our opinion, the consolidated financial statements referred to above present
  fairly, in all material respects, the consolidated financial position of Conolog
  Corporation and Subsidiaries at July 31, 2011, and the results of their operations
  and their cash flows for the year then ended in conformity with accounting
  principles generally accepted in the United States of America.



The
  accompanying consolidated financial statements have been prepared assuming
  the Company will continue as a going concern. As discussed in Note 1 to the
  consolidated financial statements, the Company has incurred a loss from operations
  in the amount of $2,502,084 for the year ended July 31, 2011 and used cash
  from operations in the amount of $1,055,549 for the year ended July 31, 2011.
  In addition, at July 31, 2011 the Company has a working capital deficiency
  of $765,966 and stockholders’ deficiency of $678,608. These factors raise
  substantial doubt about the Company’s ability to continue as a going
  concern. Management’s plans regarding those matters are also described
  in Note 1. The financial statements do not include any adjustments that might
  result from the outcome of this uncertainty.







WOLINETZ,
  LAFAZAN &
  COMPANY, P.C.





Rockville
  Centre, New York

November
  15, 2011



F-1

---









Report
    of Independent Registered Public Accounting Firm





To
  the Board of Directors and Stockholders of

Conolog
  Corporation and Subsidiaries



We
  have audited the accompanying consolidated balance sheets of Conolog Corporation
  and Subsidiaries as of July 31, 2010 and 2009, and the related consolidated
  statements of operations, stockholders’ equity and cash flows for the
  years then ended. Conolog Corporation’s management is responsible for
  these consolidated financial statements. Our responsibility is to express an
  opinion on these consolidated financial statements based on our audits.



We
  conducted our audits in accordance with the standards of the Public Company
  Accounting Oversight Board (United States). Those standards require that we
  plan and perform the audit to obtain reasonable assurance about whether the
  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 audit 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. Accordingly, we express no such opinion. An audit includes
  examining, on a test basis, evidence supporting the amounts and disclosures
  in the consolidated financial statements. An audit also includes assessing
  the accounting principles used and significant estimates made by management,
  as well as evaluating the overall financial statement presentation. We believe
  that our audits provide a reasonable basis for our opinion.



In
  our opinion, the consolidated financial statements referred to above present
  fairly, in all material respects, the consolidated financial position of Conolog
  Corporation and Subsidiaries as of July 31, 2010 and 2009, and the consolidated
  results of their operations and their cash flows for the years then ended,
  in conformity with accounting principles generally accepted in the United States
  of America.



As
  discussed in Note 3 to the consolidated financial statements for the year ended
  July 31, 2010, the Company has restated their July 31, 2009 financial statements
  to correct a misstatement.



The
  accompanying consolidated financial statements have been prepared assuming
  that the Company will continue as a going concern. As more fully discussed
  in Note 1 to the consolidated financial statements, the Company has had recurring
  losses from operations of $3,532,645 and $1,620,877 and used cash from operations
  in the amounts of $1,636,745 and $1,264,121 for the years ended July 31, 2010
  and 2009, respectively. At July 31, 2010 the Company had cash equivalents of
  $713,005. These conditions raise substantial doubt about the Company’s
  ability to continue as a going concern. Management’s plans in regard
  to these matters are also described in Note 1. The consolidated financial statements
  do not include any adjustments that might result from the outcome of this uncertainty.





WithumSmith+Brown,
  PC

Somerville,
  New Jersey

November
  30, 2010





F-1

---



CONOLOG CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets

|                                                                                                                                                                      |  |   |             |                 |   |                 |   |  | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | - | ----------- | --------------- | - | --------------- | - |  | 
|                                                                                                                                                                      |  |   |             | July
 31,
 2011 |   | July
 31,
 2010 |  
|                                                                                                                                                                      |  |   |             |                 |   |                 |  
|ASSETS                                                                                                                                                                |  |   |             |                 |   |                 |  
|Current Assets:                                                                                                                                                       |  |   |             |                 |   |                 |  
|Cash and equivalents                                                                                                                                                  |  | $ | 7,907       |                 | $ | 713,005         |  
|Accounts receivable, net of allowance                                                                                                                                 |  |   | 476,435     |                 |   | 67,603          |  
|Inventory, net of reserve for obsolescence                                                                                                                            |  |   | 389,489     |                 |   | 826,079         |  
|Prepaid expenses                                                                                                                                                      |  |   | 25,932      |                 |   | 248,297         |  
|Other current assets                                                                                                                                                  |  |   | 259         |                 |   | 5,000           |  
|                                                                                                                                                                      |  |   |             |                 |   |                 |  
|Total Current Assets                                                                                                                                                  |  |   | 900,022     |                 |   | 1,859,984       |  
|                                                                                                                                                                      |  |   |             |                 |   |                 |  
|Property and equipment:                                                                                                                                               |  |   |             |                 |   |                 |  
|Machinery and equipment                                                                                                                                               |  |   | 1,362,952   |                 |   | 1,357,053       |  
|Furniture and fixtures                                                                                                                                                |  |   | 430,924     |                 |   | 430,924         |  
|Automobiles                                                                                                                                                           |  |   | 34,097      |                 |   | 34,097          |  
|Computer software                                                                                                                                                     |  |   | 231,002     |                 |   | 231,002         |  
|Leasehold improvements                                                                                                                                                |  |   | 30,265      |                 |   | 30,265          |  
|                                                                                                                                                                      |  |   |             |                 |   |                 |  
|Total property and equipment                                                                                                                                          |  |   | 2,089,240   |                 |   | 2,083,341       |  
|Less: accumulated depreciation                                                                                                                                        |  |   | (2,001,882  | )               |   | (1,987,284      | )
|                                                                                                                                                                      |  |   |             |                 |   |                 |  
|Net Property and Equipment                                                                                                                                            |  |   | 87,358      |                 |   | 96,057          |  
|                                                                                                                                                                      |  |   |             |                 |   |                 |  
|Other Assets:                                                                                                                                                         |  |   |             |                 |   |                 |  
|Deferred financing fees, net of amortization                                                                                                                          |  |   |            |                 |   | 382,132         |  
|                                                                                                                                                                      |  |   |             |                 |   |                 |  
|                                                                                                                                                                      |  |   |             |                 |   |                 |  
|Total Other Assets                                                                                                                                                    |  |   |            |                 |   | 382,132         |  
|                                                                                                                                                                      |  |   |             |                 |   |                 |  
|TOTAL ASSETS                                                                                                                                                          |  | $ | 987,380     |                 | $ | 2,338,173       |  
|                                                                                                                                                                      |  |   |             |                 |   |                 |  
|                                                                                                                                                                      |  |   |             |                 |   |                 |  
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIENCY)                                                                                                                     |  |   |             |                 |   |                 |  
|Current Liabilities:                                                                                                                                                  |  |   |             |                 |   |                 |  
|Accounts payable                                                                                                                                                      |  | $ | 376,636     |                 | $ | 150,880         |  
|Accrued expenses                                                                                                                                                      |  |   | 1,033,002   |                 |   | 201,000         |  
|Notes payable - officer                                                                                                                                               |  |   | 256,350     |                 |   |                |  
|                                                                                                                                                                      |  |   |             |                 |   |                 |  
|Total Current Liabilities                                                                                                                                             |  |   | 1,665,988   |                 |   | 351,880         |  
|                                                                                                                                                                      |  |   |             |                 |   |                 |  
|Non-Current Liabilities:                                                                                                                                              |  |   |             |                 |   |                 |  
|Convertible debenture, net of discount of $720,687 at July 31, 2010                                                                                                   |  |   |            |                 |   | 279,313         |  
|                                                                                                                                                                      |  |   |             |                 |   |                 |  
|Total Liabilities                                                                                                                                                     |  |   | 1,665,988   |                 |   | 631,193         |  
|                                                                                                                                                                      |  |   |             |                 |   |                 |  
|                                                                                                                                                                      |  |   |             |                 |   |                 |  
|Stockholders Equity (Deficiency):                                                                                                                                    |  |   |             |                 |   |                 |  
|Preferred stock, par value $.50; Series A; 4% cumulative; 500,000
 shares authorized; 155,000 shares issued and outstanding at July 31, 2011 and
 2010, respectively. |  |   | 77,500      |                 |   | 77,500          |  
|Preferred stock, par value $.50; Series B; $.90 cumulative; 500,000
 shares authorized; 1,197 shares issued and outstanding at July 31, 2011 and
 2010, respectively; |  |   | 597         |                 |   | 597             |  
|Common stock, par value $0.01; 30,000,000 shares authorized; 12,455,380 shares issued at July 31, 2011 and 6,967,881 shares issued at July
 31, 2010, respectively.   |  |   | 124,554     |                 |   | 69,679          |  
|Contributed capital                                                                                                                                                   |  |   | 79,971,148  |                 |   | 78,088,878      |  
|Accumulated deficit                                                                                                                                                   |  |   | (80,720,673 | )               |   | (76,397,940     | )
|Less: Treasury shares at cost - 2 shares                                                                                                                              |  |   | (131,734    | )               |   | (131,734        | )
|                                                                                                                                                                      |  |   |             |                 |   |                 |  
|Total Stockholders Equity (Deficiency)                                                                                                                               |  |   | (678,608    | )               |   | 1,706,980       |  
|                                                                                                                                                                      |  |   |             |                 |   |                 |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIENCY)                                                                                                               |  | $ | 987,380     |                 | $ | 2,338,173       |  
|                                                                                                                                                                      |  |   |             |                 |   |                 |  

The accompany notes are an integral part of these consolidated
financial statements

F-2

---



CONOLOG CORPORATION AND SUBSIDIARIES
Consolidated Statements of
OperationsFor the Years Ended July 31, 2011 and 2010

|                                                           |  |      |            |      |   |             |  
|---------------------------------------------------------- |  | ---- | ---------- | ---- | - | ----------- | -
|                                                           |  | 2011 |            | 2010 |  
|                                                           |  |      |            |      |  
|OPERATING REVENUES                                         |  |      |            |      |   |             |  
|Product revenue                                            |  | $    | 1,691,852  |      | $ | 1,178,673   |  
|                                                           |  |      |            |      |   |             |  
|                                                           |  |      |            |      |   |             |  
|Cost of product revenue                                    |  |      |            |      |   |             |  
|Materials and labor used in production                     |  |      | 1,125,038  |      |   | 618,990     |  
|Inventory obsolesence                                      |  |      | 50,000     |      |   | 75,564      |  
|                                                           |  |      |            |      |   |             |  
|Total Cost of product revenue                              |  |      | 1,175,038  |      |   | 694,554     |  
|                                                           |  |      |            |      |   |             |  
|                                                           |  |      |            |      |   |             |  
|Gross Profit from Operations                               |  |      | 516,814    |      |   | 484,119     |  
|                                                           |  |      |            |      |   |             |  
|                                                           |  |      |            |      |   |             |  
|Selling, general and administrative expenses               |  |      |            |      |   |             |  
|General and adminitsrative                                 |  |      | 2,685,049  |      |   | 3,759,490   |  
|Research and development                                   |  |      | 68,022     |      |   | 139,951     |  
|Selling expenses                                           |  |      | 265,827    |      |   | 117,323     |  
|                                                           |  |      |            |      |   |             |  
|Total selling, general and admiminstrative expenses        |  |      | 3,018,898  |      |   | 4,016,764   |  
|                                                           |  |      |            |      |   |             |  
|                                                           |  |      |            |      |   |             |  
|Loss from operations                                       |  |      | (2,502,084 | )    |   | (3,532,645  | )
|                                                           |  |      |            |      |   |             |  
|                                                           |  |      |            |      |   |             |  
|OTHER INCOME (EXPENSES)                                    |  |      |            |      |   |             |  
|Loss on derivative financial instruments                   |  |      |           |      |   | (18,958,801 | )
|Beneficial conversion feature                              |  |      |           |      |   | (457,692    | )
|Incremental consideration for modificationof debt warrants |  |      |           |      |   | (107,863    | )
|Interest expense                                           |  |      | (75,230    | )    |   | (44,546     | )
|Interest income                                            |  |      | 339        |      |   | 3,630       |  
|Other income - legal settlement                            |  |      | 10,000     |      |   |            |  
|Induced conversion cost                                    |  |      | (649,147   | )    |   | (150,201    | )
|Amortization of debt discount                              |  |      | (720,687   | )    |   | (1,279,313  | )
|Amortization of financing fees                             |  |      | (382,132   | )    |   | (520,656    | )
|                                                           |  |      |            |      |   |             |  
|Total Other Income (Expense)                               |  |      | (1,816,857 | )    |   | (21,515,442 | )
|                                                           |  |      |            |      |   |             |  
|                                                           |  |      |            |      |   |             |  
|Net Loss before income taxes benefit (expense)             |  |      | (4,318,941 | )    |   | (25,048,087 | )
|                                                           |  |      |            |      |   |             |  
|                                                           |  |      |            |      |   |             |  
|Income tax benefit (expense)                               |  |      | (3,792     | )    |   | 137,331     |  
|                                                           |  |      |            |      |   |             |  
|                                                           |  |      |            |      |   |             |  
|NET LOSS APPLICABLE TO COMMON SHARES                       |  | $    | (4,322,733 | )    | $ | (24,910,756 | )
|                                                           |  |      |            |      |   |             |  
|                                                           |  |      |            |      |   |             |  
|Net Loss per basic and diluted common share                |  | $    | (0.43      | )    | $ | (5.36       | )
|                                                           |  |      |            |      |   |             |  
|                                                           |  |      |            |      |   |             |  
|Weighted Average number of common shares outstanding       |  |      | 10,104,933 |      |   | 4,650,113   |  
|                                                           |  |      |            |      |   |             |  

