10KSB 1 a44889.htm CONOLOG CORPORATION

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-KSB


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

For the fiscal year ended July 31, 2006

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

Commission File Number: 0-8174

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


DELAWARE	22-1847286
(State or other jurisdiction of	(IRS Employer
incorporation or organization)	Identification No.)

5 Columbia Road, Somerville, NJ	08876
(Address of principal executive office)	(Zip code)

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

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


Title of each class		Name of each exchange in which registered

Common Stock, $0.01 par value		NASDAQ Capital Markets

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

Yes x No o

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to the Form 10-KSB. o

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

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

TABLE OF CONTENTS


PART I

Item 1. DESCRIPTION OF BUSINESS	1

Item 2. DESCRIPTION OF PROPERTY	9

Item 3. LEGAL PROCEEDINGS	9

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	9

PART II

Item 5 MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS	10

Item 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION	11

Item 7. FINANCIAL STATEMENTS	17

Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	17

Item 8A. CONTROLS AND PROCEDURES	17

PART III

Item 9. DIRECTORS, EXECUTIVE OFFICERS	18

Item 10. EXECUTIVE COMPENSATION, PROMOTERS AND CONTROL PERSONS: COMPLIANCE WITH SECTION 16 (A) OF THE EXCHANGE ACT	20

Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT	21

Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS	22

Item 13. EXHIBITS	22

Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES	24

SIGNATURES	25

FORWARD LOOKING STATEMENTS

This annual report on Form 10KSB contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. Forward-looking statements inherently involve risks and uncertainties that could cause actual results to differ materially from those stated. Such statements are subject to certain risks and uncertainties, including possible significant variations in recognized revenue due to customer caused delays in installations and competition from larger better known, that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. Furthermore, there can be no assurance that our sales will increase. The Company does not assume any obligation to update the forward-looking information and cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made.

PART I

GENERAL INFORMATION

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

Item 1. BUSINESS DEVELOPMENT AND BUSINESS

We were organized in 1968 and were engaged primarily in the design and manufacture of electronic components and systems for military applications.

In July 1971, we merged with DSI Systems, Inc., then engaged in the development and manufacture of terminal viewers for digital retrieval of microfilm. Later that year, we changed our name to Conolog Corporation.

By 1980 it became apparent that the military segment of the business was growing while the terminal viewer segment was a drain on cash and other resources. By the year-end, the terminal viewer business was discontinued and the inventory relating thereto was written off, allowing us to concentrate on our military business.

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

Since the 1980’s, we have been an active participant in providing electromagnetic wave filters for major military programs, such as the Patriot Missile, Hawk Missile and Sea Sparrow Missile. In addition to these projects, our components are currently used by the military in tanks, the Apache helicopter and MK-50 torpedoes.

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

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

Also in September 1998, we completed a sale/leaseback of our manufacturing facility. This enabled us to significantly reduce our operating costs and increase our working capital.

In August 2000, we acquired Independent Computer Maintenance Corporation (“ICM”), a provider of installation, maintenance and troubleshooting services for commercial and corporate computer systems and networks to businesses in the greater New York metropolitan area.

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

In October 2002, we ceased operating this business and entered into an Agreement to rescind the Asset Purchase Agreement pursuant to which we acquired ICM.

In March 2004, we ceased operating our staffing business. The assets of the wholly-owned subsidiary, Nologoc, Inc. trading as Atlas Design, were sold.

