0000023503 2012-07-31 0000023503 2011-07-31 0000023503 cnlg:SeriesACumulativePreferredStockMember 2012-07-31 0000023503 cnlg:SeriesACumulativePreferredStockMember 2011-07-31 0000023503 cnlg:SeriesBCumulativePreferredStockMember 2012-07-31 0000023503 cnlg:SeriesBCumulativePreferredStockMember 2011-07-31 0000023503 2011-08-01 2012-07-31 0000023503 2010-08-01 2011-07-31 0000023503 us-gaap:SeriesAPreferredStockMember 2010-07-31 0000023503 us-gaap:SeriesBPreferredStockMember 2010-07-31 0000023503 us-gaap:CommonStockMember 2010-07-31 0000023503 us-gaap:AdditionalPaidInCapitalMember 2010-07-31 0000023503 us-gaap:RetainedEarningsMember 2010-07-31 0000023503 us-gaap:TreasuryStockMember 2010-07-31 0000023503 2010-07-31 0000023503 us-gaap:CommonStockMember 2010-08-01 2011-07-31 0000023503 us-gaap:AdditionalPaidInCapitalMember 2010-08-01 2011-07-31 0000023503 us-gaap:RetainedEarningsMember 2010-08-01 2011-07-31 0000023503 us-gaap:SeriesAPreferredStockMember 2011-07-31 0000023503 us-gaap:SeriesBPreferredStockMember 2011-07-31 0000023503 us-gaap:CommonStockMember 2011-07-31 0000023503 us-gaap:AdditionalPaidInCapitalMember 2011-07-31 0000023503 us-gaap:RetainedEarningsMember 2011-07-31 0000023503 us-gaap:TreasuryStockMember 2011-07-31 0000023503 us-gaap:CommonStockMember 2011-08-01 2012-07-31 0000023503 us-gaap:AdditionalPaidInCapitalMember 2011-08-01 2012-07-31 0000023503 us-gaap:RetainedEarningsMember 2011-08-01 2012-07-31 0000023503 us-gaap:SeriesAPreferredStockMember 2012-07-31 0000023503 us-gaap:SeriesBPreferredStockMember 2012-07-31 0000023503 us-gaap:CommonStockMember 2012-07-31 0000023503 us-gaap:AdditionalPaidInCapitalMember 2012-07-31 0000023503 us-gaap:RetainedEarningsMember 2012-07-31 0000023503 us-gaap:TreasuryStockMember 2012-07-31 0000023503 2012-12-20 0000023503 us-gaap:AccountsReceivableMember cnlg:CustomerOneMember 2011-08-01 2012-07-31 0000023503 us-gaap:AccountsReceivableMember cnlg:CustomerTwoMember 2011-08-01 2012-07-31 0000023503 us-gaap:AccountsReceivableMember cnlg:CustomerOneMember 2010-08-01 2011-07-31 0000023503 us-gaap:AccountsReceivableMember cnlg:CustomerTwoMember 2010-08-01 2011-07-31 0000023503 us-gaap:MinimumMember 2012-07-31 0000023503 us-gaap:MaximumMember 2012-07-31 0000023503 cnlg:StockIncentivePlanMember 2012-07-31 0000023503 cnlg:CommonSharesFromOutstandingWarrantsMember 2012-07-31 0000023503 cnlg:CommonSharesFromPreferredStockMember 2012-07-31 0000023503 cnlg:CommonSharesFromOutstandingWarrantsMember 2011-07-31 0000023503 cnlg:CommonSharesFromPreferredStockMember 2011-07-31 0000023503 cnlg:FederalIncomeTaxMember 2012-07-31 0000023503 cnlg:FederalIncomeTaxMember 2011-07-31 0000023503 us-gaap:StateAndLocalJurisdictionMember 2012-07-31 0000023503 us-gaap:StateAndLocalJurisdictionMember 2011-07-31 0000023503 cnlg:NJNOLSaleMember cnlg:NewJerseyStateMember 2011-08-01 2012-07-31 0000023503 cnlg:NewJerseyStateMember 2011-08-01 2012-07-31 0000023503 cnlg:NewJerseyStateMember 2010-08-01 2011-07-31 0000023503 us-gaap:ChiefExecutiveOfficerMember us-gaap:CommonStockMember 2010-08-01 2011-01-06 0000023503 us-gaap:CommonStockMember 2010-08-01 2011-01-06 0000023503 cnlg:ClassCWarrantsMember 2010-08-01 2011-07-31 0000023503 cnlg:StockIncentivePlanMember 2011-12-01 2011-12-31 0000023503 us-gaap:ConvertibleCommonStockMember 2011-12-31 0000023503 2011-12-01 2011-12-31 0000023503 2011-12-31 0000023503 2011-10-04 2012-05-24 0000023503 2012-05-03 0000023503 2012-05-14 2012-07-31 0000023503 us-gaap:CommonStockMember 2012-07-31 0000023503 us-gaap:SeriesAPreferredStockMember 2012-07-31 0000023503 us-gaap:SeriesAPreferredStockMember 2011-07-31 0000023503 us-gaap:SeriesAPreferredStockMember 2011-08-01 2012-07-31 0000023503 us-gaap:SeriesAPreferredStockMember 2010-08-01 2011-07-31 0000023503 us-gaap:SeriesBPreferredStockMember 2011-08-01 2012-07-31 0000023503 us-gaap:SeriesBPreferredStockMember 2010-08-01 2011-07-31 0000023503 us-gaap:SeriesBPreferredStockMember 2012-07-31 0000023503 us-gaap:SeriesBPreferredStockMember 2011-07-31 0000023503 2010-06-18 0000023503 cnlg:OldExercisePriceMember cnlg:ClassCWarrantsMember 2010-02-01 2010-06-18 0000023503 cnlg:NewExercisePriceMember cnlg:ClassCWarrantsMember 2010-02-01 2010-06-18 0000023503 cnlg:OldExercisePriceMember 2010-02-01 2010-06-18 0000023503 cnlg:NewExercisePriceMember 2010-02-01 2010-06-18 0000023503 2009-08-01 2010-07-31 0000023503 cnlg:ExercisedMember 2010-07-31 0000023503 cnlg:CancelledOrExpiredMember 2010-07-31 0000023503 cnlg:GrantedMember 2011-07-31 0000023503 cnlg:GrantedMember 2010-08-01 2011-07-31 0000023503 cnlg:CancelledOrExpiredMember 2011-07-31 0000023503 cnlg:StockOptionPlan2002Member 2002-04-23 0000023503 cnlg:StockOptionPlan2002Member 2011-08-01 2012-07-31 0000023503 cnlg:StockIncentivePlanMember 2011-07-31 0000023503 cnlg:StockIncentivePlanMember 2011-11-30 2011-12-31 0000023503 2011-11-30 2011-12-31 0000023503 cnlg:MajorCustomersMember 2011-08-01 2012-07-31 0000023503 cnlg:MajorCustomersMember 2010-08-01 2011-07-31 0000023503 us-gaap:ChiefExecutiveOfficerMember 2012-07-31 0000023503 us-gaap:ChiefExecutiveOfficerMember 2011-08-01 2012-07-31 0000023503 us-gaap:ChiefExecutiveOfficerMember 2010-08-01 2011-07-31 0000023503 us-gaap:ChiefExecutiveOfficerMember 2011-07-31 0000023503 cnlg:PresidentAndChiefOperatingOfficerMember 2012-07-31 0000023503 cnlg:PresidentAndChiefOperatingOfficerMember 2011-08-01 2012-07-31 0000023503 cnlg:PresidentAndChiefOperatingOfficerMember 2010-08-01 2011-07-31 0000023503 cnlg:PresidentAndChiefOperatingOfficerMember 2011-07-31 0000023503 cnlg:FormerAuditorsMember 2012-07-31 0000023503 2011-02-25 2012-12-31 0000023503 cnlg:NotesPayable1Member 2011-07-28 0000023503 2012-03-23 0000023503 cnlg:NotesPayable2Member 2012-07-16 0000023503 2012-08-01 2012-11-29 0000023503 us-gaap:StockOptionsMember 2012-08-01 2012-11-29 0000023503 2012-10-04 0000023503 2012-11-21 0000023503 2012-01-01 2012-12-11 0000023503 2012-08-01 2013-01-04 iso4217:USD xbrli:pure xbrli:shares iso4217:USD xbrli:shares