The accompany notes are an integral part of these consolidated
financial statements

F-3

---



|                                                                        
|------------------------------------------------------------------------
|CONOLOG
 CORPORATION AND SUBSIDIARIES                                   
|Consolidated Statements of Changes in
 Stockholders Equity (Deficiency)
|For the Years Ended July 31, 2011 and 2010                              

|                                                                                               |  |                 |         |                 |   |              |  |             |             |        |                |                              |  |         |            |         |   |         |  |        |            |   |   |             |   |  |   |  |   |          |   |   |             |  
|---------------------------------------------------------------------------------------------- |  | --------------- | ------- | --------------- | - | ------------ |  | ----------- | ----------- | ------ | -------------- | ---------------------------- |  | ------- | ---------- | ------- | - | ------- |  | ------ | ---------- | - | - | ----------- | - |  | - |  | - | -------- | - | - | ----------- | -
|                                                                                               |  | Series A        |         | Series B        |   |              |  |             |             |        |                | Total
 Stockholders
 Equity | 
|                                                                                               |  |                 |         |                 |   |              |  |             |             |        | Treasury Stock |                              | 
|                                                                                               |  | Preferred Stock |         | Preferred Stock |   | Common Stock |  | Contributed | Accumulated |        |                |                              | 
|                                                                                               |  | Shares          |         | Amount          |   | Shares       |  | Amount      |             | Shares |                | Amount                       |  | Capital |            | Deficit |   | Shares  |  | Amount |            |  
|                                                                                               |  |                 |         |                 |   |              |  |             |             |        |                |                              |  |         |            |         |   |         |  |        |            |   |  
|                                                                                               |  |                 |         |                 |   |              |  |             |             |        |                |                              |  |         |            |         |   |         |  |        |            |   |   |             |   |  |   |  |   |          |   |   |             |  
|Balance at July 31, 2009                                                                       |  |                 | 155,000 |                 | $ | 77,500       |  |             | 1,197       |        | $              | 597                          |  |         | 1,842,485  |         | $ | 18,425  |  | $      | 52,221,727 |   | $ | (51,487,184 | ) |  | 2 |  | $ | (131,734 | ) | $ | 699,331     |  
|                                                                                               |  |                 |         |                 |   |              |  |             |             |        |                |                              |  |         |            |         |   |         |  |        |            |   |   |             |   |  |   |  |   |          |   |   |             |  
|                                                                                               |  |                 |         |                 |   |              |  |             |             |        |                |                              |  |         |            |         |   |         |  |        |            |   |   |             |   |  |   |  |   |          |   |   |             |  
|Conversion of convertible debenture                                                            |  |                 |         |                 |   |              |  |             |             |        |                |                              |  |         | 1,328,645  |         |   | 13,287  |  |        | 1,024,662  |   |   |             |   |  |   |  |   |          |   |   | 1,037,949   |  
|Exercise of warrants                                                                           |  |                 |         |                 |   |              |  |             |             |        |                |                              |  |         | 2,746,192  |         |   | 27,462  |  |        | 607,608    |   |   |             |   |  |   |  |   |          |   |   | 635,070     |  
|Interest paid with issuance of common stock                                                    |  |                 |         |                 |   |              |  |             |             |        |                |                              |  |         | 50,559     |         |   | 505     |  |        | 39,041     |   |   |             |   |  |   |  |   |          |   |   | 39,546      |  
|Shares issued for services to be provided                                                      |  |                 |         |                 |   |              |  |             |             |        |                |                              |  |         | 265,000    |         |   | 2,650   |  |        | 506,150    |   |   |             |   |  |   |  |   |          |   |   | 508,800     |  
|Induced conversion costs associated with convertible debt                                      |  |                 |         |                 |   |              |  |             |             |        |                |                              |  |         |            |         |   |         |  |        | 150,201    |   |   |             |   |  |   |  |   |          |   |   | 150,201     |  
|reclassification of derivative liability                                                       |  |                 |         |                 |   |              |  |             |             |        |                |                              |  |         |            |         |   |         |  |        | 21,570,084 |   |   |             |   |  |   |  |   |          |   |   | 21,570,084  |  
|Incremental consideration for reduction of exercise price of Series C
 warrants                |  |                 |         |                 |   |              |  |             |             |        |                |                              |  |         |            |         |   |         |  |        | 107,863    |   |   |             |   |  |   |  |   |          |   |   | 107,863     |  
|Common shares issued to officers, directors and employees                                      |  |                 |         |                 |   |              |  |             |             |        |                |                              |  |         | 735,000    |         |   | 7,350   |  |        | 1,403,850  |   |   |             |   |  |   |  |   |          |   |   | 1,411,200   |  
|Beneficial conversion feature on February 2010 debentures in
 consideration of modifying terms |  |                 |         |                 |   |              |  |             |             |        |                |                              |  |         |            |         |   |         |  |        | 457,692    |   |   |             |   |  |   |  |   |          |   |   | 457,692     |  
|                                                                                               |  |                 |         |                 |   |              |  |             |             |        |                |                              |  |         |            |         |   |         |  |        |            |   |   |             |   |  |   |  |   |          |   |   |            |  
|Net loss for the Year                                                                          |  |                 |         |                 |   |              |  |             |             |        |                |                              |  |         |            |         |   |         |  |        |            |   |   | (24,910,756 | ) |  |   |  |   |          |   |   | (24,910,756 | )
|                                                                                               |  |                 |         |                 |   |              |  |             |             |        |                |                              |  |         |            |         |   |         |  |        |            |   |   |             |   |  |   |  |   |          |   |   |             |  
|Balance at July 31, 2010                                                                       |  |                 | 155,000 |                 | $ | 77,500       |  |             | 1,197       |        | $              | 597                          |  |         | 6,967,881  |         | $ | 69,679  |  | $      | 78,088,878 |   | $ | (76,397,940 | ) |  | 2 |  | $ | (131,734 | ) | $ | 1,706,980   |  
|                                                                                               |  |                 |         |                 |   |              |  |             |             |        |                |                              |  |         |            |         |   |         |  |        |            |   |   |             |   |  |   |  |   |          |   |   |             |  
|                                                                                               |  |                 |         |                 |   |              |  |             |             |        |                |                              |  |         |            |         |   |         |  |        |            |   |   |             |   |  |   |  |   |          |   |   |             |  
|Conversion of convertible debentures and accrued interest                                      |  |                 |         |                 |   |              |  |             |             |        |                |                              |  |         | 3,562,999  |         |   | 35,630  |  |        | 1,677,307  |   |   |             |   |  |   |  |   |          |   |   | 1,712,937   |  
|Issuance of common stock in exercise of Class C warrants in cashless
 transaction              |  |                 |         |                 |   |              |  |             |             |        |                |                              |  |         | 1,646,723  |         |   | 16,467  |  |        | (16,467    | ) |   |             |   |  |   |  |   |          |   |   |            |  
|Sale of common stock to officer                                                                |  |                 |         |                 |   |              |  |             |             |        |                |                              |  |         | 277,777    |         |   | 2,778   |  |        | 97,222     |   |   |             |   |  |   |  |   |          |   |   | 100,000     |  
|Forgiveness of officers salary                                                                 |  |                 |         |                 |   |              |  |             |             |        |                |                              |  |         |            |         |   |         |  |        | 124,208    |   |   |             |   |  |   |  |   |          |   |   | 124,208     |  
|Net loss for the Year                                                                          |  |                 |         |                 |   |              |  |             |             |        |                |                              |  |         |            |         |   |         |  |        |            |   |   | (4,322,733  | ) |  |   |  |   |          |   |   | (4,322,733  | )
|                                                                                               |  |                 |         |                 |   |              |  |             |             |        |                |                              |  |         |            |         |   |         |  |        |            |   |   |             |   |  |   |  |   |          |   |   |             |  
|Balance at July 31, 2011                                                                       |  |                 | 155,000 |                 | $ | 77,500       |  |             | 1,197       |        | $              | 597                          |  |         | 12,455,380 |         | $ | 124,554 |  | $      | 79,971,148 |   | $ | (80,720,673 | ) |  | 2 |  | $ | (131,734 | ) | $ | (678,608    | )
|                                                                                               |  |                 |         |                 |   |              |  |             |             |        |                |                              |  |         |            |         |   |         |  |        |            |   |   |             |   |  |   |  |   |          |   |   |             |  

The accompany notes are an integral part of these consolidated
financial statements

F-4

---



CONOLOG
CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended July 31, 2011 and 2010

|                                                                        |  |      |            |      |   |             |  
|----------------------------------------------------------------------- |  | ---- | ---------- | ---- | - | ----------- | -
|                                                                        |  | 2011 |            | 2010 |  
|                                                                        |  |      |            |      |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                    |  |      |            |      |   |             |  
|Net loss                                                                |  | $    | (4,322,733 | )    | $ | (24,910,756 | )
|Adjustments to reconcile net loss to net
 cash used in operations:      |  |      |            |      |   |             |  
|Depreciation                                                            |  |      | 14,598     |      |   | 27,230      |  
|Bad debt expense                                                        |  |      | 32,866     |      |   |            |  
|Reserve of obsolete inventory parts                                     |  |      | (25,000    | )    |   | (14,000     | )
|Write down of obsolete inventory parts                                  |  |      | 50,000     |      |   | 89,564      |  
|Amortization of deferred financing fees                                 |  |      | 382,132    |      |   | 520,656     |  
|Common stock issued ot officers, directors
 and employees               |  |      |           |      |   | 1,411,200   |  
|Amortization of common stock issued for
 services                       |  |      | 80,000     |      |   | 428,800     |  
|Induced conversion costs associated with
 convertible debt and warrants |  |      | 649,147    |      |   | 150,201     |  
|Amortization of discount of convertible
 debentures                     |  |      | 720,687    |      |   | 1,279,313   |  
|Beneficial conversion feature                                           |  |      |           |      |   | 457,692     |  
|Incremental consideration of modification
 of warrants                  |  |      |           |      |   | 107,863     |  
|Loss on derivative financial instruments                                |  |      |           |      |   | 18,958,801  |  
|Forgiveness of salaries by officers of
 company                         |  |      | 124,208    |      |   |             |  
|                                                                        |  |      |            |      |   |             |  
|Changes in assets and liabilities                                       |  |      |            |      |   |             |  
|(Increase) decrease in accounts receivable                              |  |      | (441,698   | )    |   | 178,377     |  
|(Increase) decrease in prepaid expenses                                 |  |      | 142,364    |      |   | (117,666    | )
|(Increase) decrease in inventories                                      |  |      | 411,590    |      |   | (313,861    | )
|(Increase) in other current assets                                      |  |      | 4,742      |      |   |            |  
|Increase (decrease) in accounts payable                                 |  |      | 225,756    |      |   | (66,575     | )
|Increase (decrease) in accrued expenses                                 |  |      | 895,792    |      |   | 176,416     |  
|                                                                        |  |      |            |      |   |             |  
|Net cash used in operations                                             |  |      | (1,055,549 | )    |   | (1,636,745  | )
|                                                                        |  |      |            |      |   |             |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                    |  |      |            |      |   |             |  
|Purchase of property and equipment                                      |  |      | (5,899     | )    |   | (22,781     | )
|                                                                        |  |      |            |      |   |             |  
|Net cash used in investing activities                                   |  |      | (5,899     | )    |   | (22,781     | )
|                                                                        |  |      |            |      |   |             |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                    |  |      |            |      |   |             |  
|Proceeds from issuance of convertible
 debentures                       |  |      |           |      |   | 2,000,000   |  
|Proceeds from exercise of warrants                                      |  |      |            |      |   | 635,070     |  
|Proceeds from issuance of common stock                                  |  |      | 100,000    |      |   |            |  
|Proceeds from officers loans                                            |  |      | 316,350    |      |   |            |  
|Payments of loans from officers                                         |  |      | (60,000    | )    |   |             |  
|Payments for deferred loan costs                                        |  |      |            |      |   | (291,507    | )
|Proceeds from note receivable                                           |  |      |            |      |   | 1,610       |  
|                                                                        |  |      |            |      |   |             |  
|Net cash provided by financing activities                               |  |      | 356,350    |      |   | 2,345,173   |  
|                                                                        |  |      |            |      |   |             |  
|                                                                        |  |      |            |      |   |             |  
|NET INCREASE (DECREASE) IN CASH AND CASH
 EQUIVALENTS                   |  |      | (705,098   | )    |   | 685,647     |  
|CASH AND CASH EQUIVALENTS - BEGINNING OF
 YEAR                          |  |      | 713,005    |      |   | 27,358      |  
|                                                                        |  |      |            |      |   |             |  
|CASH AND CASH EQUIVALENTS - END OF YEAR                                 |  | $    | 7,907      |      | $ | 713,005     |  
|                                                                        |  |      |            |      |   |             |  

The accompany notes are an integral part of
these consolidated financial statements

F-5

---



CONOLOG
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2011 AND 2010

NOTE 1  NATURE OF OPERATIONS AND BASIS OF
PRESENTATION

Conolog
Corporation (the Company) is in the business of design, manufacturing and
distribution of small electronic and electromagnetic components and
subassemblies for use in telephone, radio and microwave transmissions and
reception and other communication areas. The Companys products are used for
transceiving various quantities, data and protective relaying functions in
industrial, utility and other markets. The Companys customers include
primarily industrial customers, which include power companies located primarily
throughout the United States, and various branches of the military.