Products

We are engaged in the design and production of (i) transducers, which are electro-magnetic devices which convert electrical energy into mechanical and other forms of physical energy, or conversely convert mechanical and other forms of physical energy into electrical energy; (ii) digital signal processing (DSP) systems and electromagnetic wave filters for differentiation among discreet audio and radio frequencies; (iii) audio transmitters and modulators, for the transmission over telephone lines, microwave circuits, or satellite, of electrical signals obtained from transducers, data generated in electronic code form or by computers or other similar equipment (not manufactured by the Company); (iv) audio receivers and demodulators which are small systems which receive and decode the signals from the audio transmitters and convert them into digital codes for input into computers, teletypes or other similar equipment (not manufactured by the Company) or convert such signals into mechanical or other form of energy, such as opening or closing valves, or starting or stopping a motor; (v) magnetic “networks” which are devices that permit the matching or coupling of different types of communication equipment together or many identical or similar equipment together or onto telephone or other transmission lines so as not to cause interference; and (vi) analog transmitters and receivers, which permit the coding/transmission and receiving/decoding of a constantly variable data, such as the water level in a tank, pressure in a pipe or temperature, by actually displaying the exact information at the receiving end in digital form for storing in a computer or other devices, or by physically displaying the information in a visual fashion such as a numerical readout or meter, and (vii) multiplexer supervisory controls, which enable callers with high volumes of supervisory data to transmit on fewer phone lines.

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

Present Status/Business Product Description

We are engaged in three basic market segments:

(A) Commercial Sales
(Under the trade name “INIVEN” (a wholly owned
Division of Conolog))

- Direct sales to end-users

- Sales to system assemblers

- Sales to contractors/installers

(B) Military Sales

- Direct contract sales to the military

- As subcontractor to systems producers

- Foreign governments

(C) Commercial Sales

- As Manufacturing Subcontractor
to Systems Producers.

(A) Military Sales

Military sales are primarily for our electromagnetic wave filters used in military radios, vehicles (cars, trucks or tanks), portable (backpack), special signaling equipment and exchanges (as in field command posts), ship to ship teletype signaling filters used in deployment of ships (UCC-1 and UCC-4 systems) as well as many other signaling applications where accurate electromagnetic frequency control is required.

Our military sales are received through independent sales representatives who are paid a commission by the Company.

B) Commercial “INIVEN” Sales and Products

“INIVEN” equipment is designed around four (4) core product groups:


	(1)	Protective Tone Relay (PTR) and Protective Digital Relay (PDR) Teleprotection Series Communications Terminal, which includes the PTR-1000, PTR-1500 and PDR-2000;

	(2)	Audio Tone & Telemetry Equipment (Audio Tone Control, Telemetering and Data Transmission Systems), which includes Series “98”, “68”, “40” and “GEN-1”;

	(3)	Multiplex Supervisory Control System; and

	(4)	Communication Link Multihead Fiber Optic Couplers and Industrial Grade 12 Baud Modems.

(1) PDR Teleprotection Series


	The PDR-2000 is designed as a state of the art digital protection terminal. The PDR-2000 operates over 56/64 KBPS channel, G.703 or fiber optics. Combined with the hardwire CM-100, the PDR 2000 can operate seamlessly over fiber optics with existing substation equipment.

(2) PTR Teleprotection Series

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

The PTR-1000 is installed in pairs, one unit at each end of the line. Each unit is connected and in constant communication with the other, as they continuously monitor the line for faults. In the event of a fault occurring (such as a downed line or a short circuit) at either end, and when confirmed by the receiving PTR-1000 unit, the line is immediately isolated for shut down, averting costly damage and downtime.

The PTR-1000 system is composed of a transmitter, dual receivers, a logic card (brain center and controller of the system), relay module, line interface module and power supply module. The transmitters at each end are independent and transmit (continuously) the status (information being monitored) at their end of the line.

The PTR-1500, is a quad system and performs as 2 duals or 4 singles with many unique features such as multiple line operation, event recording with date stamp with optional analog or digital transmission modes including optic fiber interface.

The PTR and PDR Teleprotection Series are designed for global use by electric utilities and any entity generating power for its own consumption with resale of surplus power to an electric utility, such as cities, municipalities, cooperatives and large corporations that find it more economical to generate their own electricity.

The PDR-2000, PTR-1500 and the PTR-1000 target market is:


	New installations; i.e., new transmission lines, new distribution segments, for utilities and co-generators.

	Existing installations not properly protected, improving efficiency and reducing down time.

	Existing installations for upgrading to PTR-1500/1000 and PDR-2000 technology, again improving efficiency and down time.

	Sales efforts for the PDR and PTR series are presently being conducted by the Company’s Marketing executives, through independent manufacturers’ representatives and through distributors. Sales are targeted primarily to the largest utilities and co-generators.