70359

7907

132747

476435

497235

389489

43280

25932

259

743621

900022

1362952

430924

34097

231002

30265

2089240

2018442

2001882

70798

87358

814419

987380

377427

376636

1734329

1033002

190000

256350

2301756

1665988

2301756

1665988

77500

597

215925

124554

80873283

79971148

-82522908

-80720673

-131734

-1487337

-678608

814419

987380

0.04 0.04

500000

155000

0.50

0.90 0.90

500000

1197

0.50

0.01

30000000

21592450

12455380

831718

1691852

429427

1175038

429427

1175038

402291

516814

2017512

2685049

80433

68022

316001

265827

2413946

3018898

-2011655

-2502084

17207

75230

339

191

10000

649147

382132

720687

-16941

-1816857

-2028596

-4318941

-226361

3792

-1802235

-4322733

-0.10

-0.43

18928799

10104933

155000

77500

1197

597

6967881

69679

78088878

-76397940

-131734

1706980

3562999 35630 1677307 1712937

1646723

16467

-16467

277777 2778 97222 100000 124208 124208

-4322733

155000

77500

1197

597

12455380

124554

79971148

-80720673

-131734

7556072

75561

800346

875907

694286

6943

51257

58200

620000 6200 49600 55800

3600

266712

2667

-2667

-1802235

155000

77500

1197

597

21592450

215925

80873283

-82522908

-131734

16560

14598

-1000

32866

-14000 -25000 50000 80000

3600

99000

15000

124208

-344688

441698

17348

-142364

93746

-411590

-259

-4742

790

225756

701327

895792

-747105

-1055549

5899

-5899

875907

100000

115000

316350

181350

60000

809557

356350

62452

-705098

713005

CONOLOG CORP 10-K XBRL exhibits --07-31 21683066 1186802 true 0000023503 No No Smaller Reporting Company No 2012 FY 2012-07-31

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 provided 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 $2,011,656 and $2,502,084 for the fiscal years ended July 31, 2012and July 31, 2011, respectively, and used cash from operations in the amounts of $747,105for the fiscal year ended July 31, 2012and $1,055,549 for the year ended July 31, 2011, respectively. At July 31, 2012, the Company had negative working capital of $1,558,135and a stockholders’ deficiency of $1,487,337. 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.

1558135

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, 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, 2012 and 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, 2012 and July 31, 2011, were $- 0 - and $1,000, respectively. The Company has a concentration risk in trade accounts receivable with significant sales to the government and local agencies. Two customers accounted for approximately 73%and 23% of accounts receivable as of July 31, 2012. Two customers accounted for approximately 93% and 4% of accounts receivable as of July 31, 2011. The credit evaluation process has mitigated the credit risk, such losses have been minimal, and within management expectations. 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 and are awaiting shipment. Work-in-Process represents raw material components that have been requisitioned from the warehouse and are being assembled in the manufacturing area. Raw Materials consist of components parts purchased from various suppliers and are used to build our finished products. Various raw material parts are also maintained to support warranty claims for commercial and military products. Typical raw material products include PC boards, digital screen assemblies, guide rails, capacitors, terminals, power supplies, process chips, resistors, keypads, relays and face plates. The Company provides a twelve-year warranty on all commercial products and is required by government regulation to design and produce military products with a minimum 25-year operating life in addition to shelf life. The Company maintains a significant amount of raw material component parts and some of this raw material inventory is not expected to be realized within a twelve month operating cycle from the balance sheet date. For any raw material part which has not been purchased within the last twelve months from the balance sheet date, it is evaluated as part of the slow moving inventory and is part of our inventory reserve review. The Company estimated a usage rate for its raw material component parts for what it expects to use over a 36 month period. Any excess inventory based on this projected usage rate is written off as excess and obsolete. The Company then reserves 100% of the estimated usage that is over 12 months and less than 36 months. Certain raw material parts which have been written down to a zero value, may still be maintained in inventory to satisfy possible requirements under the warranty programs but are valued at zero. The Company evaluates the inventory parts based on their age and usage over a 36 month period to determine inventory obsolescence and reserve adjustments. Inventory consisted of the following as of July 31, 2012 and July 31, 2011: <table border="0" cellspacing="0" cellpadding="0" width="60%" align="center"> <tr style="FONT-SIZE:1PX"> <td width="30%" valign="bottom">   </td> <td width="3%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> <td width="10%" valign="bottom">   </td> <td width="3%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> <td width="11%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> July 31, 2012 </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> July 31, 2011 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Finished Goods </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> $ </td> <td valign="bottom" style="background-color: #E5FFFF;"> 75,155 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> $ </td> <td valign="bottom" style="background-color: #E5FFFF;"> 162,507 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom"> Work-in-process </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 246,211 </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 87,664 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Raw materials </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 210,869 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 188,318 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 532,235 </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 438,489 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Less: Inventory reserve </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 35,000 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 49,000 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom"> Inventory, net </td> <td valign="bottom">   </td> <td valign="bottom"> $ </td> <td valign="bottom"> 497,235 </td> <td valign="bottom">   </td> <td valign="bottom"> $ </td> <td valign="bottom"> 389,489 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> </table> The Company 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, 2012 and July 31, 2011, inventory reserves amounted to $35,000 and $49,000, respectively. For the years ended July 31, 2012 and July 31, 2011, inventory written off as obsolete amounted to $47,143 and $50,000, respectively and charged to cost of sales. 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 (3) and thirty-nine(39) years. Depreciation was $16,560 and$14,598 for the fiscal years ended July 31, 2012 and 2011, 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. 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 notes payable - officer. 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 notes payable – officer approximates fair value because of the short maturity of these instruments. 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, 2012 and July 31, 2011, $0 of deferred financing costs remained to be amortized. Amortization of deferred financing costs amounted to $0 and $382,132 for the fiscal years ended July 31, 2012 and 2011, respectively. 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. Amortization of debt discounts amounted to $0 and $720,687 for the fiscal years ended July 31, 2012 and 2011, respectively. 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. The Company believes its current assumptions and estimates are reasonable and appropriate; however, unanticipated events and changes in market conditions could affect such estimates, resulting in the need for an impairment charge in future periods For the years ended July 31, 2012 and 2011 no such events or circumstances occurred causing an impairment charge. 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 is 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. Research and Development Research and Development costs are expensed as incurred. Research and Development costs were $80,433 and $68,022 for the fiscal years ended July 31, 2012 and 2011, respectively. Shipping and Handling Costs Shipping and handling costs are expensed as incurred and amounted to $10,037 and $16,545 for the fiscal years ended July 31, 2012 and 2011, respectively. 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 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. 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 2012, 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. Warranty The Company provides a 12 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 that 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. 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. During the fiscal year ended July 31, 2012, the company issued 1,100,000 shares of Common Stock (par value $0.01) at $.09 per share valued at $99,000. In addition, an officer of the Company granted 45,000 shares at $.07 per share to an employee. This grant was valued at $3,600 and was treated as contributed capital. 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. Potentially dilutive securities at July 31, 2012, consist of 2,502,087 common shares from outstanding warrants and 155,006 common shares from preferred stock. Potentially dilutive securities at July 31, 2011, consisted of 982,837 common shares from outstanding warrants and 155,006 common shares from preferred stock. Diluted and basic weighted average shares are the same, as potentially dilutive shares are anti-dilutive. 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. Advertising / Public Relations Costs Advertising/Public Relations costs are charged to operations when incurred. These expenses were $3,750 and $15,000 for the fiscal years ended July 31, 2012 and 2011, respectively. Future Impact of Recently Issued Accounting Standards In July 2012, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment” (“ASU 2012-02”). ASU 2012-02 gives entities an option to first assess qualitative factors to determine whether the existence of events and circumstances indicate that it is more likely than not that the indefinite-lived intangible asset impaired. If based on its qualitative assessment an entity concludes that it is more likely than not that the fair value of an indefinite lived intangible asset is less than its carrying amount, quantitative impairment testing is required. However, if an entity concludes otherwise, quantitative impairment testing is not required. ASU is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. ASU 2012-02 is not expected to have a material impact on the Company’s financial position or results of operations. In December 2011, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”). ASU 2011-11 enhances current disclosures about financial instruments and derivative instruments that are either offset on the statement of financial position or subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset on the statement of financial position. Entities are required to provide both net and gross information for these assets and liabilities in order to facilitate comparability between financial statements prepared on the basis of U.S. GAAP and financial statements prepared on the basis of IFRS. ASU 2011-11 is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. ASU 2011-11 is not expected to have a material impact on the Company’s financial position or results of operations. In September 2011, the FASB issued Accounting Standards Update No. 2011-08 (“ASU 2011-08”), which updates the guidance in ASC Topic 350, Intangibles – Goodwill & Other. The amendments in ASU 2011-08 permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than the carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in ASC Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than fifty percent. If, after assessing the totality of events or circumstances, an entity determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. The amendments in ASU 2011-08 include examples of events and circumstances that an entity should consider in evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. However, the examples are not intended to be all-inclusive and an entity may identify other relevant events and circumstances to consider in making the determination. The examples in this ASU 2011-08 supersede the previous examples under ASC Topic 350 of events and circumstances an entity should consider in determining whether it should test for impairment between annual tests, and also supersede the examples of events and circumstances that an entity having a reporting unit with a zero or negative carrying amount should consider in determining whether to perform the second step of the impairment test. Under the amendments in ASU 2011-08, an entity is no longer permitted to carry forward its detailed calculation of a reporting unit’s fair value from a prior year as previously permitted under ASC Topic 350. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of ASU 2011-08 did not have a material impact on the Company’s financial position or results of operations. In May 2011, the FASB issued Accounting Standards Update 2011-04 (“ASU 2011-04”), which updated the guidance in ASC Topic 820, Fair Value Measurement. The amendments in ASU 2011-04 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. ASU 2011-04 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 ASU 2011-04 are to be applied prospectively. For public entities, the amendments are effective for interim and annual periods beginning after December 15, 2011. The adoption of ASU 2011-04 did not have a material impact on the Company’s financial position or results of operations. Management does not believe there would have been a material effect on the accompanying financial statements had any other recently issued, but not yet effective, accounting standards been adopted in the current period