The
Company formed a wholly owned Subsidiary, Nologoc Corporation. In September
1998, Nologoc Corporation purchased the assets of Atlas Design, Incorporated.
In January, 2001, Nologoc Corporation purchased the assets of Prime Time
Staffing, Incorporated and Professional Temp Solutions Incorporated. Atlas
Design, Prime Time Staffing and Professional Temp Solutions provide short-term
and long-term qualified engineering and technical staff, as well as human
resource consulting to various industries. In March 2004 the Company ceased
operating its staffing business. The assets of the Companys wholly-owned
subsidiary, Nologoc, Inc. trading as Atlas Design, were sold to the Companys
vice-president of operations of Atlas Design.

Going
Concern

The
accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and satisfaction
    of liabilities in the normal course of business. The Company has had recurring
losses from operations of $2,502,084 and $3,532,645 for the years ended July
31, 2011 and 2010, respectively, and used cash from operations in the amounts
of $1,055,549 and $1,636,745 for the years ended July 31, 2011 and 2010,
respectively. At July 31, 2011, the Company had a working capital deficiency
    of $765,966 and a stockholders deficiency of $678,608. These factors raise
    substantial doubt as to the Companys
    ability to continue as a going concern. The accompanying consolidated financial
    statements do not include any adjustments that might result from this uncertainty.

The
Company plans to raise additional capital through debt and equity placements
and increase revenue through new product development. In the event that the
Company cannot generate sufficient cash flow from its operations or raise
proceeds from offering debt or equity securities, the Company may be forced to
curtail or cease its activities. There can be no assurance that the Company
will be successful in achieving its goals.

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.

NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash and Equivalents

For
the purpose of the statements of cash flows, cash equivalents include time
deposits, certificates of deposit and all highly liquid debt instruments with
original maturities of three months or less. The Company maintains cash and
cash equivalents balances at financial institutions and are insured by the
Federal Deposit Insurance Corporation up to $250,000. At times during the year,
balances in certain bank accounts may exceed the FDIC insured limits. Cash
equivalents consist of highly liquid investments with an original maturity of
three months or less when purchased. At July 31, 2011 the Company did not have
any cash equivalents.

Receivables and Allowance for Doubtful Accounts

Trade
Receivables are non-interest bearing, uncollateralized customer obligations and
are stated at the amounts billed to customers. The preparation of financial
statements requires our management to make estimates and assumptions relating
to the collectivity of our accounts receivable. Management specifically
analyzes historical bad debts, customer credit worthiness, current economic
trends and changes in our customer payment terms when evaluating the adequacy
of the allowance for doubtful accounts. The allowance for doubtful accounts at
July 31, 2011 and 2010 was $1,000 and $1,000, respectively.

F-6

---



CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2011 AND 2010

NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)

The
Company has a concentration risk in trade accounts receivable with significant
sales to the government and local agencies. Two customers accounted for
approximately 93% and 4% of accounts receivable as of July 31, 2011. Two
customers accounted for approximately 50% and 31% of accounts receivable as of
July 31, 2010. The credit evaluation process has mitigated the credit risk.

Inventories

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

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

The
Company provides a twelve-year warranty on all commercial products and is
required by government regulation to design and produce military products with
a minimum 25-year operating life in addition to shelf life. The Company
maintains a significant amount of raw material component parts and some of this
raw material inventory is not expected to be realized within a twelve month
operating cycle from the balance sheet date. For any raw material part which
has not been purchased within the last twelve months from the balance sheet
date, it is evaluated as part of the slow moving inventory and is part of our
reserve review. The Company estimated a usage rate for its raw material
component parts for what it expects to use over a 36 month period. Any excess
inventory based on this projected usage rate is written off as excess and
obsolete. The Company then reserves 100% of the estimated usage that is over 12
months and less than 36 months. Certain raw material parts which have been
written down to a zero value, may still be maintained in inventory to satisfy
possible requirements under the warranty programs but are valued at zero.
Ongoing the Company evaluates the inventory parts based on their age and usage
over a 36 month period to determine inventory obsolescence and reserve
adjustments.

Property and Equipment

Property
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 which range between three and seven years. Depreciation was
$14,598 and $27,230 for the years ended July 31, 2011 and 2010, respectively.
Repairs and maintenance expenditures which do not extend the useful lives of
the related assets are expensed as incurred. Gains and losses on depreciable
assets retired or sold are recognized in the consolidated statement of
operations in the year of disposal.

Deferred Financing Costs

The
Company follows authoritative guidance for accounting for financing costs as it
relates to convertible debt issuance cost. These costs are deferred and
amortized over the term of the debt period or until redemption of the
convertible Debentures. As of July 31, 2011 and 2010, $0 and $382,132,
respectively of deferred financing costs remained to be amortized. Amortization
of deferred financing costs amounted to $382,132 and $520,656 for years ended
July 31, 2011 and 2010, respectively.

Derivative Liability

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

F-7

---



CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2011 AND 2010

NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)

Effective
August 1, 2009, the Company adopted the provisions of the Financial Accounting
Standards Board Accounting Codification Topic 815-40-15-5, Evaluating Whether
an Instrument Involving a Contingency is Considered Indexed to an Entitys Own
Stock (FASB ASC 815-40-15-5). FASB ASC 815-40-15-5 provides guidance in
assessing whether an equity linked financial instrument (or embedded feature)
is indexed to an entitys own stock for purposes of determining whether the
equity-linked instrument (or embedded feature) qualifies as a derivative
instrument. We have determined that our convertible Debentures and certain of
our warrants issued after the adoption of FASB ASC 815-40-15-5 contain features
that are not indexed to our own stock and therefore, were classified as
derivative instruments. Upon adoption of FASB ASC 815-40-15-5 we did not record
a cumulative effect of a change in accounting principle as it did not apply to
any outstanding convertible Debentures or warrants at that time.

On
June 18, 2010, the Companys common stock warrants and convertible notes were
amended. As a result of these amendments we determined that the equity-linked
instruments (or embedded features) are indexed to our Companys stock within
the meaning of FASB ASC 815-40-15-5 and no longer qualify as a derivative
instrument.

Debt Discount

The
Company follows the authoritative guidance for accounting for debt discount and
valuation of detachable warrants. The Company recognized the value of
detachable warrants issued in conjunction with issuance of the secured
convertible Debenture notes. The Company valued the warrants using the
Black-Scholes pricing model. The Company recorded the warrant relative fair
value as an increase to additional paid-in capital and discount against the
related debt. The discount attributed to the value of the warrants is amortized
over the term of the underlying debt using the effective interest method.

Impairment of Long-Lived Assets

We
review our long-lived assets for impairment whenever events and circumstances
indicate that the carrying value of an asset might not be recoverable. An
impairment loss, measured as the amount by which the carrying value exceeds the
fair value, is recognized if the carrying amount exceeds estimated undiscounted
future cash flows.

Research and Development

Research
and Development costs are expensed as incurred. Research and Development costs
were $68,022 and $139,951 for the years ended July 31, 2011 and 2010,
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.

Warranty

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

F-8

---



CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2011 AND 2010

NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)

Advertising / Public Relations Costs

Advertising/Public
Relations costs are charged to operations when incurred. These expenses were
$15,000 and $72,329 for the years ended July 31, 2011 and 2010, respectively.

Shipping and Handling Costs

Shipping
and handling costs are expensed as incurred and amounted to $16,545 and $37,416
for the years ended July 31, 2011 and 2010, respectively.

Stock Based Compensation

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

Fair Value
Measurements

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

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

Level
2  Inputs other than Level 1 that are observable, either directly or
indirectly, such as quoted prices for similar assets or liabilities; quoted
prices in markets that are not active; or other inputs that are observable or
corroborated by observable market data or substantially the full term of the
assets or liabilities.

Level 3
 Unobservable inputs that are supported by little or no market activity and
that are significant to the value of the assets or liabilities.

The
Companys financial instruments include cash and cash equivalents, accounts
receivable, other current assets, accounts payable, accrued expenses, and
convertible debentures. All of these items were determined to be Level 1 fair
value measurements.

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

Income Taxes

The
Company follows the authoritative guidance for accounting for income taxes.
Deferred income taxes are determined using the asset and liability method.
Under this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. A valuation allowance is recorded
when the expected recognition of a deferred tax asset is considered to be
unlikely. The guidance also requires that the Company determine whether it is
more likely than not that a tax position will not be sustained upon examination
by the

F-9

---



CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2011 AND 2010

NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)

appropriate
taxing authority. If a tax position does not meet the more likely than not
recognition criterion, the guidance requires that the tax position be measured
at the largest amount of benefit greater than 50 percent not likely of being
sustained upon ultimate settlement. Based on the Companys evaluation,
management has concluded that there are significant uncertain tax positions
requiring recognition in the consolidated financial statements with respect to
the sale of the Companys New Jersey Net Operating Loss Carryovers. In the
event the Company receives an assessment for interest and/or penalties by major
tax jurisdiction it would be classified in the financial statements as general
and administrative expense. See note 4, Income taxes.

Other State Tax Benefits

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 2010,
the Company entered into agreements to sell its unused NOLs. Recognition of
this asset and income have been in accordance with the guidance of SAB Topic 13
and are recorded upon the State of New Jerseys approval of the technology tax
benefit transfer certificate and receipt of a contract to purchase a fixed
amount of these NOLs.

Loss Per Share of Common Stock

Basic
loss per share of common stock is computed by dividing the Companys net
loss by the weighted average number of shares of Common Stock outstanding during
the period. The preferred dividends are not reflected in arriving at the net
loss as they are not material and would have no effect on loss per share available
to common shareholders. Diluted loss per shares is based on the treasury stock
method and includes the effect from potential issuance of common stock such as
shares issuable pursuant to the exercise of warrants and conversions of
debentures. The Company did not have any dilutive securities for the year ended
July 31, 2011 and 2010. Potentially dilutive securities at July 31, 2011
consist of 982,837 common shares from outstanding warrants and 155,006 common
shares from preferred stock. Potentially dilutive securities at July 31, 2010
consist of 2,939,036 common shares from outstanding warrants, 1,666,667 common
shares from convertible debt and 155,006 common shares from preferred stock.

Use of Estimates

The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. The estimates and assumptions made by
management are based upon available current information, historical experience
and other factors that are believed to be reasonable under the circumstances.
The estimates and assumptions made by management involve risks and
uncertainties which could cause reported amounts to differ materially from
actual future results. If managements estimates and assumptions are inaccurate,
the Companys reported amounts and disclosures of contingent assets and
liabilities could be materially and adversely affected. Management considers
its reserve for inventory and accounting for derivative liabilities to be
significant estimates.

Future Impact of Recently Issued Accounting Standards

In
May 2011, the Financial Accounting Standards Board (FASB) issued Accounting
Standards Update (ASU) 2011-04, which updated the guidance in ASC Topic 820, Fair Value Measurement.The amendments in this
ASU generally represent clarifications of Topic 820, but also include some
instances where a particular principle or requirement for measuring fair value
or disclosing information about fair value measurements has changed. This
update results in common principles and requirements for measuring fair value
and for disclosing information about fair value measurements in accordance with
U.S. GAAP and International Financial Reporting Standards. The amendments in
this ASU are to be applied prospectively. For public entities, the amendments
are effective for interim and annual periods beginning after December 15, 2011,
and early application is not permitted. ASU 2011-04 is not expected to have a
material impact on the Companys financial position or results of operations

F-10

---



CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2011 AND 2010

NOTE 2- SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES(continued)

Future Impact of Recently Issued Accounting Standards
(continued)

In
December 2010, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update (ASU) 2010-29, Business Combinations (ASC Topic
805): Disclosure of Supplementary Pro Forma Information for Business
Combinations. The amendments in this ASU affect any public entity as defined
by ASC Topic 805 that enters into business combinations that are material on an
individual or aggregate basis. The amendments in this ASU specify that if a
public entity presents comparative financial statements, the entity should
disclose revenue and earnings of the combined entity as though the business
combination(s) that occurred during the current year had occurred as of the
beginning of the comparable prior annual reporting period only. The amendments
also expand the supplemental pro forma disclosures to include a description of
the nature and amount of material, nonrecurring pro forma adjustments directly
attributable to the business combination included in the reported pro forma
revenue and earnings. The amendments are effective prospectively for business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2010. Early
adoption is permitted. The Company does not expect adoption of ASU 2010-29 to
have a material impact on the Companys results of operations or financial
condition.