	According to McGraw-Hill, Inc. Electrical World (Electric Utilities of the United States), in the United States alone, there are over 500 large entities generating electricity. They are:


		Investor-owned
		Municipal Systems
		Cooperative Systems
		Federal, State and District systems.

(3) Audio Tone and Telemetry Equipment

For many years there has been a need for a modularly independent system that would permit a user, from a distance, to control functions such as opening a valve, starting a motor, shutting down a compressor, changing a traffic signal, control landing lights at an airport, activate a hazard warning on a highway, and in return allow the user to receive information, such as the liquid level in a tank, the pressure in a pipe, the rate of flow out of a compressor, the flow of traffic, the status of a traffic light, airport lights, or confirmation that a command was performed. Such information is transmitted and received and the control functions are performed from a distance utilizing telephone lines, microwave link or direct wire.

These applications, by their nature, can be accomplished with slow speed signaling systems composed of a transmitter on one end and a receiver on the other to carry out the necessary instructions provided by the transmitter. Each set (transmitter/receiver combination) is called a channel. Because of the slow speed, up to 30 channels could be made to transmit and receive signals, in either direction on a single telephone line, microwave link or direct-wired line at the same time. This parallel transmission permits each transmitter/receiver pair to be independent of all the others.

This product segment includes the first generation equipment, known as GEN-1, followed by later generations which include technological improvements and programmable capabilities to include:


	GEN-1 Series - First generation with electromagnetic modules and first generation programmable modules without electro-magnetic modules.

	“98” and “68” Series - The latest generation applies DSP and microprocessor technology with full programmability, in the field or at the factory.

	“40” Series - Designed to function with the “98” or “68” series; transmits and receives variable analog data.

GEN-1 and GEN-1 Programmable Series

The diversity of applications for this equipment makes it available for a wide range of users who are not restricted to a single industry. Typical industrial uses include: the measurement of water and gas, waste water, gasoline, oil, traffic, and electricity. Typical users include: utilities, co-generators, airports, navy yards, telephone companies, paper and pulp processors and wherever remote control and data acquisition is required.

Because of the ease of use and installation, GEN-1 type equipment is used in the United States by a spectrum of users. Since our line has a distinct mechanical configuration, we designed our GEN-1 Programmable units and other improvements as replacements for existing units. These account for approximately 18% of the Company’s commercial sales. The Company’s line of GEN-1 equipment is extensive and provides the user with the ability to perform multiple control functions,

status monitoring as well as continuous variable data monitoring, such as a level in a tank or pressure gauge.

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

Sales to this market are made in the same manner as the PTR-1000 market except that manufacturers’ representatives specialize in selling to this diverse market.

“98,” “68” and “40” Series represent our latest designs in the audio tone equipment utilizing the more advanced DSP technology, which provides high accuracy and long-term stability. These features have allowed the Company to greatly improve the scope, density and number of functions that can be performed on a single phone line, microwave link or direct line.

Sales of these products are made by the same agents who sell our GEN-1 products, but are also directed to encompass more sophisticated users with larger amounts of data and control points. The mechanical configuration of the “98” series is more compact, permitting more equipment in a given space, while performing many more functions when it is connected to the “40” Series. The “68” Series is the “98” Series repackaged mechanically specifically for customers with older systems permitting them to upgrade their systems to DSP technology. The “40” Series, when connected to the “98” or “68” in the same chassis, permits the continuous monitoring of variable data.

Typical applications for these products include transmission of the variable data (such as volume, temperature, pressure and moisture) for water, gas, industrial gases, oil, gasoline, transportation equipment and telephone exchanges, and for use at airports, tunnels and bridges and for security and electricity systems.

(4) Multiplex Supervisory (IM) Control System

This product is a response to the cost and scarcity of dedicated phone lines (connections whereby the phone link is dedicated to one subscriber), and enables customers with high volumes of supervisory data (where many functions are monitored from a single site) to transmit data on fewer phone lines (i.e., with more data per channel, up to a maximum of 30 channels per line).