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, 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, 2012 and 2011, the Company did not have any cash equivalents

250000

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, 2012 and July 31, 2011, were $- 0 - and $1,000, respectively. The Company has a concentration risk in trade accounts receivable with significant sales to the government and local agencies. Two customers accounted for approximately 73%and 23% of accounts receivable as of July 31, 2012. Two customers accounted for approximately 93% and 4% of accounts receivable as of July 31, 2011. The credit evaluation process has mitigated the credit risk, such losses have been minimal, and within management expectations

1000

0.73

0.23

0.93

0.04

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 and are awaiting shipment. Work-in-Process represents raw material components that have been requisitioned from the warehouse and are being assembled in the manufacturing area. Raw Materials consist of components parts purchased from various suppliers and are used to build our finished products. Various raw material parts are also maintained to support warranty claims for commercial and military products. Typical raw material products include PC boards, digital screen assemblies, guide rails, capacitors, terminals, power supplies, process chips, resistors, keypads, relays and face plates. The Company provides a twelve-year warranty on all commercial products and is required by government regulation to design and produce military products with a minimum 25-year operating life in addition to shelf life. The Company maintains a significant amount of raw material component parts and some of this raw material inventory is not expected to be realized within a twelve month operating cycle from the balance sheet date. For any raw material part which has not been purchased within the last twelve months from the balance sheet date, it is evaluated as part of the slow moving inventory and is part of our inventory reserve review. The Company estimated a usage rate for its raw material component parts for what it expects to use over a 36 month period. Any excess inventory based on this projected usage rate is written off as excess and obsolete. The Company then reserves 100% of the estimated usage that is over 12 months and less than 36 months. Certain raw material parts which have been written down to a zero value, may still be maintained in inventory to satisfy possible requirements under the warranty programs but are valued at zero. The Company evaluates the inventory parts based on their age and usage over a 36 month period to determine inventory obsolescence and reserve adjustments. Inventory consisted of the following as of July 31, 2012 and July 31, 2011: <table border="0" cellspacing="0" cellpadding="0" width="60%" align="center"> <tr style="FONT-SIZE:1PX"> <td width="30%" valign="bottom">   </td> <td width="3%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> <td width="10%" valign="bottom">   </td> <td width="3%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> <td width="11%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> July 31, 2012 </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> July 31, 2011 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Finished Goods </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> $ </td> <td valign="bottom" style="background-color: #E5FFFF;"> 75,155 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> $ </td> <td valign="bottom" style="background-color: #E5FFFF;"> 162,507 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom"> Work-in-process </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 246,211 </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 87,664 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Raw materials </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 210,869 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 188,318 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 532,235 </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 438,489 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Less: Inventory reserve </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 35,000 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 49,000 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom"> Inventory, net </td> <td valign="bottom">   </td> <td valign="bottom"> $ </td> <td valign="bottom"> 497,235 </td> <td valign="bottom">   </td> <td valign="bottom"> $ </td> <td valign="bottom"> 389,489 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> </table> The Company 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, 2012 and July 31, 2011, inventory reserves amounted to $35,000 and $49,000, respectively. For the years ended July 31, 2012 and July 31, 2011, inventory written off as obsolete amounted to $47,143 and $50,000, respectively and charged to cost of sales.

1.00

35000

49000

47143

50000

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 (3) and thirty-nine(39) years. Depreciation was $16,560 and$14,598 for the fiscal years ended July 31, 2012 and 2011, 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

(3) (39)

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 notes payable - officer. 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 notes payable – officer approximates fair value because of the short maturity of these instruments

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, 2012 and July 31, 2011, $0 of deferred financing costs remained to be amortized. Amortization of deferred financing costs amounted to $0 and $382,132 for the fiscal years ended July 31, 2012 and 2011, respectively

382132

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. Amortization of debt discounts amounted to $0 and $720,687 for the fiscal years ended July 31, 2012 and 2011, respectively

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. The Company believes its current assumptions and estimates are reasonable and appropriate; however, unanticipated events and changes in market conditions could affect such estimates, resulting in the need for an impairment charge in future periods For the years ended July 31, 2012 and 2011 no such events or circumstances occurred causing an impairment charge

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 is 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

Research and Development Research and Development costs are expensed as incurred. Research and Development costs were $80,433 and $68,022 for the fiscal years ended July 31, 2012 and 2011, respectively

Shipping and Handling Costs Shipping and handling costs are expensed as incurred and amounted to $10,037 and $16,545 for the fiscal years ended July 31, 2012 and 2011, respectively

10037

16545

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 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

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 2012, 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

Warranty The Company provides a 12 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 that 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

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. During the fiscal year ended July 31, 2012, the company issued 1,100,000 shares of Common Stock (par value $0.01) at $.09 per share valued at $99,000. In addition, an officer of the Company granted 45,000 shares at $.07 per share to an employee. This grant was valued at $3,600 and was treated as contributed capital

1100000

0.09

99000

45000

0.07

3600

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. Potentially dilutive securities at July 31, 2012, consist of 2,502,087 common shares from outstanding warrants and 155,006 common shares from preferred stock. Potentially dilutive securities at July 31, 2011, consisted of 982,837 common shares from outstanding warrants and 155,006 common shares from preferred stock. Diluted and basic weighted average shares are the same, as potentially dilutive shares are anti-dilutive

2502087 155006 982837 155006

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

Advertising / Public Relations Costs Advertising/Public Relations costs are charged to operations when incurred. These expenses were $3,750 and $15,000 for the fiscal years ended July 31, 2012 and 2011, respectively

3750

15000

Future Impact of Recently Issued Accounting Standards In July 2012, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment” (“ASU 2012-02”). ASU 2012-02 gives entities an option to first assess qualitative factors to determine whether the existence of events and circumstances indicate that it is more likely than not that the indefinite-lived intangible asset impaired. If based on its qualitative assessment an entity concludes that it is more likely than not that the fair value of an indefinite lived intangible asset is less than its carrying amount, quantitative impairment testing is required. However, if an entity concludes otherwise, quantitative impairment testing is not required. ASU is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. ASU 2012-02 is not expected to have a material impact on the Company’s financial position or results of operations. In December 2011, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”). ASU 2011-11 enhances current disclosures about financial instruments and derivative instruments that are either offset on the statement of financial position or subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset on the statement of financial position. Entities are required to provide both net and gross information for these assets and liabilities in order to facilitate comparability between financial statements prepared on the basis of U.S. GAAP and financial statements prepared on the basis of IFRS. ASU 2011-11 is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. ASU 2011-11 is not expected to have a material impact on the Company’s financial position or results of operations. In September 2011, the FASB issued Accounting Standards Update No. 2011-08 (“ASU 2011-08”), which updates the guidance in ASC Topic 350, Intangibles – Goodwill & Other. The amendments in ASU 2011-08 permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than the carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in ASC Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than fifty percent. If, after assessing the totality of events or circumstances, an entity determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. The amendments in ASU 2011-08 include examples of events and circumstances that an entity should consider in evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. However, the examples are not intended to be all-inclusive and an entity may identify other relevant events and circumstances to consider in making the determination. The examples in this ASU 2011-08 supersede the previous examples under ASC Topic 350 of events and circumstances an entity should consider in determining whether it should test for impairment between annual tests, and also supersede the examples of events and circumstances that an entity having a reporting unit with a zero or negative carrying amount should consider in determining whether to perform the second step of the impairment test. Under the amendments in ASU 2011-08, an entity is no longer permitted to carry forward its detailed calculation of a reporting unit’s fair value from a prior year as previously permitted under ASC Topic 350. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of ASU 2011-08 did not have a material impact on the Company’s financial position or results of operations. In May 2011, the FASB issued Accounting Standards Update 2011-04 (“ASU 2011-04”), which updated the guidance in ASC Topic 820, Fair Value Measurement. The amendments in ASU 2011-04 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. ASU 2011-04 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 ASU 2011-04 are to be applied prospectively. For public entities, the amendments are effective for interim and annual periods beginning after December 15, 2011. The adoption of ASU 2011-04 did not have a material impact on the Company’s financial position or results of operations. Management does not believe there would have been a material effect on the accompanying financial statements had any other recently issued, but not yet effective, accounting standards been adopted in the current period