In
December 2010, the FASB issued ASU 2010-28, Intangibles - Goodwill and Other
(ASC Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for
Reporting Units with Zero or Negative Carrying Amounts. The amendments in this
ASU modify Step 1 of the goodwill impairment test for reporting units with zero
or negative carrying amounts. For those reporting units, an entity is required
to perform Step 2 of the goodwill impairment test if it is more likely than not
that a goodwill impairment exists. In determining whether it is more likely
than not that a goodwill impairment exists, an entity should consider whether
there are any adverse qualitative factors indicating that an impairment may
exist. The qualitative factors are consistent with the existing guidance and
examples, which require that goodwill of a reporting unit be tested for
impairment between annual tests if an event occurs or circumstances change that
would more likely than not reduce the fair value of a reporting unit below its
carrying amount. For public entities, the amendments in this ASU are effective
for fiscal years, and interim periods within those years, beginning after
December 15, 2010. Early adoption is not permitted. The Company does not expect
the adoption of ASU 2010-28 to have a material impact on the Companys results
of operations or financial condition.

In
April 2010, the FASB issued ASU 2010-17, Revenue Recognition  Milestone Method(ASU
2010-17). ASU 2010-17 provides guidance on the criteria that should be met for
determining whether the milestone method of revenue recognition is appropriate.
A vendor can recognize consideration that is contingent upon achievement of a
milestone in its entirety as revenue in the period in which the milestone is
achieved only if the milestone meets all criteria to be considered substantive.
The following criteria must be met for a milestone to be considered substantive.
The consideration earned by achieving the milestone should (i) be commensurate
with either the level of effort required to achieve the milestone or the
enhancement of the value of the item delivered as a result of a specific
outcome resulting from the vendors performance to achieve the milestone; (ii)
be related solely to past performance; and (iii) be reasonable relative to all
deliverables and payment terms in the arrangement. No bifurcation of an
individual milestone is allowed and there can be more than one milestone in an
arrangement. Accordingly, an arrangement may contain both substantive and
non-substantive milestones. ASU 2010-17 is effective on a prospective basis for
milestones achieved in fiscal years, and interim periods within those years,
beginning on or after June 15, 2010. Management evaluated the potential impact
of ASU 2010-17 and does not expect its adoption to have a material effect on
the Companys results of operations or financial condition.

In
January 2010, the FASB issued ASU 2010-06, Improving
Disclosures about Fair Value
Measurements. ASU 2010-06 amends ASC 820 to require a number of
additional disclosures regarding fair value measurements. The amended guidance
requires entities to disclose the amounts of significant transfers between
Level 1 and Level 2 of the fair value hierarchy and the reasons for
these transfers, the reasons for any transfers in or out of Level 3, and
information in the reconciliation of recurring Level 3 measurements about
purchases, sales, issuances and settlements on a gross basis. The ASU also
clarifies the requirements for entities to disclose information about both the
valuation techniques and inputs used in estimating Level 2 and
Level 3 fair value measurements. The amended guidance is effective for
interim and annual financial periods beginning after December 15, 2009.
The adoption of ASU 2010-06 did not have a significant effect on the Companys
financial statements.

F-11

---



CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2011 AND 2010

NOTE 2-
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued)

Future Impact of Recently Issued Accounting Standards
(continued)

In
October 2009, the FASB issued guidance on multiple deliverable revenue arrangements
which eliminates the residual method of allocation and requires the relative
selling price method when allocating deliverables of a multiple-deliverable
revenue arrangement. The determination of the selling price for each
deliverable requires the use of a hierarchy designed to maximize the use of
available objective evidence including, vendor specific objective evidence,
third party evidence of selling price, or estimated selling price. This
guidance is effective prospectively for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010, and
must be adopted in the same period using the same transition method. If
adoption is elected in a period other than the beginning of a fiscal year, the
amendments in these standards must be applied retrospectively to the beginning
of the fiscal year. Full retrospective application of these amendments to prior
fiscal years is optional. Early adoption of these standards may be elected. The
adoption of this guidance did not have a significant impact on the Companys
consolidated financial statements.

Management
does not believe that any other recently issued, but not currently effective,
accounting standards if currently adopted would have a material effect on the accompanying
consolidated financial statements.

NOTE 3- INVENTORY

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

|                       |  |      |         |      |   |         | 
|---------------------- |  | ---- | ------- | ---- | - | ------- | 
|                       |  | 2011 |         | 2010 |  
|                       |  |      |         |      |  
|Finished goods         |  | $    | 162,507 |      | $ | 587,835 | 
|Work-in-process        |  |      | 87,664  |      |   | 83,441  | 
|Raw materials          |  |      | 188,318 |      |   | 228,803 | 
|                       |  |      |         |      |   |         | 
|                       |  |      | 438,489 |      |   | 900,079 | 
|Less Inventory reserve |  |      | 49,000  |      |   | 74,000  | 
|                       |  |      |         |      |   |         | 
|Inventory, net         |  | $    | 389,489 |      | $ | 826,079 | 
|                       |  |      |         |      |   |         | 

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

As
of July 31, 2011 and 2010, inventory reserves amounted to $49,000 and $74,000,
respectively. For the years ended July 31, 2011 and 2010, inventory written off
as obsolete, amounted to $50,000 and $89,565, respectively, and was charged to
cost of sales.

NOTE 4  INCOME TAXES

The
income tax (benefit) is comprised of the following:

|                   |  |      |       |      |   |          |  
|------------------ |  | ---- | ----- | ---- | - | -------- | -
|                   |  | 2011 |       | 2010 |  
|                   |  |      |       |      |  
|Current:           |  |      |       |      |   |          |  
|Federal            |  | $    |      |      | $ |         |  
|State              |  |      | 3,792 |      |   | (137,331 | )
|Deferred:          |  |      |       |      |   |          |  
|Federal            |  |      |      |      |   |         |  
|State              |  |      |      |      |   |         |  
|                   |  |      |       |      |   |          |  
|                  
|Total tax
 benefit |  | $    | 3,792 |      | $ | (137,331 | )
|                   |  |      |       |      |   |          |  

F-12

---



CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2011 AND 2010

NOTE 4  INCOME TAXES (continued)

The
U.S. federal statutory income tax rate is reconciled to the effective rate at
July 31, 2011 and 2010, as follows:

|                                                          |  |      |       |      |  |       |   
|--------------------------------------------------------- |  | ---- | ----- | ---- |  | ----- | --
|                                                          |  | 2011 |       | 2010 | 
|                                                          |  |      |       |      | 
|Income tax expense at U.S. federal statutory rate         |  |      | (34.0 | %)   |  | (34.0 | %)
|New Jersey state statutory rate                           |  |      | (5.8  | %)   |  | (5.8  | %)
|Change in valuation allowance                             |  |      | 22.6  | %    |  | 2.3   | % 
|Loss on derivative financial instruments                  |  |      | 0.0   | %    |  | 30.1  | % 
|Common stock issue for services                           |  |      | 0.7   | %    |  | 2.9   | % 
|Amortization of debt discount and deferred financing fees |  |      | 10.2  | %    |  | 2.9   | % 
|Benefits and modification of debt                         |  |      | 0.0   | %    |  | .9    | % 
|Induced conversion cost                                   |  |      | 6.2   | %    |  | .2    | % 
|                                                          |  |      |       |      |  |       |   
|                                                          | 
|Effective tax benefit                                     |  |      | 0.1   | %    |  | (0.5  | %)
|                                                          |  |      |       |      |  |       |   

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, 2010, the Company entered into agreements to sell up to $5,594,000 of its
unused tax losses. The Company received net proceeds of $284,703 during the
fiscal year ended July 31, 2010, related to the sale and accordingly recorded
them as a tax benefit in the year received. The net tax benefit recorded in the
Statement of Operations consists of the proceeds received from the sale of the
companys NJ NOLs offset by the unrecorded tax benefit due to uncertain
tax positions of $135,000 in 2010.

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

At July 31, 2011 and 2010, the Company has net
operating loss carry forward for federal income tax purpose of approximately
$29,218,000 and $26,890,000 respectively, which is available to offset future
Federal taxable income through 2030. At July 31, 2011 and 2010, the Company has
net operating loss carryforward toward state income tax purposes of
approximately $9,223,000 and $6,900,000 respectively, to offset future state
taxable income through 2030.

There was a provision for income taxes of
$3,792 for the year ended July 31, 2011 and no provision for income taxes for
the year ended July 31, 2010. The Company has no open tax years
prior to 2006 for the State of New Jersey and 2003 for the federal income tax
purposes which are subject to examination.

F-13

---



CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2011 AND 2010

NOTE 4  INCOME TAXES (continued)

The
components of the net deferred tax assets (liabilities) at July 31, 2011 and
2010 are as follows:

|                          |  |      |             |      |   |            |  
|------------------------- |  | ---- | ----------- | ---- | - | ---------- | -
|                          |  | 2011 |             | 2010 |  
|                          |  |      |             |      |  
|                          |  |      |             |      |   |            |  
|Deferred tax asset        |  |      |             |      |   |            |  
|Net operating loss        |  | $    | 10,689,000  |      | $ | 9,708,000  |  
|Reserves                  |  |      | 20,000      |      |   | 63,000     |  
|                          |  |      |             |      |   |            |  
|                          |  |      |             |      |   |            |  
|Total deferred tax assets |  |      | 10,709,000  |      |   | 9,771,000  |  
|                          |  |      |             |      |   |            |  
|Deferred tax liability    |  |      |            |      |   |           |  
|                          |  |      |             |      |   |            |  
|                          |  |      |             |      |   |            |  
|Net deferred tax asset    |  |      | 10,709,000  |      |   | 9,771,000  |  
|                          |  |      |             |      |   |            |  
|Less: Valuation allowance |  |      | (10,709,000 | )    |   | (9,771,000 | )
|                          |  |      |             |      |   |            |  
|Net deferred tax asset    |  | $    |            |      | $ |           |  
|                          |  |      |             |      |   |            |  

The Company periodically assesses the likelihood
that it will be able to recover its deferred tax assets and determines if a
valuation allowance is necessary. As a result of this analysis the Company
concluded that it is more likely than not that its deferred tax assets will not
be recovered and, accordingly, recorded 100% of the deferred tax asset to a
valuation allowance as of July 31, 2011 and July 31, 2010.

The
Company accounts for the recognition, measurement, presentation and disclosure
of uncertain tax positions in accordance with the provisions of ASC 740-10,
Accounting for Uncertainty in Income Taxes. The Company evaluates these
unrecognized tax benefits each reporting period. As of July 31, 2011, the total
amount of unrecognized tax benefits that, if recognized, would affect the effective
tax rate is $135,000. The unrecognized tax benefit is the result of the
Companys position to deduct the write off of the obsolete inventory for income
tax purposes. The Company maintains some of its obsolete inventory utilization
in repairing its products previously sold in accordance with the Companys
warranty program.

The
Company, over the years, has discarded obsolete inventory; however, the company
did not keep a detailed log of the inventory that was discarded. These
inventory items were written down to zero in the Companys inventory system as
they were deemed to have no value and therefore the Company deducted the
amounts on its income tax returns.

A
reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows:

|                                                          |  |                |         | 
|--------------------------------------------------------- |  | -------------- | ------- | 
|                                                          |  | July
 31, 2011 |        
|                                                          |  |                |        
|Balance
 at beginning of period                           |  | $              | 135,000 | 
|                                                          |  |                |         | 
|Additions
 based on tax positions related to current year |  |                |        | 
|                                                          |  |                |         | 
|Balance
 at end of period                                 |  | $              | 135,000 | 
|                                                          |  |                |         | 

F-14

---



CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2011 AND 2010

NOTE 4  INCOME TAXES (continued)

The
Company and its subsidiaries are subject to United States federal income tax as
well as income tax of multiple state jurisdictions. These uncertain tax
positions are related to the Sale of the Companys NJ NOLs and are within the
tax years that remain subject to examination by the relevant taxing
authorities.

It
is reasonably possible that the amount of unrecognized tax benefits will
increase or decrease in the next twelve months. These changes may be the result
of new state audits. It is also expected that the statute of limitations for
certain unrecognized tax benefits will expire in the next 12 months resulting
in a reduction of the liability for unrecognized tax benefits of approximately
$22,000. The balance of the unrecognized tax benefits is primarily related to
uncertain tax positions for which there are no current ongoing federal or state
audits and therefore, an estimate of the range of the reasonably possible
outcomes cannot be made.

The
Company has recorded accrued interest of $16,000 and $5,000 as of July 31, 2011
    and 2010, respectively which has been included in accrued expenses in the
    Balance Sheet. During the fiscal year ended July 31, 2011 and 2010, the Company
    has included $11,000 and $5,000, respectively of interest expense in the statement
    of operations.