Using the “98” DSP Series as its communications link, the Company designed the Multiplexer Supervisory Control System to handle 8 times the normal capacity per channel. The microprocessor-based system allows a single telephone line to handle up to 900 data inputs.

This product line, because of its data density capability, may be utilized for a very broad range of applications. This product has only recently been introduced and the Company sales efforts for it are being conducted through its existing independent manufacturers sales representatives.

(5) Fiber Optic Link and Data Modem

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

OUR STRATEGY

Our strategy is to develop new commercial markets by continuing to develop new products and enhance existing products to improve both its market share and competitive position. Growth in commercial sales is expected to come through internal growth of existing products, new product introductions and the expansion of regional markets to meet the growing needs of its customers for more sophisticated and comprehensive products and services.

MARKETING AND SALES

In general, the Company’s products are marketed through telemarketing and customer contacts by our direct sales force and through independent manufacturing sales representatives and distributors.

MILITARY - We market our military products directly and through independent manufacturing sales representatives.

COMMERCIAL - We market the PTR-1000, PTR-1500, PDR-2000 and all of our INIVEN products to utilities by means of our Sales personnel, through independent manufacturers representatives, and through distributors, focusing mainly on the largest utilities and co-generators. The long sales cycle of our systems is the result of rigorous utility testing in addition to many months of field operations in conjunction with existing equipment at the utility’s substations. In the United States alone there are over 500 large entities generating electricity that are identified as investor-owned, municipal systems, cooperative systems and federal, state and district systems.

We market the Gen-1 and Gen-1 Programmable Series, as well as the “98” Series, “68” Series and “40” Series, in the same way as the PTR-1000 except that the manufacturers representatives used by the Company specialize in selling to the diverse markets that utilize such products.

COMPETITION

The market for our products and staffing services is very competitive. There are several companies engaged in providing the services and in the manufacturing the products of the type produced by us, most of which are substantially larger and have substantially greater name recognition or greater financial resources and personnel. The major competitive factors include availability of personnel, product quality, reliability, price, service and delivery. Competition is expected to continue and intensify. The market is also characterized by rapid technological changes and advances. We would be adversely affected if our competitors introduced technology superior products or offered these products and services at significantly lower prices than our products.

LARGEST CUSTOMERS

Sales to our major customers during fiscal 2006 (Bonneville Power Authority, NSTAR) totaled $90,215 and $68,222, respectively (totaling 17% and 13% of all sales, respectively. Sales to our major customers during fiscal 2005 (Bonneville Power Authority, U.S. Military) totaled $168,150 and $174,121, respectively (totaling 30% and 32% of all sales, respectively). None of these customers has or had any material relationship other than business with the Company.

INVENTORY

Raw Materials

We believe that we have adequate sources of raw materials available for use in our business. Our products are assembled from a variety of standard electronic components, such as integrated circuits, transformers, transistors, passive components (i.e., resistors, capacitors and inductors), diodes and assorted hardware, such as, printed circuit boards, connectors and faceplates. We are not

dependent upon any single supplier. We also purchase a number of other electronic components and sub-assemblies from various suppliers. There has been no material increase in the cost of most raw materials and we do not foresee a significant shortage of raw materials in the future.

In the past, we manufactured and held in our inventory finished products pursuant to the military specifications and based upon the military forecast for future quantities and delivery schedules. Widespread military procurements were discontinued as a result of the end of the cold war and the downsizing of the military establishment. As a result, we no longer manufacturer military products in advance. Rather, we only schedule production as purchase orders are received.

MANUFACTURING

The Company currently rents approximately 7,000 square feet of the facility located at 5 Columbia Road, for a combination of manufacturing and office space. The Company assembles, under normal workload conditions, the product it sells, however, to accommodate the peak demands that occur from time to time, we can engage a number of subcontractors to assemble boards to our specifications. All assemblies, however, are inspected and fully tested by the Company’s quality, engineering and testing departments. We maintain test equipment and every product is burned-in (i.e., each product is run at full power for 48 hours) and tested prior to shipment.