Inventory consisted of the following as of July 31, 2012 and July 31, 2011: <table border="0" cellspacing="0" cellpadding="0" width="60%" align="center"> <tr style="FONT-SIZE:1PX"> <td width="30%" valign="bottom">   </td> <td width="3%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> <td width="10%" valign="bottom">   </td> <td width="3%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> <td width="11%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> July 31, 2012 </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> July 31, 2011 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Finished Goods </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> $ </td> <td valign="bottom" style="background-color: #E5FFFF;"> 75,155 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> $ </td> <td valign="bottom" style="background-color: #E5FFFF;"> 162,507 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom"> Work-in-process </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 246,211 </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 87,664 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Raw materials </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 210,869 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 188,318 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 532,235 </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 438,489 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Less: Inventory reserve </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 35,000 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 49,000 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom"> Inventory, net </td> <td valign="bottom">   </td> <td valign="bottom"> $ </td> <td valign="bottom"> 497,235 </td> <td valign="bottom">   </td> <td valign="bottom"> $ </td> <td valign="bottom"> 389,489 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> </table>

75155

162507

246211

87664

210869

188318

532235

438489

-35000

-49000

NOTE 3 – INCOME TAXES The income tax (benefit) is comprised of the following: <table border="0" cellspacing="0" cellpadding="0" width="90%" align="center"> <tr style="FONT-SIZE:1PX"> <td width="63%" valign="bottom">   </td> <td width="3%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> <td width="9%" valign="bottom">   </td> <td width="3%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> <td width="9%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> 2012 </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> 2011 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Current: </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom"> Federal </td> <td valign="bottom">   </td> <td valign="bottom"> $ </td> <td valign="bottom"> — </td> <td valign="bottom">   </td> <td valign="bottom"> $ </td> <td valign="bottom"> — </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> State </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> (226,361 </td> <td valign="bottom" style="background-color: #E5FFFF;"> ) </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 3,792 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom"> Deferred: </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Federal </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> — </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> — </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom"> State </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> — </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> — </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Total tax benefit </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> $ </td> <td valign="bottom" style="background-color: #E5FFFF;"> (226,361 </td> <td valign="bottom" style="background-color: #E5FFFF;"> ) </td> <td valign="bottom" style="background-color: #E5FFFF;"> $ </td> <td valign="bottom" style="background-color: #E5FFFF;"> 3,792 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> </table> The U.S. federal statutory income tax rate is reconciled to the effective rate at July 31, 2012 and 2011, as follows: <table border="0" cellspacing="0" cellpadding="0" width="90%" align="center"> <tr style="FONT-SIZE:1PX"> <td width="65%" valign="bottom">   </td> <td width="3%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> <td width="7%" valign="bottom">   </td> <td width="3%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> <td width="7%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> 2012 </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> 2011 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Income tax expense at U.S. federal statutory rate </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> (34.0 </td> <td valign="bottom" style="background-color: #E5FFFF;"> %) </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> (34.0 </td> <td valign="bottom" style="background-color: #E5FFFF;"> %) </td> </tr> <tr> <td valign="bottom"> New Jersey state statutory rate </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> (5.8 </td> <td valign="bottom"> %) </td> <td valign="bottom">   </td> <td valign="bottom"> (5.8 </td> <td valign="bottom"> %) </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Change in valuation allowance </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 23.6 </td> <td valign="bottom" style="background-color: #E5FFFF;"> % </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 22.6 </td> <td valign="bottom" style="background-color: #E5FFFF;"> % </td> </tr> <tr> <td valign="bottom"> Loss on derivative financial instruments </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 0.0 </td> <td valign="bottom"> % </td> <td valign="bottom">   </td> <td valign="bottom"> 0.0 </td> <td valign="bottom"> % </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Common stock issue for services </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 2.3 </td> <td valign="bottom" style="background-color: #E5FFFF;"> % </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 0.7 </td> <td valign="bottom" style="background-color: #E5FFFF;"> % </td> </tr> <tr> <td valign="bottom"> Amortization of debt discount and deferred financing fees </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 0.0 </td> <td valign="bottom"> % </td> <td valign="bottom">   </td> <td valign="bottom"> 10.2 </td> <td valign="bottom"> % </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Benefits and modification of debt </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 0.0 </td> <td valign="bottom" style="background-color: #E5FFFF;"> % </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 0.0 </td> <td valign="bottom" style="background-color: #E5FFFF;"> % </td> </tr> <tr> <td valign="bottom"> Induced conversion cost </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 0.0 </td> <td valign="bottom"> % </td> <td valign="bottom">   </td> <td valign="bottom"> 6.2 </td> <td valign="bottom"> % </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Effective tax benefit </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> (13.9 </td> <td valign="bottom" style="background-color: #E5FFFF;"> )% </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 0.1 </td> <td valign="bottom" style="background-color: #E5FFFF;"> % </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> </table> 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 the fiscal year ended July 31, 2012, the Company entered into agreements to sell up to $5,707,131 of its unused tax losses. The Company received net proceeds of $227,945, during the fiscal year ended July 31, 2012, related to the sale and accordingly recorded them as a tax benefit in the period received. During the fiscal year ended July 31, 2011, the Company did not enter into such agreements and did not receive such tax benefits. 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, 2012 and 2011, the Company has net operating loss carry forward for federal income tax purpose of approximately $30,341,000 and $29,218,000 respectively, which is available to offset future Federal taxable income through 2030. At July 31, 2012 and 2011, the Company has net operating loss carryforward toward state income tax purposes of approximately $4,242,000 and $9,223,000 respectively, to offset future state taxable income through 2030. The tax provision for the fiscal year ended July 31, 2012, was a tax benefit of $226,361 which consists of a tax benefit for the sale of NJ NOL’s of $227,945, New Jersey State tax refunds of $4,800 and New Jersey state tax expense of $6,384 and for the fiscal year ended July 31, 2011, was a tax expense of $3,792. The Company has no open tax years for the State of New Jersey or federal income tax purposes, which are subject to examination. The components of the net deferred tax assets (liabilities) at July 31, 2012 and 2011 are as follows: <table border="0" cellspacing="0" cellpadding="0" width="90%" align="center"> <tr style="FONT-SIZE:1PX"> <td width="60%" valign="bottom">   </td> <td width="3%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> <td width="10%" valign="bottom">   </td> <td width="3%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> <td width="10%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> 2012 </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> 2011 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Deferred tax asset </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom"> Net operating loss </td> <td valign="bottom">   </td> <td valign="bottom"> $ </td> <td valign="bottom"> 10,633,000 </td> <td valign="bottom">   </td> <td valign="bottom"> $ </td> <td valign="bottom"> 10,689,000 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Reserves </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 14,000 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 20,000 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom"> Total deferred tax assets </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 10,677,000 </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 10,709,000 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Deferred tax liability </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> — </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> — </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom"> Net deferred tax asset </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 10,677,000 </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 10,709,000 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Less: Valuation allowance </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> (10,677,000 </td> <td valign="bottom" style="background-color: #E5FFFF;"> ) </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> (10,709,000 </td> <td valign="bottom" style="background-color: #E5FFFF;"> ) </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom"> Net deferred tax asset </td> <td valign="bottom">   </td> <td valign="bottom"> $ </td> <td valign="bottom"> — </td> <td valign="bottom">   </td> <td valign="bottom"> $ </td> <td valign="bottom"> — </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> </table> 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, 2012 and July 31, 2011. 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, 2012, 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: <table style="width: 60%;" border="0" cellspacing="0" cellpadding="0" align="center"> <tr style="font-size: 1PX;"> <td valign="bottom" width="40%">   </td> <td valign="bottom" width="3%">   </td> <td valign="bottom" width="1%">   </td> <td valign="bottom" width="1%">   </td> <td valign="bottom" width="15%">   </td> <td valign="bottom" width="1%">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td colspan="3" valign="bottom"> July 31, 2012 </td> <td valign="bottom">   July 31, 2011 </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td colspan="3" valign="bottom"> <hr noshade="noshade" size="1" width="100%" /> </td> <td valign="bottom">   </td> </tr> <tr> <td style="background-color: #e5ffff;" valign="bottom"> Balance at beginning of period </td> <td style="background-color: #e5ffff;" valign="bottom">   </td> <td style="background-color: #e5ffff;" valign="bottom"> $ </td> <td style="background-color: #e5ffff;" valign="bottom">   </td> <td style="background-color: #e5ffff;" valign="bottom"> 135,000 </td> <td style="background-color: #e5ffff;" valign="bottom">  135,000 </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom"> Additions based on tax positions related to current year </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> — </td> <td valign="bottom">  — </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr noshade="noshade" size="1" width="100%" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr noshade="noshade" size="1" width="100%" /> </td> <td valign="bottom">   </td> </tr> <tr> <td style="background-color: #e5ffff;" valign="bottom"> Balance at end of period </td> <td style="background-color: #e5ffff;" valign="bottom">   </td> <td style="background-color: #e5ffff;" valign="bottom"> $ </td> <td style="background-color: #e5ffff;" valign="bottom">   </td> <td style="background-color: #e5ffff;" valign="bottom"> 135,000 </td> <td style="background-color: #e5ffff;" valign="bottom">  135,000 </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr noshade="noshade" size="3" width="100%" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr noshade="noshade" size="3" width="100%" /> </td> <td valign="bottom">   </td> </tr> </table> 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. 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 $31,000 and $16,000 as of July 31, 2012 and July 31, 2011 respectively, which has been included in accrued expenses in the Balance Sheet. During the fiscal years ended July 31, 2012 and July 31, 2011 the Company included $15,000 and $11,000 of interest expense in the statement of operations.