NOTE 5 PROFIT SHARING PLAN

The
Company sponsors a contributing thrift and savings plan which qualifies under
Section 401(k) of the Internal Revenue Code that covers eligible employees
meeting age and service requirements. Eligible participating employees may
elect to contribute up to the maximum allowed under the IRS code to an
investment trust. For tax year 2011 and 2010 this maximum allowable deferred
contribution was $16,500 ($22,500 for employee over age 50). Employer
contributions to the plan are discretionary and determined annually by
management. The Company made matching contributions to the plan of $0 for both
the fiscal years ended July 31, 2011 and 2010, respectively.

NOTE 6 STOCKHOLDERS EQUITY (DEFICIENCY)

The
Series A Preferred Stock provides 4% cumulative dividends, which were $130,083
($0.84 per share) and $126,983 ($0.82 per shares) in arrears at July 31, 2011
and 2010, respectively. 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 $5,760,000 (due to reverse stock splits) per share. The
Company may redeem the Series A Preferred Stock at $.50 per share plus accrued
and unpaid dividends. The liquidation preference of the Series A Preferred
Stock was $207,583 and $204,483 at July 31, 2011 and 2010, respectively.

The
Series B Preferred Stock provides cumulative dividends of $0.90 per share,
which were $43,173 ($36.06 per share) and $42,096 ($35.17 per share) in arrears
at July 31, 2011 and 2010, respectively. In addition, each share of Series B
Preferred Stock is convertible into .005 of one share of Common Stock. The
liquidation preference of the Series B Preferred Stock is the dividend in
arrears plus $15 per share. The liquidation preference was $61,131 and $60,051
at July 31, 2011 and 2010, respectively.

On
January 14, 2011, at the a Special Meeting of Shareholders of Conolog
Corporation (the Company), the Companys shareholders approved an amendment
to the Certificate of Incorporation of the Company to effect a reverse stock
split of the companys common stock, par value $.001 per share, at a ratio not
less than two-for-one and not greater than five-for-one, with the exact ratio
to be set within such range in the discretion of the Board of Directors,
without further approval or authorization of the Companys shareholders,
provided that the Board of Directors determines to effect the reverse stock
split and such amendment is filed with the Delaware Secretary of State no later
than August 1, 2011.

F-15

---



CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2011 AND 2010

NOTE 6 STOCKHOLDERS EQUITY (DEFICIENCY) (continued)

On
January 6, 2011, Conolog Corporation (the Company) entered into a Securities
Purchase Agreement (the Securities Purchase Agreement) with Robert Benou, the
Companys Chief Executive Officer and Chairman of the Companys
Board of Directors, pursuant to which the Company sold to Robert Benou a total
of 277,777 shares of its Common Stock at a price per share of $0.36 for an
aggregate purchase price of $100,000.

At
various times during the years ended July 31, 2011 and 2010, $1,000,000 and
$1,037,949 of convertible debt, respectively, were converted into 3,333,333 and
1,328,645 shares of common stock, respectively.

At
various times during the years ended July 31, 2011 and 2010, $88,177 and
$39,546 of interest expense, respectively, were converted into 229,666 and
50,559 shares of common stock, respectively.

At
various times during the years ended July 31, 2011 an aggregate 1,955,782 Class
C Warrants were exercised in cashless exercises into 1,646,723 shares of common
stock.

On
January 31, 2011, the Company received notice from the Listing Qualifications
Staff of the NASDAQ Stock Market (NASDAQ) indicating that the Company had
failed to regain compliance with NASDAQ Listing Rule 5550(b), which requires
the Company to have a minimum of $2,500,000 in stockholders equity (the
Rule), and that, accordingly, its common stock will be delisted from The
NASDAQ Capital Market and that trading of its common stock was suspended, effective
with the open of business on February 2, 2011. The Company securities have
traded on the OTCQB under the symbol CNLG since the suspension of trading on
NASDAQ. The Company intends to continue to file periodic reports with the SEC
pursuant to the requirements of the Securities Exchange Act of 1934, as amended.

During
the year ended July 31, 2010, the Company issued 265,000 common shares to
consultants for services to be provided. The common shares were valued at
$508,800 for the year ended July 31, 2010.

During
the years ended July 31, 2010, the Company issued 735,000 common shares to
officers, directors and employees as compensation. The common shares were
valued at $1,411,200 for the year ended July 31, 2010.

During
the year ended July 31, 2010, investors were issued 2,746,192 common shares for
the exercise of warrants. The Company received proceeds of $635,070 from the
exercise of these warrants during the years ended July 31, 2010.

F-16

---



CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2011 AND 2010

NOTE 6 STOCKHOLDERS EQUITY (DEFICIENCY) (continued)

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

|                                               |  |                          |            |              |   |                       |  |           | 
|---------------------------------------------- |  | ------------------------ | ---------- | ------------ | - | --------------------- |  | --------- | 
|                                               |  | Number of
      Warrants |            | Strike Price |   | Expiration
      Date | 
|                                               |  |                          |            |              |   |                       | 
|                                               |  |                          |            |              |   |                       |  |           | 
|2/18/2005 Warrants                             |  |                          | 6,321      |              | $ | 150.00                |  | 2/18/2010 | 
|7/16/2005 Warrants                             |  |                          | 12,000     |              | $ | 202.70                |  | 7/16/2010 | 
|1/19/2006 Warrants                             |  |                          | 417        |              | $ | 25.00                 |  | 1/19/2011 | 
|3/12/2007 Warrants                             |  |                          | 84,750     |              | $ | 21.00                 |  | 3/12/2012 | 
|11/2/2007 Warrants                             |  |                          | 33,355     |              | $ | 33.20                 |  | 11/2/2012 | 
|                                               |  |                          |            |              |   |                       |  |           | 
|                                               |  |                          |            |              |   |                       |  |           | 
|Outstanding Balance at July 31, 2009           |  |                          | 136,843    |              |   |                       |  |           | 
|                                               |  |                          |            |              |   |                       |  |           | 
|Issued:                                        |  |                          |            |              |   |                       |  |           | 
|Class
          A Warrants                     |  |                          | 2,564,102  |              | $ | 1.12                  |  | 8/3/2014  | 
|Class
          C Warrants                     |  |                          | 2,564,104  |              | $ | 1.12                  |  | 2/26/2015 | 
|Selling
          Agent Warrants               |  |                          | 256,410    |              | $ | 1.12                  |  | 8/3/2014  | 
|Selling
          Agent Warrants               |  |                          | 256,410    |              | $ | 1.12                  |  | 2/26/2015 | 
|                                               |  |                          |            |              |   |                       |  |           | 
|Exercised:                                     |  |                          |            |              |   |                       |  |           | 
|Class
          A Warrants                     |  |                          | (1,929,032 | )            | $ | 0.01                  |  | 8/3/2014  | 
|Class
          A Warrants                     |  |                          | (635,070   | )            | $ | 1.00                  |  | 8/3/2014  | 
|Selling
          Agent Warrants               |  |                          | (256,410   | )            | $ | 1.12                  |  | 8/3/2014  | 
|                                               |  |                          |            |              |   |                       |  |           | 
|Cancelled:                                     |  |                          |            |              |   |                       |  |           | 
|2/18/2005
          Warrants                   |  |                          | (6,321     | )            | $ | 150.00                |  | 2/18/2010 | 
|7/16/2005
          Warrants                   |  |                          | (12,000    | )            | $ | 202.70                |  | 7/16/2010 | 
|                                               |  |                          |            |              |   |                       |  |           | 
|                                               |  |                          |            |              |   |                       |  |           | 
|Outstanding Balance at
          July 31, 2010 |  |                          | 2,939,036  |              |   |                       |  |           | 
|                                               |  |                          |            |              |   |                       |  |           | 
|                                               |  |                          |            |              |   |                       |  |           | 
|Exercised:                                     |  |                          |            |              |   |                       |  |           | 
|Class
          C Warrants                     |  |                          | (1,955,782 | )            | $ | 1.12                  |  | 2/26/2015 | 
|                                               |  |                          |            |              |   |                       |  |           | 
|Cancelled:                                     |  |                          |            |              |   |                       |  |           | 
|2/18/2005
          Warrants                   |  |                          |            |              |   |                       |  |           | 
|1/19/2006
          Warrants                   |  |                          | (417       | )            | $ | 25.00                 |  | 1/19/2011 | 
|                                               |  |                          |            |              |   |                       |  |           | 
|                                               |  |                          |            |              |   |                       |  |           | 
|Outstanding Balance at
          July 31, 2011 |  |                          | 982,837    |              |   |                       |  |           | 
|                                               |  |                          |            |              |   |                       |  |           | 

F-17

---



CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2011 AND 2010

The above table excludes our
Class B warrants for which 40,000 were issued and 10,000 were exercised during
the year ended July 31, 2010. During the fiscal year ended July 31, 2010, the
Company issued Class B Warrants to purchase up to $4,000,000 of principal
amount of the Companys 8% convertible notes on the same revised terms as
the August 2009 Debentures, upon the exercise of the Class B Warrants, the holder
of the Class B Warrant will be issued two Class C Warrants for each share of
the Companys
common stock that would be issued on the exercise date of the Class B Warrant
assuming the full conversion of the notes issued on such date, and Class C
warrants which entitle the warrant holder to purchase 10,256,416 shares of the
Companys Common Stock with an exercise price equal to the lesser of 105
% of the closing bid price of the Companys common stock or the exercise
price of the Class A Warrants. The Class B Warrants expire on January 30, 2013.

All of our outstanding
warrants (with the exception of the Class B warrants) contain a cashless
exercise provision, whereby, the holder is entitled to receive a number of
shares of common stock equal to (x) the excess of the market price of our
common stock as of the trading day immediately prior to the exercise date over
the total cash exercise price of the portion of the warrant then being
exercised, divided by (y) the market price of our common stock as of the
trading day immediately prior to the date of exercise.

For further information
regarding the Companys warrants please see Notes 9 and 10.

NOTE 7  NOTES RECEIVABLE

The
 Company entered into an Agreement to Rescind an 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
 $1,607 (principal of $1,239 and interest at 5% of $368) begin December 30,
 2004 and were to have continued monthly until the full balance was repaid.
 During fiscal 2009, the maker of the note stopped making payments and the
 Company reserved $83,100 at July 31, 2009. During fiscal 2010 the principal
 made only one payment of $1,610. The Company filed legal action and a
 Judgment was granted in favor of the Company. On March 28, 2011, the Company
 entered into a settlement agreement with Independent Computer Maintenance
 Corporation in which the Company received a payment of $10,000. This case is
 now closed.

NOTE 8  NOTES PAYABLE - OFFICER

On
July 28, 2011, Conolog Corporation issued a promissory note in favor of Robert
Benou in the principal amount of $191,350, consisting of amounts previously
advanced by Mr. Benou to the Company between January 24, 2011 and June 20,
2011. Mr. Benou is the Chief Executive Officer and Chairman of the Company. The
Note is payable on demand and does not bear interest. The Note is subject to
various default provisions and the occurrence of such an Event of Default will
cause the outstanding principal amount under the Note, together with any and
all other amounts payable under this Note, to become immediately due and
payable to Mr. Benou.

On July 28, 2011, Conolog Corporation issued a promissory note in favor
of Robert Benou in the principal amount of $65,000, consisting of amounts
advanced by Mr. Benou to the Company on July 12, 2011 and July 18, 2011. Mr.
Benou is the Chief Executive Officer and Chairman of the Company. The Note is
payable on demand and does not bear interest. The Note is subject to various
default provisions, and the occurrence of such an Event of Default will cause
the outstanding principal amount under the Note, together with any and all
other amounts payable under the Note, to become immediately due and payable to
Mr. Benou.