WARRANTY AND SERVICE

We provide a twelve-year warranty on our products, which covers parts and labor. The Company, at its option, repairs or replaces products that are found defective during the warranty period providing proper preventive maintenance procedures have been followed by customers. Repairs that are necessitated by misuse of such products are not covered by our warranty.

In cases of defective products, the customer typically returns them to our facility in Somerville, New Jersey. Our service personnel then replace or repair the defective items and ship them back to the customer. Generally all servicing is completed at our plant and customers are charged a fee for those service items that are not covered by the warranty. We do not offer our customers any formal written service contracts.

RESEARCH AND DEVELOPMENT

New Products- CM-100 platform

During fiscal 2005-2006, we introduced the CM-100, which we believe is the first of its kind, direct substation hardened communication consolidator that fills the existing gap in substation communications. The hardwired CM-100 will allow our existing products, including the PDR-2000, to operate seamlessly over fiber optics together with existing substation equipment. We plan to commence deliveries of the CM-100 by December 2006.

During fiscal 2003-2004, we proceeded with the design and testing of the PDR-2000 8 channel digital transfer trip communications product.

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

During fiscal 2000-2001, we invested approximately $25,000 to complete the accessory modules of the PTR-1500 and extend the range of our Multiplexer products. During fiscal 1999-2000 we invested approximately $1,705,257 for product development and amortization of product costs.

The Company also developed a new platform for its GEN1 products allowing for its use by the Canadian utilities.

PATENTS AND TRADEMARKS

We do not have any patents covering any of our present products. We use the trademark INIVEN for our commercial products. We believe that such trademark is recognized in our industry. We believe that our prospects are dependent primarily on our ability to offer our customers high quality, reliable products at competitive prices rather than on our ability to obtain and defend patents and trademarks. We do not believe that our INIVEN trademark is of material importance to the Company’s business.

GOVERNMENTAL REGULATION

Our manufacturing facilities are subject to numerous existing and proposed Federal and State regulations designed to protect the environment, establish occupational safety and health standards and cover other matters. We believe that our operations are in compliance with existing regulations and we do not believe that such compliance has had or will have any material effect upon our capital expenditures, earnings or competitive position. With respect to military sales, we are not subject to any special regulations. The products manufactured are done so in accordance with accepted commercial practices.

EMPLOYEES

As of July 31, 2006, we employed 14 persons on a full-time basis, including 2 in management, 1 in sales, 1 in clerical, 1 in accounting, 1 in purchasing, 5 in engineering and quality control and 3 in production. We have enjoyed good labor relations.

None of our employees are represented by a labor union or bound by a collective bargaining agreement. We have never suffered a work stoppage. We believe our future success will depend, in part, on our continued ability to recruit and retain highly skilled management, marketing and technical personnel.

Item 2. DESCRIPTION OF PROPERTY

Our principal executive offices are located at 5 Columbia Somerville, New Jersey. The space consists of approximately 7,000 square feet of which approximately 5,000 square feet is dedicated to manufacturing, production and testing and approximately 2,000 square feet is dedicated to administrative and storage needs. Our current monthly rent expense is $ 4,600.The executive office houses both the manufacturing division and the temporary staffing division. In the opinion of management, the space is adequately covered by insurance.

Item 3. LEGAL PROCEEDINGS

None

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

None

PART II

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS

MARKET PRICE FOR COMMON STOCK AND CLASS A WARRANTS

Our Common Stock is traded on the Nasdaq Capital Market, under the symbol CNLG.

The following table sets forth, for the periods indicated, the high and low prices of the Company’s Common Stock traded on the Nasdaq Capital Market for 2006 and 2005.


	Common Stock

Fiscal Year 2006	High		Low


First Quarter		2.13		.92

Second Quarter		1.16		.86

Third Quarter		1.01		.81

Fourth Quarter		.90		.36


	Common Stock

Fiscal Year 2005	High		Low


First Quarter		6.61		1.41

Second Quarter		6.30		3.40

Third Quarter		4.29		1.50

Fourth Quarter		2.07		1.45

(b) As of July 31, 2006, the Company’s Common Stock was held by approximately 739 shareholders of record. Our transfer agent is Continental Stock Transfer & Trust Company, with offices at 17 Battery Place, 8^th floor, New York, New York, telephone number (212) 509-4000. As transfer agent for our shares of common stock the transfer agent is responsible for all record-keeping and administrative functions in connection with the common shares of stock.