5707131 227945

30341000

29218000

4242000

9223000

227945

4800

6384

3792

1.00 1.00

135000

31000

16000

15000

11000

The income tax (benefit) is comprised of the following: <table border="0" cellspacing="0" cellpadding="0" width="90%" align="center"> <tr style="FONT-SIZE:1PX"> <td width="63%" valign="bottom">   </td> <td width="3%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> <td width="9%" valign="bottom">   </td> <td width="3%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> <td width="9%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> 2012 </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> 2011 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Current: </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom"> Federal </td> <td valign="bottom">   </td> <td valign="bottom"> $ </td> <td valign="bottom"> — </td> <td valign="bottom">   </td> <td valign="bottom"> $ </td> <td valign="bottom"> — </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> State </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> (226,361 </td> <td valign="bottom" style="background-color: #E5FFFF;"> ) </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 3,792 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom"> Deferred: </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Federal </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> — </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> — </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom"> State </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> — </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> — </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Total tax benefit </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> $ </td> <td valign="bottom" style="background-color: #E5FFFF;"> (226,361 </td> <td valign="bottom" style="background-color: #E5FFFF;"> ) </td> <td valign="bottom" style="background-color: #E5FFFF;"> $ </td> <td valign="bottom" style="background-color: #E5FFFF;"> 3,792 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> </table>

-226361

3792

The U.S. federal statutory income tax rate is reconciled to the effective rate at July 31, 2012 and 2011, as follows: <table border="0" cellspacing="0" cellpadding="0" width="90%" align="center"> <tr style="FONT-SIZE:1PX"> <td width="65%" valign="bottom">   </td> <td width="3%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> <td width="7%" valign="bottom">   </td> <td width="3%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> <td width="7%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> 2012 </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> 2011 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Income tax expense at U.S. federal statutory rate </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> (34.0 </td> <td valign="bottom" style="background-color: #E5FFFF;"> %) </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> (34.0 </td> <td valign="bottom" style="background-color: #E5FFFF;"> %) </td> </tr> <tr> <td valign="bottom"> New Jersey state statutory rate </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> (5.8 </td> <td valign="bottom"> %) </td> <td valign="bottom">   </td> <td valign="bottom"> (5.8 </td> <td valign="bottom"> %) </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Change in valuation allowance </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 23.6 </td> <td valign="bottom" style="background-color: #E5FFFF;"> % </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 22.6 </td> <td valign="bottom" style="background-color: #E5FFFF;"> % </td> </tr> <tr> <td valign="bottom"> Loss on derivative financial instruments </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 0.0 </td> <td valign="bottom"> % </td> <td valign="bottom">   </td> <td valign="bottom"> 0.0 </td> <td valign="bottom"> % </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Common stock issue for services </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 2.3 </td> <td valign="bottom" style="background-color: #E5FFFF;"> % </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 0.7 </td> <td valign="bottom" style="background-color: #E5FFFF;"> % </td> </tr> <tr> <td valign="bottom"> Amortization of debt discount and deferred financing fees </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 0.0 </td> <td valign="bottom"> % </td> <td valign="bottom">   </td> <td valign="bottom"> 10.2 </td> <td valign="bottom"> % </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Benefits and modification of debt </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 0.0 </td> <td valign="bottom" style="background-color: #E5FFFF;"> % </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 0.0 </td> <td valign="bottom" style="background-color: #E5FFFF;"> % </td> </tr> <tr> <td valign="bottom"> Induced conversion cost </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 0.0 </td> <td valign="bottom"> % </td> <td valign="bottom">   </td> <td valign="bottom"> 6.2 </td> <td valign="bottom"> % </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Effective tax benefit </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> (13.9 </td> <td valign="bottom" style="background-color: #E5FFFF;"> )% </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 0.1 </td> <td valign="bottom" style="background-color: #E5FFFF;"> % </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> </table>

-0.340

-0.058

0.236

0.226

0.000 0.000 0.023 0.007 0.000 0.102 0.000 0.000 0.000 0.062

-0.139

0.001

The components of the net deferred tax assets (liabilities) at July 31, 2012 and 2011 are as follows: <table border="0" cellspacing="0" cellpadding="0" width="90%" align="center"> <tr style="FONT-SIZE:1PX"> <td width="60%" valign="bottom">   </td> <td width="3%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> <td width="10%" valign="bottom">   </td> <td width="3%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> <td width="10%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> 2012 </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> 2011 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Deferred tax asset </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom"> Net operating loss </td> <td valign="bottom">   </td> <td valign="bottom"> $ </td> <td valign="bottom"> 10,633,000 </td> <td valign="bottom">   </td> <td valign="bottom"> $ </td> <td valign="bottom"> 10,689,000 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Reserves </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 14,000 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 20,000 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom"> Total deferred tax assets </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 10,677,000 </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 10,709,000 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Deferred tax liability </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> — </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> — </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom"> Net deferred tax asset </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 10,677,000 </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 10,709,000 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Less: Valuation allowance </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> (10,677,000 </td> <td valign="bottom" style="background-color: #E5FFFF;"> ) </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> (10,709,000 </td> <td valign="bottom" style="background-color: #E5FFFF;"> ) </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom"> Net deferred tax asset </td> <td valign="bottom">   </td> <td valign="bottom"> $ </td> <td valign="bottom"> — </td> <td valign="bottom">   </td> <td valign="bottom"> $ </td> <td valign="bottom"> — </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> </table>

10633000

10689000

14000

20000

10677000

10709000

10677000

10709000

10677000

10709000

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: <table style="width: 60%;" border="0" cellspacing="0" cellpadding="0" align="center"> <tr style="font-size: 1PX;"> <td valign="bottom" width="40%">   </td> <td valign="bottom" width="3%">   </td> <td valign="bottom" width="1%">   </td> <td valign="bottom" width="1%">   </td> <td valign="bottom" width="15%">   </td> <td valign="bottom" width="1%">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td colspan="3" valign="bottom"> July 31, 2012 </td> <td valign="bottom">   July 31, 2011 </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td colspan="3" valign="bottom"> <hr noshade="noshade" size="1" width="100%" /> </td> <td valign="bottom">   </td> </tr> <tr> <td style="background-color: #e5ffff;" valign="bottom"> Balance at beginning of period </td> <td style="background-color: #e5ffff;" valign="bottom">   </td> <td style="background-color: #e5ffff;" valign="bottom"> $ </td> <td style="background-color: #e5ffff;" valign="bottom">   </td> <td style="background-color: #e5ffff;" valign="bottom"> 135,000 </td> <td style="background-color: #e5ffff;" valign="bottom">  135,000 </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom"> Additions based on tax positions related to current year </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> — </td> <td valign="bottom">  — </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr noshade="noshade" size="1" width="100%" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr noshade="noshade" size="1" width="100%" /> </td> <td valign="bottom">   </td> </tr> <tr> <td style="background-color: #e5ffff;" valign="bottom"> Balance at end of period </td> <td style="background-color: #e5ffff;" valign="bottom">   </td> <td style="background-color: #e5ffff;" valign="bottom"> $ </td> <td style="background-color: #e5ffff;" valign="bottom">   </td> <td style="background-color: #e5ffff;" valign="bottom"> 135,000 </td> <td style="background-color: #e5ffff;" valign="bottom">  135,000 </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr noshade="noshade" size="3" width="100%" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr noshade="noshade" size="3" width="100%" /> </td> <td valign="bottom">   </td> </tr> </table>