F-18

---



CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2011 AND 2010

NOTE 9 
CONVERTIBLE DEBENTURES August 2009
Debentures On August 3, 2009, the Company entered into a
Subscription Agreement pursuant to which it sold a $500,000 convertible
debenture on August 3, 2009, and a $500,000 debenture on September 24, 2009,
(collectively, the August 2009 Debentures). The initial interest rate of the
August 2009 debentures is 4% per annum and upon the shareholder Approval the
interest rate will be 8% per annum. The August 2009 Debentures have maturity
dates of 15 months from their closing dates. Interest shall accrue from the
closing date and shall be payable quarterly, in arrears, commencing six months
after the closing date. The August 2009 Debentures are convertible into shares
of the Companys common stock at a conversion price of $0.78 per share. Commencing six months
after the closing date, the Conversion Price shall be adjusted to the lesser of
the $0.78 or 75% of the lowest three closing bid prices for the Companys
common stock for the ten days prior to when the August 2009 Debentures are
converted. Additionally, the conversion price of the debenture is adjustable
upon the occurrence of certain events. Accordingly, the conversion feature of
the debenture was accounted for as a discount to the August 2009 debentures in
the amount of $1,000,000 at their commitment dates. In connection with the August 2009
Debentures, the Company issued Class A and Class B warrants. The Class A
warrants provide the holder with the option to purchase 2,564,102 shares of the
Companys common stock at an exercise price $1.12 per share. The Class A
warrants are exercisable for a period beginning on August 3, 2009 and terminate
on August 3, 2014. Additionally, the 40,000 Class B Warrants issued entitles
the holder until July 3, 2012, to purchase up to $4,000,000 of principal amount
of the Companys 8% notes on the same terms as the August 2009 Debentures. Upon
the exercise of the Class B Warrants, the holder of the Class B Warrant will be
issued two Class C Warrants for each share of the Companys common stock that
would be issued on the exercise date of the Class B Warrant assuming the full
conversion of the notes issued on such date. The Class C warrants entitle the warrant holder to purchase 10,256,416
shares of the Companys Common Stock with an exercise price equal to the lesser
of 105 % of the closing bid price of the Companys common stock or the exercise
price of the Class A Warrants. For each $100,000 principal of notes purchased
pursuant to the Class B Warrants, the holder will surrender 1,000 Class B
Warrants. The Class A and Class B Warrants were accounted for as derivative
liabilities resulting in a charge to derivative liability with a corresponding
charge to the statement of operations at the commitment date of the August 2009
Debenture in the amount of $16,975,954. The August
2009 Debentures cannot be converted to the extent such conversion would cause
the debenture holder, together with such holders affiliates, to beneficially
own in excess of 4.99% of the Companys outstanding common stock immediately
following such conversion. The Company
also entered into a Security Agreement pursuant to which it granted the Subscribers
a security interest in its assets. The Security Agreement will terminate when
the August 2009 debentures, including outstanding interest due thereon are
repaid. In accordance
with the terms of the August 2009 Debentures, the occurrence of any of the
following events shall, at the option of the note holder, make all sums of
principal and interest then remaining unpaid immediately due and payable, upon
demand:


|  |                                                                                                                                                                                                                                                                                                         
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Failure to pay principal or interest when due and such failure
 continues for a period of five (5) business days after the due date.                                                                                                                                                                    
| | The Company breaches any material covenant or other term or condition
 of the subscription agreement and convertible debenture in any material
 respect and such breach, if subject to cure, continues for a period of ten
 (10) business days after written notice to the Company from the note holder.
| | Breach of any material representation or warranty of the Company made
 in the subscription agreement or convertible debenture or in any agreement,
 statement or certificate given in writing shall be false or misleading in any
 material respect as of the date made and the closing Date.           
| | The Company or any Subsidiary of Company shall make an assignment for
 the benefit of creditors, or apply for or consent to the appointment of a
 receiver or trustee for them or for a substantial part of their property or
 business; or such a receiver or trustee shall otherwise be appointed.    

F-19

---



CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2011 AND 2010

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                          
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  | NOTE 9
CONVERTIBLE DEBENTURES (continued)                                                                                                                                                                                                                                                                                                                                                                                               
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | Any money judgment, writ or similar final process shall be entered or
 filed against the Company or any subsidiary of the Company or any of their
 property or other assets for more than $100,000, and shall remain unvacated,
 unbonded or unstayed for a period of forty-five (45) days.                                                                                                                                              
| | The Company shall have received a notice of default, which remains
 uncured for a period of more than twenty (20) business days, on the payment
 of any one or more debts or obligations aggregating in excess of One Hundred
 Thousand Dollars (US $100,000.00) beyond any applicable grace period;                                                                                                                                     
| | Bankruptcy, insolvency, reorganization or liquidation proceedings or
 other proceedings or relief under any bankruptcy law or any law, or the
 issuance of any notice in relation to such event, for the relief of debtors
 shall be instituted by or against the Company or any subsidiary of the
 Company and if instituted against them are not dismissed within sixty (60)
 days of initiation.                                      
| | Failure of the Common Stock to be quoted or listed on the NASDAQ
 National Market System; failure to comply with the requirements for continued
 listing on the Bulletin Board for a period of seven consecutive trading days;
 or notification from the Bulletin Board or the NASDAQ National Market System
 that the Company is not in compliance with the conditions for such continued
 listing on the NASDAQ National Market System.
| | An SEC or judicial stop trade order or a NASDAQ National Market
 System trading suspension with respect to Borrowers Common Stock that lasts
 for five or more consecutive trading days.                                                                                                                                                                                                                                                
| | The Companys failure to timely deliver Common Stock to the note
 holder pursuant to and in the form required by this convertible note or
 subscription agreement, and, if requested by Company, a replacement
 convertible note, and such failure continues for a period of five (5)
 business days after the due date.                                                                                                                 
| | The Company effectuates a reverse split of its Common Stock without
 twenty days prior written notice to the note holder.                                                                                                                                                                                                                                                                                                                
| | A default by the Company of a material term, covenant, warranty or
 undertaking of any agreement to which the Company and note holder are
 parties, or the occurrence of a material event of default under any such
 other agreement which is not cured after any required notice and/or cure
 period.                                                                                                                                   

In connection with the August 2009 Debentures
entered into on August 3, 2009, the Company paid Garden State Securities, Inc.,
the selling agent, a cash fee of $100,000 and issued warrants to purchase
256,410 shares of the Companys common stock. The Company calculated the fair
value of the warrants on August 3, 2009 at $231,025 using the Black-Scholes
option pricing model. The assumptions used in computing the fair value are a
closing stock price of $1.14, expected volatility of 108% over the remaining
contractual life of five years and a risk free rate of 2.66%. The Company
recorded the cash fee and the fair value of the warrants issued to Garden State
Securities, Inc. plus $40,000 fee paid to an attorney totaling $371,025 as
deferred financing costs. The deferred financing costs are being amortized over
the term of the August 2009 Debenture agreement. As of July 31, 2011, the
remaining balance was $0. At various times during the fiscal year ended July 31, 2010, an
aggregate $1,000,000 of the August 2009 debentures and $36,968 of accrued
interest were converted into 1,329,447 shares of the Companys common stock. As
of July31, 2011 and July 31, 2010 the remaining balance of the August 2009
debentures were $0. February 2010
Debentures On February 24, 2010, holders of the Class B warrants exercised 10,000
Class B Warrants to purchase $1,000,000 in convertible notes (February 2010
Debentures). The February 2010 Debentures were issued under the same terms as
the August 2009 Debentures. Accordingly,
the conversion feature of the debenture was accounted for as a liability
resulting in a discount to the February 2010 debentures in the amount of
$1,000,000 at their commitment dates. With the exercise of the 10,000
Class B warrants, the Company also issued Class C Warrants to purchase
2,564,104 shares of the Companys common stock at an exercise price of $1.12. In connection with the exercise of the Class
B warrants and pursuant to a Selling Agent Agreement the Company paid Garden
State Securities, Inc., a cash fee of $100,000 and issued Garden State additional
warrants to purchase 256,410 shares of the Companys common stock. The Company
calculated the fair value of the warrants on March 3, 2010 to be $380,256 using
the Black-Scholes option pricing model. The assumptions used in computing the
fair value are a closing stock price of $1.12, expected volatility of 108% over
the remaining contractual life of five years and a risk free rate of


F-20

---



CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2011 AND 2010

2.27%. The Company recorded the cash fee and
the fair value of the warrants totaling $480,256 issued to Garden State as
deferred financing costs. The deferred financing costs are being amortized over
the term of the February 2010 Debenture agreement. As of July 31, 2011 the
remaining balance was $0.

F-21

---



CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2011 AND 2010

NOTE 9 
CONVERTIBLE DEBENTURES(continued)

February 2010
Debentures(continued)

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

On June 18, 2010, the Company entered into an
amendment with the holders of its outstanding convertible debentures and
warrants. Pursuant to the amendments, the parties agreed to the following: (i)
remove the above provision which allowed for an adjustment to the conversion
price of the debentures or exercise price of the debentures, (ii) the
conversion feature of the February 2010 debentures were adjusted to a fixed
conversion price $0.60, (iii) all future Class C Common Stock Purchase Warrants
issued upon exercise of the Class B Common warrants shall have an exercise
price of $0.50 per share, (iv) the exercise price of the outstanding Class C
warrants shall be adjusted to $0.50 per share, (v) the exercise price of the
outstanding selling agent warrants shall be adjusted to $0.60 per share.

As a result of the June 18, 2010 amendments
the embedded conversion features of the debentures and the warrants were
considered indexed to the Companys stock. Accordingly, the outstanding
derivative liabilities were reclassified to additional paid in capital at their
fair value on June 18, 2010 with the change in fair value being recorded in the
statement of operations.

The February 2010 Debentures cannot be converted to the extent such
conversion would cause the debenture holder, together with such holders
affiliates, to beneficially own in excess of 4.99% of the Companys outstanding
common stock immediately following such conversion. The Company also entered into a Security Agreement pursuant to which it
granted the Subscribers a security interest in its assets. The Security
Agreement will terminate when the February 2010 Debentures, including
outstanding interest due thereon are repaid.

In accordance with the terms of the February 2010 Debentures, the
occurrence of any of the following events shall, at the option of the note
holder, make all sums of principal and interest then remaining unpaid
immediately due and payable, upon demand:

|  |                                                                                                                                                                                                                                                                                                                                              
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Failure to pay principal or
          interest when due and such failure continues for a period of five (5)
          business days after the due date.                                                                                                                                                                                      
| | The Company breaches any material
          covenant or other term or condition of the subscription agreement and
          convertible debenture in any material respect and such breach, if subject
          to cure, continues for a period of ten (10) business days after written
          notice to the Company from the note holder.
| | Breach of any material representation
          or warranty of the Company made in the subscription agreement or convertible
          debenture or in any agreement, statement or certificate given in writing
          shall be false or misleading in any material respect as of the date
          made and the closing Date.           
| | The Company or any Subsidiary
          of Company shall make an assignment for the benefit of creditors, or
          apply for or consent to the appointment of a receiver or trustee for
          them or for a substantial part of their property or business; or such
          a receiver or trustee shall otherwise be appointed.    
| | Any money judgment, writ or
          similar final process shall be entered or filed against the Company
          or any subsidiary of the Company or any of their property or other
          assets for more than $100,000, and shall remain unvacated, unbonded
          or unstayed for a period of forty-five (45) days.             
| | The Company shall have received
          a notice of default, which remains uncured for a period of more than
          twenty (20) business days, on the payment of any one or more debts
          or obligations aggregating in excess of One Hundred Thousand Dollars
          (US $100,000.00) beyond any applicable grace period;    
| | Bankruptcy, insolvency, reorganization
          or liquidation proceedings or other proceedings or relief under any
          bankruptcy law or any law, or the issuance of any notice in relation
          to such event, for the relief of debtors shall                                                                                 

F-22

---



CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2011 AND 2010

NOTE 9 
CONVERTIBLE DEBENTURES (continued)

February 2010
Debentures(continued)


      Be instituted by or against
            the Company or any subsidiary of the Company and if instituted against
      them are not dismissed within sixty (60) days of initiation
      Failure of the Common Stock
            to be quoted or listed on The NASDAQ Stock Market; failure to comply
            with the requirements for continued listing on the Bulletin Board
            for a period of seven consecutive trading days; or notification from
            the Bulletin Board or NASDAQ that the Company is not in compliance
            with the conditions for such continued listing on The NASDAQ Capital
            Market.
      An SEC or judicial stop trade
            order or a NASDAQ National Market System trading suspension with
            respect to Borrowers Common Stock that lasts for five or more
            consecutive trading days.
      The Companys failure
            to timely deliver Common Stock to the note holder pursuant to and
            in the form required by this convertible note or subscription agreement,
            and, if requested by Company, a replacement convertible note, and
            such failure continues for a period of five (5) business days after
            the due date.
      The Company effectuates a
            reverse split of its Common Stock without twenty days prior written
            notice to the note holder.
      A default by the Company of
            a material term, covenant, warranty or undertaking of any agreement
            to which the Company and note holder are parties, or the occurrence
            of a material event of default under any such other agreement which
            is not cured after any required notice and/or cure period.


On December 1, 2010, the Company reduced the conversion price on its
February 2010 debentures from $0.60 to $0.30. As a result of the reduction in
the conversion price, an aggregate $1,000,000 of the February 2010 Debentures
and $63,790 of accrued interest were converted into an aggregate of 3,562,999
shares of common stock. The Company recognized an induced conversion cost of
$649,147 related to these conversions.

As of July 30, 2011 the remaining balance of
the February 2010 Debentures were $0.

Event
of Default

On June 23, 2010, the Company received a NASDAQ Staff Deficiency Letter. As a result
of the NASDAQ Staff Deficiency Letters, an event of default under the February
2010 Debenture occurred. The note holders did not exercise their rights upon an
event of default and in December 2010 the Company received a waiver from note
holders.

NOTE
10  LOSS ON DERIVATIVE FINANCIAL INSTRUMENTS

Embedded Conversion Feature of August 2009
Debentures

The August 2009 Debentures contained a provision whereby we have the
obligation to reduce the conversion price if we offer, issue or agree to issue
any common stock or securities into or exercisable for shares of common stock
to any person or entity at a price per share or conversion or exercise price
per share which is less than the conversion price of the August 2009
Debentures. Accordingly the embedded conversion feature was accounted for as a
derivative liability. The Company calculated the fair value of the embedded
conversion feature on August 3, 2009 and September 24, 2009 (commitment dates)
to be $1,466,538 ($1,000,000 of which was recorded as debt discount and
$466,538 was recorded as a loss on derivative financial instruments) using the
Black-Scholes option pricing model. The weighted average assumptions used in
computing the fair values are a closing stock price of $1.83, expected
volatility of 117.4% over the remaining contractual life of one year and five
months and a risk free rate of 2.46%. At various times throughout the three
months ended October 31, 2009, the holders of the August 2009 Debentures
converted $221,256 of the debentures into common shares of the Companys
stock. At each conversion date the Company marked to market the fair value of
the derivative and reclassified it to additional paid in capital. The amounts
reclassified to additional paid in capital aggregated $328,395 and were
calculated using the Black-Scholes option pricing. The weighted average
assumptions used in computing the fair value are a closing stock price of
$1.99, expected volatility of 117.4% over the remaining contractual life of 1
year and a risk free rate of 2.37%. The fair value of the derivative increased
by $277,475 during the year ended July 31, 2010, which
has been recorded in the statements of operations.

F-23

---



CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2011 AND 2010



NOTE 10  LOSS ON
DERIVATIVE FINANCIAL INSTRUMENTS(continued)

August 2009 Selling Agent Warrants

In connection
with the August 2009 debentures, the Company issued to the selling agent,
warrants to purchase 256,410 shares of common stock at an exercise price of
$1.12. Under the original terms of the August 2009 Selling Agent Warrants we
had the obligation to reduce the exercise price if we offer, issue or agree to
issue any common stock or securities into or exercisable for shares of common
stock to any person or entity at a price per share or conversion or exercise
price per share which is less than the exercise price of the August 2009
Selling Agent Warrants. Accordingly the warrants were accounted for as a
derivative liability. The Company calculated the fair value of the warrants on
August 3, 2009 at $231,025 using the Black-Scholes option pricing model. The
assumptions used in computing the fair value are a closing stock price of
$1.14, expected volatility of 108% over the remaining contractual life of five
years and a risk free rate of 2.66%. The fair value of the derivative increased
by $487,205 during the year ended July 31, 2010, respectively, which has been
recorded in the statements of operations.

The February
2010 Debentures contain a provision whereby we have the obligation to reduce the conversion price if we offer, issue or agree to
issue any common stock or securities into or exercisable for shares of common stock to any person or entity at a price per share
or conversion or exercise price per share which is less than the conversion price of the February 2010 Debentures. Accordingly
the embedded conversion feature was accounted for as a derivative liability. The Company calculated the fair value of the embedded
conversion feature on February 26, 2010 and March 3, 2010 (commitment dates) to be $1,714,462 using the Black-Scholes option pricing
model. The weighted average assumptions used in computing the fair values are a closing stock price of $1.86, expected volatility
of 240% over the remaining contractual life of one year and six months and a risk free rate of 2.28%. On June 18, 2010, the February
2010 Debentures were amended whereby the above anti-dilution provision was eliminated. As a result the embedded conversion feature
of the February 2010 Debentures were no longer accounted for as a derivative. The Company calculated the fair value of the embedded
conversion feature on June 18, 2010 using the Black-Scholes option pricing model. The weighted average assumptions used in computing
the fair value as of June 18, 2010 are a closing stock price of $1.19, expected volatility of 151.7% over the remaining contractual
life of one year and two months and a risk free rate of 0.30%. The fair value of the derivative at June 18, 2010 was $1,032,667
which was reclassified to additional paid in capital. The fair value of the derivative decreased by $681,795 which has been recorded
in the statement of operations for the year ended July 31, 2010.

February
2010 Selling Agent Warrants

In connection with the February
2010 debentures, the Company issued to the selling agent, warrants to purchase
256,410 shares of common stock at an exercise price of $1.12. Under the terms
of the February 2010 Selling Agent Warrants we have the obligation to reduce
the exercise price if we offer, issue or agree to issue any common stock or
securities into or exercisable for shares of common stock to any person or
entity at a price per share or conversion or exercise price per share which is
less than the exercise price of the February 2010 Selling Agent Warrants.
Accordingly the warrants were accounted for as a derivative liability. The
Company calculated the fair value of the warrants on February 26, 2010 at
$380,256 using the Black-Scholes option pricing model. The assumptions used in
computing the fair value are a closing stock price of $1.98, expected
volatility of 108% over the remaining contractual life of five years and a risk
free rate of 2.30%. On June 18, 2010, the February 2010 Selling Agent Warrants
were amended whereby the above anti-dilution provision was eliminated. As a
result the warrants were no longer accounted for as a derivative. The Company
calculated the fair value of the 256,410 exercised warrants on June 18, 2010
using the Black-Scholes option pricing model. The assumptions used in computing
the fair value as of June 18, 2010 are a closing stock price of $1.12, expected
volatility of 143.4% over the remaining contractual life of four years and
eight months and a risk free rate of 2.04%. The fair value of the derivative at
June 18, 2010 was $271,538 which was reclassified to additional paid in
capital. The fair value of the derivative decreased by $108,717 which has been
recorded in the statement of operations for the year ended July 31, 2010.

Class A Warrants

In connection with the August 2009 debentures, the Company issued Class
A Warrants to purchase 2,564,102 shares of common stock. The warrants were
issued with an exercise price of $1.12. Under the terms of the Class A Warrants
we have the obligation to reduce the exercise price if we offer, issue or agree
to issue any common stock or securities into or exercisable for shares of
common stock to any person or entity at a price per share or conversion or
exercise price per share which is less than the exercise price of the Class A
Warrants. Accordingly the warrants were accounted for as a derivative
liability. The Company calculated the fair value of the warrants on August 3,
2009 at $2,310,256 using the Black-Scholes option pricing model. The
assumptions used in computing the fair value are a closing stock price of
$1.14, expected volatility of 108% over the remaining contractual life of five
years and a risk free rate of 2.66%. The fair value of the derivative increased
by $1,332,305 during the year ended July 31, 2010 which has been recorded in
the statements of operations.

Class B Warrants

In connection with the August 2009 debentures, the Company issued Class
B Warrants to purchase up to $4,000,000 of principal amount of the Companys 8%
convertible notes on the same terms as the August 2009 debentures, upon the
exercise of the Class B Warrants, the holder of the Class B Warrant will be
issued two Class C Warrants for each share of the Companys common stock that
would be issued on the exercise date of the Class B Warrant assuming the full
conversion of the notes issued on such date, and Class C warrants which entitle
the warrant holder to purchase

F-24

---



CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2011 AND 2010

10,256,408 shares of the Companys Common Stock with and exercise price
equal to the lesser of 105 % of the closing bid price of the Companys common
stock or the exercise price of the Class A Warrants. The financial instruments
underlying the Class B Warrants contain provisions whereby we will have the
obligation to reduce the exercise price if we offer, issue or agree to issue
any common stock or securities into or exercisable for shares of common stock
to any person or entity at a price per share or conversion or exercise price per
share which is less than the exercise price of the Class C Warrants or
conversion price of the 8% convertible notes. Accordingly the Class B Warrants
were accounted for as a derivative liability. The Company calculated the fair
value of the Class B Warrants on August 3, 2009 at $14,665,698 consisting of a
fair value for the underlying Class C Warrants of $10,369,894 and a fair value
for the underlying embedded conversion feature of the 8% convertible notes of
$4,295,804. The Company used the Black-Scholes option pricing model. The
assumptions used in computing the fair value of the Class C Warrants are a
closing stock price of $1.14, expected volatility of 138.26% over the remaining
contractual life of five years and a risk free rate of 2.66%. The assumptions
used in computing the fair value of the embedded conversion feature of the 8%
convertible notes are a closing stock price of $1.14, expected volatility
159.87% over the remaining contractual life of one year and six months and a
risk free rate of 1.18%. The fair value of the derivative decreased by
$3,218,370 during the years ended July 31, 2010 which has been recorded in the
statements of operations.

F-25

---



CONOLOG CORPORATION AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
FOR THE YEARS ENDED JULY 31, 2011 AND 2010

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | NOTE 10 
 LOSS ON DERIVATIVE FINANCIAL INSTRUMENTS (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | Class C
 Warrants                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | In
 connection with the February 2010 debentures, the Company issued Class C
 Warrants to purchase 2,564,102 shares of common stock. The warrants were
 issued with an exercise price of $1.12. Under the terms of the Class C
 Warrants we have the obligation to reduce the exercise price if we offer,
 issue or agree to issue any common stock or securities into or exercisable
 for shares of common stock to any person or entity at a price per share or
 conversion or exercise price per share which is less than the exercise price
 of the Class C Warrants. Accordingly the warrants were accounted for as a
 derivative liability. The Company calculated the fair value of the warrants
 on February 26, 2010 and March 3, 2010 (commitment dates) at $3,974,618 using
 the Black-Scholes option pricing model. The weighted average assumptions used
 in computing the fair value are a closing stock price of $1.86, expected
 volatility of 108% over the remaining contractual life of five years and a
 risk free rate of 2.28%. On June 18, 2010, the Class C Warrants were amended
 whereby the above anti-dilution provision was eliminated. As a result the
 warrants were no longer accounted for as a derivative. The Company calculated
 the fair value of the 2,564,102 Class C warrants on June 18, 2010 using the
 Black-Scholes option pricing model. The weighted average assumptions used in
 computing the fair value as of June 18, 2010 are a closing stock price of
 $1.19, expected volatility of 143.4% over the remaining contractual life of
 four years and eight months and a risk free rate of 2.04%. The fair value of
 the derivative at June 18, 2010 was $2,713,745 which was reclassified to
 additional paid in capital. The fair value of the derivative decreased by
 $1,260,873 which has been recorded in the statement of operations for the
 year ended July 31, 2010.On December 8, 2010, the Company reduced the
 exercise price of its outstanding Class C Warrants from $0.50 to $0.10.

The following
is a roll forward schedule of the Company’s derivative liability and components of the embedded conversion features for fiscal
year ending 2010. There was no activity during fiscal year ending 2011:


| |                                                                                              |  |            |   |           |   |           |  | Number of               |   |               |           |            |   |             |  
| | -------------------------------------------------------------------------------------------- |  | ---------- | - | --------- | - | --------- |  | ----------------------- | - | ------------- | --------- | ---------- | - | ----------- | -
| |                                                                                              |  | Number of  |   | Number of |   | Number of |  | Warrants                |   | Face Value of |           | Total      |  
| |                                                                                              |  | Class A    |   | Class B   |   | Class C   |  | Issued to               |   | Convertible   |           | Derivative |  
| |                                                                                              |  | Warrants   |   | Warrants  |   | Warrants  |  | Selling
          Agent |   | Debt          |           | Liability  |  
| |                                                                                              |  |            |   |           |   |           |  |                         |   |               |           |            |   |             |  
| | Balance 8/1/09                                                                               |  |           |   |          |   |          |  |                        |   | $             |          |            | $ |            |  
| | Granted                                                                                      |  | 2,564,102  |   | 40,000    |   |          |  | 256,410                 |   |               |          |            |   | (17,206,979 | )
| | Debt Issuance                                                                                |  |           |   |          |   |          |  |                        |   |               | 1,000,000 |            |   | (1,466,538  | )
| | Debt Conversion                                                                              |  |           |   |          |   |          |  |                        |   |               | (221,256  | )          |   | 328,395     |  
| | Change in Fair Value of Derivative                                                           |  |           |   |          |   |          |  |                        |   |               |          |            |   | (7,107,807  | )
| | Balance 10/31/09                                                                             |  | 2,564,102  |   | 40,000    |   |          |  | 256,410                 |   |               | 778,744   |            |   | (25,452,929 | )
| |                                                                                              |  |            |   |           |   |           |  |                         |   |               |           |            |   |             |  
| | Reclassification due to Change in Exercise Price To
          $0.01 for 1,929,032 A Warrants |  |           |   |          |   |          |  |                        |   |               |          |            |   | 2,723,600   |  
| | Exercised                                                                                    |  | (635,070   | ) |          |   |          |  |                        |   |               |          |            |   | 918,961     |  
| | Debt Conversion                                                                              |  |           |   |          |   |          |  |                        |   |               | (489,344  | )          |   | 926,993     |  
| | Change in Fair Value of Derivative                                                           |  |           |   |          |   |          |  |                        |   |               |          |            |   | (9,178,209  | )
| | Balance 1/31/10                                                                              |  | 1,929,032  |   | 40,000    |   |          |  | 256,410                 |   |               | 289,400   |            |   | (30,061,583 | )
| |                                                                                              |  |            |   |           |   |           |  |                         |   |               |           |            |   |             |  
| | Exercise (no impact as these were reduced to $0.01)                                          |  | (1,929,032 | ) |          |   |          |  |                        |   |               |          |            |   |            |  
| | Exercise                                                                                     |  |           |   | (10,000   | ) |          |  | (256,410                | ) |               |          |            |   | 718,230     |  
| | Debt Issuance                                                                                |  |           |   |          |   |          |  |                        |   |               | 1,000,000 |            |   | (1,714,462  | )
| | Debt Conversion                                                                              |  |           |   |          |   |          |  |                        |   |               | (289,400  | )          |   | 488,625     |  
| | Granted                                                                                      |  |           |   |          |   | 2,564,104 |  | 256,410                 |   |               |          |            |   | (4,354,874  | )
| | Change in Fair Value of Derivative                                                           |  |           |   |          |   |          |  |                        |   |               |          |            |   | 13,743,309  |  
| | Balance 4/30/10                                                                              |  |           |   | 30,000    |   | 2,564,104 |  | 256,410                 |   |               | 1,000,000 |            |   | (21,180,755 | )
| |                                                                                              |  |            |   |           |   |           |  |                         |   |               |           |            |   |             |  
| | Change in Fair Value of Derivative                                                           |  |           |   |          |   |          |  |                        |   |               |          |            |   | 5,715,478   |  
| | Reclassification to APIC                                                                     |  |           |   |          |   |          |  |                        |   |               |          |            |   | 15,465,277  |  
| | Balance 7/31/10                                                                              |  |           |   | 30,000    |   | 2,564,104 |  | 256,410                 |   | $             | 1,000,000 |            | $ |            |  