135000

NOTE 4 – STOCKHOLDERS’ DEFICIENCY 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 year ended July 31, 2011, $1,000,000 of convertible debt was converted into 3,333,333 shares of common stock. At various times during the year ended July 31, 2011, $88,177 of interest expense was converted into 229,666 shares of common stock. At various times during the year 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 December of 2011, the company granted to employees, officers, and directors 1,100,000 shares of Common Stock priced at $.09 per share and 45,000 shares priced at $.07 per share for an aggregate expense of $102,600. Between October 4, 2011 and May 24, 2012, the Company issued and sold an aggregate of 6,754,072 of its common stock for $675,407, in a first private placement offering. This offering contains an “Anti-Dilution” provision that calls for the issuance of additional shares to the investors, if the company issues or sells additional common shares on or before December 31, 2012. The number of shares to be issued will be such that each investor’s percentage of ownership remains the same as it was before the additional common shares were issued or sold. On May 3, 2012, the Board of Directors authorized the issuance of 214,286 shares, valued at $15,000, of the Company’s common stock (par value $.01) to a vendor for payment of a previously recorded expense. Between May 14, 2012 and July 31, 2012, the Company issued and sold units containing an aggregate of 802,000 shares of its common stock and 1,604,000, 2 year warrants with an exercise price of $.01 for $200,500, in a second private placement offering. These warrants are not exercisable until January 1, 2013 and will expire on December 31, 2014. In addition, subject to the terms of the first private placement the Company is obligated to issue to the investors in the first private placement 266,712 anti-dilution shares at $.01 par value. These shares have been recorded and are included in the financial statements as of July 31, 2012. The Series A Preferred Stock provides 4% cumulative dividends, which were $133,183 ($0.86 per share) and $130,083 ($0.84 per shares) in arrears at July 31, 2012 and July 31, 2011, 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 $210,683 and $207,583 at July 31, 2012 and July 31, 2011, respectively. The Series B Preferred Stock provides cumulative dividends of $0.90 per share, which were $44,250 ($36.97 per share) and $43,173 ($36.07 per share) in arrears at July 31, 2012 and July 31, 2011, 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 $62,205 and $61,128 at July 31, 2012 and July 31, 2011, respectively. The following table summarizes the warrants activities: <table border="0" cellspacing="0" cellpadding="0" width="90%"> <tr style="FONT-SIZE:1PX"> <td width="40%" valign="bottom">   </td> <td width="3%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> <td width="9%" valign="bottom">   </td> <td width="3%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> <td width="10%" valign="bottom">   </td> <td width="3%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> <td width="10%" valign="bottom">   </td> <td width="3%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> <td width="10%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> Number of shares </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> Weighted Average Exercise price </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> Weighted Average Remaining contractual term in years </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> Aggregated Intrinsic Value </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Outstanding at July 31, 2010 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 2,939,036 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> $ </td> <td valign="bottom" style="background-color: #E5FFFF;"> 1.47 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 4.47 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> $ </td> <td valign="bottom" style="background-color: #E5FFFF;"> 961.539 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom"> Granted </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> — </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> — </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> — </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> — </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Exercised </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> (1,955,782 </td> <td valign="bottom" style="background-color: #E5FFFF;"> ) </td> <td valign="bottom" style="background-color: #E5FFFF;"> $ </td> <td valign="bottom" style="background-color: #E5FFFF;"> .60 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> — </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> — </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom"> Cancelled / Expired </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> (417 </td> <td valign="bottom"> ) </td> <td valign="bottom"> $ </td> <td valign="bottom"> 25.00 </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> — </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> — </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Outstanding at July 31, 2011 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 982,837 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> $ </td> <td valign="bottom" style="background-color: #E5FFFF;"> 3.40 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 3.24 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> $ </td> <td valign="bottom" style="background-color: #E5FFFF;"> — </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom"> Granted </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 1,604,000 </td> <td valign="bottom">   </td> <td valign="bottom"> $ </td> <td valign="bottom"> 0.01 </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 2.42 </td> <td valign="bottom">   </td> <td valign="bottom"> $ </td> <td valign="bottom"> 112,280 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Exercised </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> — </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> — </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> — </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> — </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom"> Cancelled / Expired </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> (84,750 </td> <td valign="bottom"> ) </td> <td valign="bottom"> $ </td> <td valign="bottom"> 21.00 </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> — </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> — </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Outstanding at July 31, 2012 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 2,502,087 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> $ </td> <td valign="bottom" style="background-color: #E5FFFF;"> .63 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 2.44 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> $ </td> <td valign="bottom" style="background-color: #E5FFFF;"> 112,280 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> </table> 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) the exercise price of the outstanding Class C warrants shall be adjusted from $1.12 to $0.50 per share, (iv) the exercise price of the outstanding selling agent warrants shall be adjusted from $1.12 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.

277777

0.36

100000

1000000

3333333

88177 229666 1955782 1646723 2500000

1100000

0.09

45000

0.07

102600

6754072

675407

214286

15000

0.01

802000

1604000

200500

266712

0.01

0.04 0.04

133183

0.86

130083

0.84

5760000

210683

207583

0.90

44250

36.97

43173

36.07

62205

61128

0.60

1.12 0.50 1.12 0.60

The following table summarizes the warrants activities: <table border="0" cellspacing="0" cellpadding="0" width="90%"> <tr style="FONT-SIZE:1PX"> <td width="40%" valign="bottom">   </td> <td width="3%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> <td width="9%" valign="bottom">   </td> <td width="3%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> <td width="10%" valign="bottom">   </td> <td width="3%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> <td width="10%" valign="bottom">   </td> <td width="3%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> <td width="10%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> Number of shares </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> Weighted Average Exercise price </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> Weighted Average Remaining contractual term in years </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> Aggregated Intrinsic Value </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Outstanding at July 31, 2010 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 2,939,036 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> $ </td> <td valign="bottom" style="background-color: #E5FFFF;"> 1.47 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 4.47 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> $ </td> <td valign="bottom" style="background-color: #E5FFFF;"> 961.539 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom"> Granted </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> — </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> — </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> — </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> — </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Exercised </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> (1,955,782 </td> <td valign="bottom" style="background-color: #E5FFFF;"> ) </td> <td valign="bottom" style="background-color: #E5FFFF;"> $ </td> <td valign="bottom" style="background-color: #E5FFFF;"> .60 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> — </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> — </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom"> Cancelled / Expired </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> (417 </td> <td valign="bottom"> ) </td> <td valign="bottom"> $ </td> <td valign="bottom"> 25.00 </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> — </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> — </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Outstanding at July 31, 2011 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 982,837 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> $ </td> <td valign="bottom" style="background-color: #E5FFFF;"> 3.40 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 3.24 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> $ </td> <td valign="bottom" style="background-color: #E5FFFF;"> — </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom"> Granted </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 1,604,000 </td> <td valign="bottom">   </td> <td valign="bottom"> $ </td> <td valign="bottom"> 0.01 </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 2.42 </td> <td valign="bottom">   </td> <td valign="bottom"> $ </td> <td valign="bottom"> 112,280 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Exercised </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> — </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> — </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> — </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> — </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom"> Cancelled / Expired </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> (84,750 </td> <td valign="bottom"> ) </td> <td valign="bottom"> $ </td> <td valign="bottom"> 21.00 </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> — </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> — </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Outstanding at July 31, 2012 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 2,502,087 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> $ </td> <td valign="bottom" style="background-color: #E5FFFF;"> .63 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 2.44 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> $ </td> <td valign="bottom" style="background-color: #E5FFFF;"> 112,280 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> </table>

2939036

1.47

P4Y171D

961.539

-1955782

0.60

-417

25.00

982837

3.40

P3Y87D

1604000

0.01

P2Y153D

112280

-84750

21.00

2502087

0.63

P2Y160D

112280

NOTE 5 – 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. The Plan terminated in April 2012. As of July 31, 2012 and July 31, 2011, 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, no common shares of Company stock were issued to current officers, directors, employees and consultants for the fiscal years ended July 31, 2012 and July 31, 2011. Securities Issued for Services During December of 2011, the company granted to employees, officers, and directors 1,100,000 shares of Common Stock priced at $.09 per share and 45,000 shares priced at $.07 per share for an aggregate expense of $102,600.

158

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

800000

1100000

45000

102600

NOTE 6 - MAJOR CUSTOMERS The following summarizes sales to major customers (each 10% or more of net sales) by the Company: <table border="0" cellspacing="0" cellpadding="0" width="92%" style="margin-left:8%"> <tr style="FONT-SIZE:1PX"> <td width="19%" valign="bottom">   </td> <td width="2%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> <td width="14%" valign="bottom">   </td> <td width="2%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> <td width="15%" valign="bottom">   </td> <td width="2%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> <td width="19%" valign="bottom">   </td> <td width="2%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> <td width="16%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> </tr> <tr> <td valign="bottom"> Fiscal Year Ended </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> Total Revenue </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> Sales to Major Customers </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> Number of Customers </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> Percentage of Total </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td colspan="2" valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td colspan="2" valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td colspan="2" valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td colspan="2" valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom"> July 31, 2012 </td> <td valign="bottom">   </td> <td valign="bottom"> $ </td> <td valign="bottom"> 831,718 </td> <td valign="bottom">   </td> <td valign="bottom"> $ </td> <td valign="bottom"> 543,322 </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 2 </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 65.3 </td> <td valign="bottom"> % </td> </tr> <tr> <td valign="bottom"> July 31, 2011 </td> <td valign="bottom">   </td> <td valign="bottom"> $ </td> <td valign="bottom"> 1,691,852 </td> <td valign="bottom">   </td> <td valign="bottom"> $ </td> <td valign="bottom"> 1,373,787 </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 3 </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 81.2 </td> <td valign="bottom"> % </td> </tr> </table>

The following summarizes sales to major customers (each 10% or more of net sales) by the Company: <table border="0" cellspacing="0" cellpadding="0" width="92%" style="margin-left:8%"> <tr style="FONT-SIZE:1PX"> <td width="19%" valign="bottom">   </td> <td width="2%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> <td width="14%" valign="bottom">   </td> <td width="2%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> <td width="15%" valign="bottom">   </td> <td width="2%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> <td width="19%" valign="bottom">   </td> <td width="2%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> <td width="16%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> </tr> <tr> <td valign="bottom"> Fiscal Year Ended </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> Total Revenue </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> Sales to Major Customers </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> Number of Customers </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> Percentage of Total </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td colspan="2" valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td colspan="2" valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td colspan="2" valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td colspan="2" valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom"> July 31, 2012 </td> <td valign="bottom">   </td> <td valign="bottom"> $ </td> <td valign="bottom"> 831,718 </td> <td valign="bottom">   </td> <td valign="bottom"> $ </td> <td valign="bottom"> 543,322 </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 2 </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 65.3 </td> <td valign="bottom"> % </td> </tr> <tr> <td valign="bottom"> July 31, 2011 </td> <td valign="bottom">   </td> <td valign="bottom"> $ </td> <td valign="bottom"> 1,691,852 </td> <td valign="bottom">   </td> <td valign="bottom"> $ </td> <td valign="bottom"> 1,373,787 </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 3 </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 81.2 </td> <td valign="bottom"> % </td> </tr> </table>

543322

2 0.653

1373787

3 0.812

NOTE 7 – COMMITMENTS EMPLOYMENT CONTRACTS 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, 2012, 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 fiscal years ended July 31, 2012, and 2011, the Company’s CEO did not receive any payment of his salary and forgave $0 and $107,500 of his salary, respectively. The Company has accrued and expensed $450,000 for the unpaid portion of his salary for the fiscal year ended July 31, 2012 and accrued and expensed $334,167 for the unpaid portion of his salary for the fiscal year ended July 31, 2011. The Company’s President and Chief Operating Officer is serving under an employment agreement commencing May 3, 2012 and ending May 3, 2016, 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, 2012 was $199,000 and he receives annual increases of $3,000 on May 3rd of each year. The Company’s President and Chief Operating 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 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 fiscal years ended July 31, 2012 and 2011, the Company’s President and Chief Operating Officer was paid $84,467 and $61,873 of his salary, respectively. During the fiscal year ended July 31, 2011, the Company’s president forgave $24,167 of his salary. The Company has accrued and expensed $158,658 for the unpaid portion of his salary for the fiscal year ended July 31, 2012 and accrued and expensed $169,150 for the unpaid portion of his salary for the fiscal year ended July 31, 2011.. INSTALLMENT AGREEMENT: The Company has an outstanding balance with its former auditors Withum, Smith & Brown and has agreed to pay the balance of $122,500 as follows: <table border="0" cellspacing="0" cellpadding="0" width="90%"> <tr style="FONT-SIZE:1PX"> <td width="4%" valign="top">   </td> <td width="4%" valign="top">   </td> <td width="92%" valign="top">   </td> </tr> <tr> <td valign="top">   </td> <td valign="top"> • </td> <td valign="top"> Monthly installment payments of $1,000 commencing March 25, 2011. </td> </tr> <tr> <td valign="top">   </td> <td valign="top"> • </td> <td valign="top"> 8% of all additional net financing received by the Company over the next 22 months beginning February 25, 2011 and ending December 31. 2012. </td> </tr> <tr> <td valign="top">   </td> <td valign="top"> • </td> <td valign="top"> 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. </td> </tr> </table> As of July 31, 2012, the remaining balance on this indebtedness was $90,704, which is included as part of accrued expenses on the Balance Sheet.

450000 20000 0.06 0 107500

450000

334167

199000 3000 0.06

84467

61873

24167

158658

169150

122500

Monthly installment payments of $1,000 commencing March 25, 2011. 8% of all additional net financing received by the Company over the next 22 months beginning February 25, 2011 and ending December 31. 2012. 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 1000 0.08

90704

NOTE 8 – LOANS FROM OFFICERS On July 28, 2011, Conolog Corporation issued two promissory notes in favor of Robert Benou in the aggregate principal amount of $256,350, consisting of amounts advanced by Mr. Benou to the Company between January 24, 2011 and July 18, 2011. During the year ended July 31, 2012, the Company made repayments to Robert Benou totaling $181,350 for loans made by him during the year ended July 31, 2011. On March 23, 2012, Conolog Corporation issued a promissory note in favor of Robert Benou in the aggregate principal amount of $100,000, consisting of amounts advanced by Mr. Benou to the Company on that date. On July 16, 2012, Conolog Corporation issued a promissory note in favor of Robert Benou in the aggregate principal amount of $15,000, consisting of amounts advanced by Mr. Benou to the Company on that date. Mr. Benou is the Chief Executive Officer and Chairman of the Company. The Notes are payable on demand and do not bear interest. The Notes are 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. The outstanding balance as of July 31, 2012, was $190,000.