Fair Value Assumptions Used in
Accounting for Derivative Warrant Liability


The Company has determined its derivative warrant liabilities
to be a Level 2 fair value measurement and used the Black-Scholes pricing model to calculate the fair value at the adoption and
for the first, second and third quarters of the fiscal year ended July 31, 2010. Key weighted average assumptions used in the Black-Scholes
fair value calculation were as follows:




| |                          |  | July 31, |  | April 30, |   | January 31, |   | October 31, |  
| | ------------------------ |  | -------- |  | --------- | - | ----------- | - | ----------- | -
| |                          |  | 2010*    |  | 2010      |   | 2010        |   | 2009        |  
| |                          |  |          |  |           |   |             |   |             |  
| | Expected term (in years) |  | N/A      |  | 3.94      |   | 3.86        |   | 3.93        |  
| | Volatility               |  | N/A      |  | 143.34    | % | 150.82      | % | 141.71      | %
| | Risk-free interest rate  |  | N/A      |  | 2.10      | % | 1.88        | % | 1.96        | %
| | Dividend yield           |  | N/A      |  | 0.00      | % | 0.00        | % | 0.00        | %
| |                          |  |          |  |           |   |             |   |             |  

* Inputs are not applicable as there are no derivative
liabilities outstanding at July 31, 2010.


| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | NOTE 11 
 STOCK-BASED COMPENSATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | 2002 Stock
 Option Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | On
 April 23, 2002, the Board of Directors of the Company adopted the 2002 Stock
 Option Plan (the 2002 Plan). Under the 2002 Plan, the Company may grant up
 to 158 shares of common stock as either incentive stock options under Section
 422A of the Internal Revenue Code or nonqualified stock options. Subject to
 the terms of the 2002 Plan, options may be granted to eligible persons at any
 time and under such terms and conditions as determined by the 2002 Stock
 Option Committee (the Committee). Unless otherwise determined by the
 Committee, each stock option shall terminate no later than ten years (or such
 shorter time as may be fixed by the Committee) after the date in which it was
 granted. The exercise price for incentive stock options must be at least one
 hundred percent (100%) of the fair market value of common stock as determined
 on the date of the grant. The exercise price for nonqualified stock options
 may not be granted at less than eighty-five percent (85%) of the fair market
 value of the shares on the date of grant.As of July 31, 2011 and 2010, there
 had been no shares granted under the 2002 Plan.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | Stock
 Incentive Plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | The
 Company has Stock Incentive Plans pursuant to which the Company may grant a
 number of shares of the Companys Common Stock to the Companys officers,
 directors, employees and consultants. The Companys 2008 and 2009 Stock
 Incentive Plan was approved by its shareholders, authorizing the Board to,
 from time-to-time, issue up to 800,000 shares of the Companys Common Stock
 to the Companys officers, directors, employees and consultants under each
 plan.The specific number of shares of the Companys Common Stock granted to
 any officer, director employee or consultant will be determined by the Board. Pursuant to the Corporations 2009 Stock Incentive Plan, 800,000 common
 shares of Company stock were issued to current officers, directors, employees
 and consultants. These shares were recorded at a value of $1,536,000 for the
 year ended July 31, 2010. The shares are fully vested and non-cancelable when
 granted therefore, the entire amount of stock grant compensation expense was
 recognized at the date the shares were authorized by the board of directors
 to be granted.                                            

F-26

---



CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
FOR THE YEARS ENDED JULY 31, 2011 AND 2010

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Securities
 Issued for Services                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | During
 the fiscal year ended July 31, 2010, the Company issued a total of 265,000
 shares of common stock to non-employees for services rendered during the
 period or to be rendered in future periods. These services were valued at
 $508,800. Services to be performed beyond fiscal year 2010, will be amortized
 and expensed to general and administrative expenses. The unamortized amount
 of prepaid services at July 31, 2011 is $0. These services were valued at
 their fair value of consideration received at the date of the agreement in
 accordance with ASC 505 Accounting Recognition for Certain Transactions
 Involving Equity Instruments Granted to Other Than Employees.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | NOTE 12 -
 MAJOR CUSTOMERS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | The following summarizes
 sales to major customers (each 10% or more of net sales) by the Company:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

|           |  |               |           |                           |   |                     |  |                     |   |  |  |      |  
|---------- |  | ------------- | --------- | ------------------------- | - | ------------------- |  | ------------------- | - |  |  | ---- | -
|Year Ended |  | Total Revenue |           | Sales to Major
 Customers |   | Number of Customers |  | Percentage of Total |  
|           |  |               |           |                           |   |                     |  |                     |   |  |  |      |  
|2011       |  | $             | 1,691,852 |                           | $ | 1,373,787           |  |                     | 3 |  |  | 81.2 | %
|2010       |  | $             | 1,178,673 |                           | $ | 509,796             |  |                     | 2 |  |  | 43.3 | %

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | NOTE 13 
 COMMITMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | Total
 rental expense for all operating leases of the Company amounted to
 approximately $66,120 and $53,540 during the years ended July 31, 2011 and
 2010, respectively. The Company currently leases its facilities on a
 month-to-month basis                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | The
 Companys Chief Executive Officer is serving under an employment agreement
 commencing June 1, 1997 and ending May 31, 2002, which pursuant to its terms,
 renews for one-year terms until cancelled by either the Company or the Chief
 Executive Officer. His annual base salary as of July 31, 2011 was $450,000
 and increases by $20,000 annually on January 1st of each year. In
 addition, the Chief Executive Officer is entitled to an annual bonus equal to
 6% of the Companys annual income before income tax provision as
 stated in its annual Form 10-K. The employment agreement also entitles Chief
 Executive Officer to the use of an automobile and to employee benefit plans,
 such as; life, health, pension, profit sharing and other plans. Under the employment
 agreement, employment terminates upon death or disability of the employee and
 the employee may be terminated by the Company for cause. During the year
 ended July 31, 2011, the Companys CEO forgave $105,000 of his accrued
 salary which was recorded as an addition to paid-in-capital. For the year ended
 July 31, 2011 $334,167 of the CEOs salary has been accrued.                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | The
 Companys President and Chief Operating Officer is serving under an
 employment agreement commencing June 1, 1997 and ending May 31, 2002, which
 pursuant to its terms, renews for one-year terms until cancelled by either
 the Company or employee. His annual base salary as of July 31, 2011 was
 $260,200 and he receives annual increases of $6,000 on January 1st
 of each year. The Companys President and Chief Operating Officer is entitled
 to an annual bonus equal to 3% of the Companys annual income before income
 tax provision as stated in its annual Form 10-K. The employment agreement
 also entitles him to the use of an automobile and to employee benefit plans,
 such as life, health, pension, profit sharing and other plans. Under the
 employment agreement, employment is terminated upon death or disability of
 the employee and employee may be terminated by the Company for cause. During
 the year ended July 31, 2011 the Companys President and Chief Operating
 Officer forgave $19,208 of his accrued salary which has been recorded as an
 addition to paid-in-capital. For the year ended July 31, 2011, $169,150 of
 the Companys President and Chief Operating Officers salary has been
 accrued.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | The
 Company has an outstanding balance with its former auditors Withum, Smith
 & Brown (WS+B) and has agreed to pay the balance of $129,500 as
 follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Monthly installment
 payments of $1,000 commencing March 25, 2011.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | 8% of all additional net financing
    received by Conolog over the next 22 months beginning February 25, 2011 and
     ending December 31, 2012.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | Payment of $36,000 has been made based on the
         additional financing.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | If there is still a remaining balance after December 31, 2012, the balance
         will be paid in Conolog common stock at the fair market value of the
         stock on December 31, 2012.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |   | On September 29, 2010 the Company received
         a subpoena from the Securities and Exchange Commission (the Commission)
    in connection with an informal fact finding inquiry, which as noted by the
         Commission should not be construed as an indication by the Commission
         or its staff that any violation of the law has occurred or as an adverse
    reflection upon any person, entity or security. The Company  responded
         to the subpoena in November 2010. From  November 2010 through the
         date of the filing of this Form 10-K, there has been no further correspondence
    from the Commission with respect to the subpoena.

F-27

---



CONOLOG CORPORATION AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFOR
THE YEARS ENDED JULY 31, 2011 AND 2010

| |                                                            
| | -----------------------------------------------------------
| | NOTE 14 
 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

|                                                 |  |                            |           |                            |   |           | 
|------------------------------------------------ |  | -------------------------- | --------- | -------------------------- | - | --------- | 
|                                                 |  | Year
 Ended
 July 31, 2011 |           | Year
 Ended
 July 31, 2010 |  
|CASH PAID
 DURING THE PERIOD FOR:                |  |                            |           |                            |   |           | 
|Interest expense                                 |  | $                          |          |                            | $ |          | 
|                                                 |  |                            |           |                            |   |           | 
|Income Taxes                                     |  | $                          |          |                            | $ | 11,099    | 
|                                                 |  |                            |           |                            |   |           | 
|SUPPLEMENTAL
 DISCLOSURE OF NONCASH ACTIVITIES:  |  |                            |           |                            |   |           | 
|Debt converted to equity                         |  | $                          | 1,000,000 |                            | $ | 1,037,949 | 
|                                                 |  |                            |           |                            |   |           | 
|Common stock issued for
 services to be provided |  |                            |          |                            | $ | 508,800   | 
|                                                 |  |                            |           |                            |   |           | 
|Common stock issued for
 accrued interest        |  | $                          | 63,790    |                            | $ | 39,545    | 
|                                                 |  |                            |           |                            |   |           | 
|Warrants granted to broker                       |  | $                          |          |                            | $ | 611,281   | 
|                                                 |  |                            |           |                            |   |           | 
|Cashless exercise of
 warrants                   |  | $                          | 16,467    |                            | $ |          | 
|                                                 |  |                            |           |                            |   |           | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | NOTE 15 -
 SUBSEQUENT EVENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | On
 August 12, 2011 the Board of Directors of Conolog Corporation appointed Mr.
 Michael Horn as a member of the Board. In connection with the appointment, on
 August 15, 2011, the Company entered into a Director Agreement with Horn. The
 term of the Director Agreement is from August 15, 2011, up to the Companys
 next annual stockholders meeting. The Director Agreement may, at the option
 of the Board, be automatically renewed on such date that Horn is re-elected
 to the Board. Horn is not due any compensation under the Director Agreement.
 On October 6, 2011, the Company completed its initial closing of the Private
 Placement. At the closing, the Company issued and sold an aggregate of
 5,114,072 shares to 14 accredited investors at a purchase price of $0.10 per
 share receiving proceeds of $511,407. The subscription agreement contains
 representations and warranties that the parties made to, and solely for the
 benefit of, the other in the context of all of the terms and conditions of
 that agreement and in the context of the specific relationship between the
 parties. The provisions of the subscription agreement, including the
 representations and warranties contained therein, are not for the benefit of
 any party other than the parties to such agreements, and are not intended as
 documents for investors and the public to obtain factual information about
 the current state of affairs of the parties to those documents and their
 agreements.These securities were not registered under the Securities Act of
 1933, as amended (the Securities Act), but qualified for exemption under
 Section 4(2) of the Securities Act. The securities were exempt from
 registration under Section 4(2) of the Securities Act because the issuance of
 such securities by the Company did not involve a public offering, as
 defined in Section 4(2) of the Securities Act, due to the insubstantial
 number of persons involved in the transaction, size of
 the offering, manner of the offering and number of securities offered. The
 Company did not undertake an offering in which it sold a high number of
 securities to a high number of investors. In addition, these shareholders had
 the necessary
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

F-28

---



CONOLOG CORPORATION AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
FOR THE YEARS ENDED JULY 31, 2011 AND 2010

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | NOTE 15 - SUBSEQUENT EVENTS (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | investment intent as required by Section 4(2) of the Securities Act
 since they agreed to, and received, share certificates bearing a legend
 stating that such securities are restricted pursuant to Rule 144 of the
 Securities Act. This restriction ensures that these securities would not be
 immediately redistributed into the market and therefore not be part of a public
 offering. Based on an analysis of the above factors, the Company has met the
 requirements to qualify for exemption under Section 4(2) of the Securities
 Act.

During the period August 1, 2011 through November 15, 2011
the Company repaid an aggregate of $106,350 of the notes payable to an officer (see
Note 8). The balance owed at November 15, 2011 was $150,000.

F-29

---