256350

181350

100000 15000 190000

NOTE 9 – SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION <table style="margin-left: 2%; width: 98%;" border="0" cellspacing="0" cellpadding="0"> <tr style="font-size: 1PX;"> <td valign="bottom" width="69%">   </td> <td valign="bottom" width="3%">   </td> <td valign="bottom" width="1%">   </td> <td valign="bottom" width="10%">   </td> <td valign="bottom" width="3%">   </td> <td valign="bottom" width="1%">   </td> <td valign="bottom" width="10%">   </td> <td valign="bottom" width="1%">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td style="border-bottom: 1px solid black;" colspan="2" valign="bottom"> Fiscal Year Ended July 31, 2012 </td> <td valign="bottom">   </td> <td style="border-bottom: 1px solid black;" colspan="2" valign="bottom"> Fiscal Year Ended July 31, 2011 </td> <td valign="bottom">   </td> </tr> <tr> <td style="background-color: #e5ffff;" valign="bottom"> CASH PAID DURING THE PERIOD FOR: </td> <td style="background-color: #e5ffff;" valign="bottom">   </td> <td style="background-color: #e5ffff;" valign="bottom">   </td> <td style="background-color: #e5ffff;" valign="bottom">   </td> <td style="background-color: #e5ffff;" valign="bottom">   </td> <td style="background-color: #e5ffff;" valign="bottom">   </td> <td style="background-color: #e5ffff;" valign="bottom">   </td> <td style="background-color: #e5ffff;" valign="bottom">   </td> </tr> <tr> <td valign="bottom"> Interest expense </td> <td valign="bottom">   </td> <td valign="bottom"> $ </td> <td valign="bottom"> 2,207 </td> <td valign="bottom">   </td> <td valign="bottom"> $ </td> <td valign="bottom"> 25 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr noshade="noshade" size="3" width="100%" /> </td> <td valign="bottom"> <hr noshade="noshade" size="3" width="100%" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr noshade="noshade" size="3" width="100%" /> </td> <td valign="bottom"> <hr noshade="noshade" size="3" width="100%" /> </td> <td valign="bottom">   </td> </tr> <tr> <td style="background-color: #e5ffff;" valign="bottom"> Income Taxes </td> <td style="background-color: #e5ffff;" valign="bottom">   </td> <td style="background-color: #e5ffff;" valign="bottom"> $ </td> <td style="background-color: #e5ffff;" valign="bottom"> 6,384 </td> <td style="background-color: #e5ffff;" valign="bottom">   </td> <td style="background-color: #e5ffff;" valign="bottom"> $ </td> <td style="background-color: #e5ffff;" valign="bottom"> — </td> <td style="background-color: #e5ffff;" valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr noshade="noshade" size="3" width="100%" /> </td> <td valign="bottom"> <hr noshade="noshade" size="3" width="100%" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr noshade="noshade" size="3" width="100%" /> </td> <td valign="bottom"> <hr noshade="noshade" size="3" width="100%" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom"> SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES: </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> </tr> <tr> <td style="background-color: #e5ffff;" valign="bottom"> None </td> <td style="background-color: #e5ffff;" valign="bottom">   </td> <td style="background-color: #e5ffff;" valign="bottom"> $ </td> <td style="background-color: #e5ffff;" valign="bottom"> — </td> <td style="background-color: #e5ffff;" valign="bottom">   </td> <td style="background-color: #e5ffff;" valign="bottom"> $ </td> <td style="background-color: #e5ffff;" valign="bottom"> — </td> <td style="background-color: #e5ffff;" valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr noshade="noshade" size="3" width="100%" /> </td> <td valign="bottom"> <hr noshade="noshade" size="3" width="100%" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr noshade="noshade" size="3" width="100%" /> </td> <td valign="bottom"> <hr noshade="noshade" size="3" width="100%" /> </td> <td valign="bottom">   </td> </tr> </table>

<table style="margin-left: 2%; width: 98%;" border="0" cellspacing="0" cellpadding="0"> <tr style="font-size: 1PX;"> <td valign="bottom" width="69%">   </td> <td valign="bottom" width="3%">   </td> <td valign="bottom" width="1%">   </td> <td valign="bottom" width="10%">   </td> <td valign="bottom" width="3%">   </td> <td valign="bottom" width="1%">   </td> <td valign="bottom" width="10%">   </td> <td valign="bottom" width="1%">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td style="border-bottom: 1px solid black;" colspan="2" valign="bottom"> Fiscal Year Ended July 31, 2012 </td> <td valign="bottom">   </td> <td style="border-bottom: 1px solid black;" colspan="2" valign="bottom"> Fiscal Year Ended July 31, 2011 </td> <td valign="bottom">   </td> </tr> <tr> <td style="background-color: #e5ffff;" valign="bottom"> CASH PAID DURING THE PERIOD FOR: </td> <td style="background-color: #e5ffff;" valign="bottom">   </td> <td style="background-color: #e5ffff;" valign="bottom">   </td> <td style="background-color: #e5ffff;" valign="bottom">   </td> <td style="background-color: #e5ffff;" valign="bottom">   </td> <td style="background-color: #e5ffff;" valign="bottom">   </td> <td style="background-color: #e5ffff;" valign="bottom">   </td> <td style="background-color: #e5ffff;" valign="bottom">   </td> </tr> <tr> <td valign="bottom"> Interest expense </td> <td valign="bottom">   </td> <td valign="bottom"> $ </td> <td valign="bottom"> 2,207 </td> <td valign="bottom">   </td> <td valign="bottom"> $ </td> <td valign="bottom"> 25 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr noshade="noshade" size="3" width="100%" /> </td> <td valign="bottom"> <hr noshade="noshade" size="3" width="100%" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr noshade="noshade" size="3" width="100%" /> </td> <td valign="bottom"> <hr noshade="noshade" size="3" width="100%" /> </td> <td valign="bottom">   </td> </tr> <tr> <td style="background-color: #e5ffff;" valign="bottom"> Income Taxes </td> <td style="background-color: #e5ffff;" valign="bottom">   </td> <td style="background-color: #e5ffff;" valign="bottom"> $ </td> <td style="background-color: #e5ffff;" valign="bottom"> 6,384 </td> <td style="background-color: #e5ffff;" valign="bottom">   </td> <td style="background-color: #e5ffff;" valign="bottom"> $ </td> <td style="background-color: #e5ffff;" valign="bottom"> — </td> <td style="background-color: #e5ffff;" valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr noshade="noshade" size="3" width="100%" /> </td> <td valign="bottom"> <hr noshade="noshade" size="3" width="100%" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr noshade="noshade" size="3" width="100%" /> </td> <td valign="bottom"> <hr noshade="noshade" size="3" width="100%" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom"> SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES: </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> </tr> <tr> <td style="background-color: #e5ffff;" valign="bottom"> None </td> <td style="background-color: #e5ffff;" valign="bottom">   </td> <td style="background-color: #e5ffff;" valign="bottom"> $ </td> <td style="background-color: #e5ffff;" valign="bottom"> — </td> <td style="background-color: #e5ffff;" valign="bottom">   </td> <td style="background-color: #e5ffff;" valign="bottom"> $ </td> <td style="background-color: #e5ffff;" valign="bottom"> — </td> <td style="background-color: #e5ffff;" valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr noshade="noshade" size="3" width="100%" /> </td> <td valign="bottom"> <hr noshade="noshade" size="3" width="100%" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr noshade="noshade" size="3" width="100%" /> </td> <td valign="bottom"> <hr noshade="noshade" size="3" width="100%" /> </td> <td valign="bottom">   </td> </tr> </table>

2207 25

6384

NOTE 10– 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. Employer contributions to the plan are discretionary and determined annually by management. The Company did not make any matching contributions to the plan for either the fiscal year ended July 31, 2012 or the fiscal year ended July 31, 2011.

NOTE 11 – SUBSEQUENT EVENTS The Company has evaluated subsequent events through the date the financial statements were issued and up to the time of filing of the financial statements with the Securities and Exchange Commission. Between August 1 and November 29, 2012, the Company issued units consisting of 68,000 shares of its common stock and 136,000 warrants valued at $17,000 as part of its secondary private placement offering. Pursuant to Anti-Dilution provisions, the Company is obligated to issue an additional 22,614 shares of its common stock to investors in the Company’s first private placement. On October 4, 2012, Conolog Corporation issued a promissory note in favor of Robert Benou in the aggregate principal amount of $100,000, consisting of amounts advanced by Mr. Benou to the Company on that date. The note is not interest bearing and is payable on demand. On November 13, 2012, the Company filed a form 8-K with the Securities and Exchange Commission (“SEC”) stating that in light of the unprecedented interruptions caused by Hurricane Sandy, the Company would be unable to file its Form 10-K by the 12b-25 extension deadline of Monday, November 13, 2012. The next day, the SEC issued press release 2012-226 which states, in part, “Companies that receive an extension on filing Exchange Act annual reports or quarterly reports pursuant to the order will be considered to have a due date of Nov. 21, 2012 for those reports for purposes of Exchange Act Rule 12b-25”. On November 13, 2012, Mr. Marc R. Benou (“Mr. Benou”) resigned from his position as the Secretary of the Company. Mr. Benou shall remain with the Company in the capacity of President, Chief Operating Officer and Director. Mr. Benou’s resignation is not the result of any disagreement with the Company on any matter relating to the Company’s operations, policies or practices. On November 13, 2012, the Board approved, by unanimous written consent, the appointment of Mr. Michael Horn as the Company’s Vice President and Secretary. Mr. Horn has been a director of the Company since August 2011. On November 21, 2012, Conolog Corporation issued a promissory note in favor of Robert Benou in the aggregate principal amount of $98,000, consisting of amounts advanced by Mr. Benou to the Company on that date. The note is not interest bearing and is payable on demand. On December 11, 2012 the Company entered into agreements to sell up to $2,208,444 of its unused tax losses and received net proceeds of $92,732 related to the sale. Between August 1, 2012 and January 4, 2013, the Company paid an aggregate amount of $103,000 to Robert Benou as repayment towards his outstanding notes.

68000

136000

17000

22614

100000 98000 2208444 92732

103000