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

EQUITY COMPENSATION PLAN INFORMATION

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



	Number of Securities to be issued upon exercise of outstanding options, warrants and rights (a)	Weighted average exercise price of outstanding options, warrants and rights (b)	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)

Equity compensation plans approved by security holders	On July 9, 2002 our stockholders approved our 2002 Stock Option Plan under which up to 190,000 shares of our common stock may be granted to our employees, directors and consultants. To date, no options have been granted under this plan. The exercise price of options granted under the 2002 Stock Option Plan will be the fair market value of our common stock on the date immediately preceding the date on which the option is granted.	N/A	190,000

Equity compensation plans not approved by security holders	N/A

Total	190,000

Item 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION

Subsequent to July 31, 2004, (1) the remaining principal balance of $1,094,000 from the issuance of convertible debentures during the fiscal year ended July 31, 2004, was converted into 1,032,076 common shares. (2) Additionally, warrants expiring April 26, 2011 were exercised resulting in the issuance of 270,000 common shares in exchange for $429,300.

On July 29, 2004, the Company entered into a subscription agreement with certain investors to issue and sell in a private placement exempt from the registration requirements of the Securities Act of 1933, as amended. Pursuant to the subscription agreement the Company sold to the investors 479,000 shares of its common stock and warrants to purchase 200,000 shares of the Company’s common stock at a price of $1.84 per share, which expire on July 30, 2009 and received gross proceeds of $688,500 and net proceeds of $598,995 before deducting attorneys’ fees, printing fees, filing fees and other miscellaneous fees and expenses related to the private placement. The warrants were valued using the Black-Scholes option valuation model with a resulting allocation of the aggregate proceeds from the subscription attributable to the warrants of $399,401. The following assumptions were utilized to value the warrants: price per share of common stock of $1.84; expected life of five years; expected volatility of 149%; a risk free interest rate of 3.7%; and an expected yield of 0.0%. On February 15, 2005 the 200,000 warrants were exercised and the Company received proceeds of $367,500.

On February 18, 2005, the Company entered into a subscription agreement with certain investors to issue and sell in a private placement exempt from the registration requirements of

the Securities Act of 1933, as amended. Pursuant to the subscription agreement, the Company sold to the investors 1,369,355 shares of its common stock and warrants to purchase 958,549 shares of its common stock at a price of $1.25, which expire on August 18, 2010 and received gross proceeds of $4,245,000 and net proceeds of $3,710,650 before deducting attorneys’ fees, printing fees, filing fees and other miscellaneous fees and expenses related to the private placement.

On July 19, 2005, the Company entered into a subscription agreement with certain investors to issue and sell in a private placement exempt from the registration requirements of the Securities Act of 1933, as amended. Pursuant to the subscription agreement, the Company sold to the investors 1,200,000 shares of its common stock and warrants to purchase 1,440,000 shares of its common stock at a price of $1.6892 per share, which expire on January 19, 2011 and the Company received gross proceeds of $1,500,000 and net proceeds of $1,350,000 before deducting attorneys’ fees, printing fees, filing fees and other miscellaneous fees and expenses related to the private placement.

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

RESULTS OF OPERATIONS

2006 Compared to 2005

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

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

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

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

The Company’s interest income increased by $77,687 for the fiscal year ended July 31, 2006 to $135,841 compared to $58,154 for fiscal year ended July 31, 2005. The totals for fiscal years 2006 and 2005 include interest income derived from the Company’s interest bearing accounts through several banks.

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

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

2005 Compared to 2004

Product revenue for the fiscal year ended July 31, 2005 totaled $549,222, a decrease of 42.9% or $413,786 from $963,008 reported for fiscal year ended July 31, 2004. The Company attributed the decrease in product revenue to delayed and extended deliveries. Subsequent to the events of September 11, 2001, utilities were required to upgrade security on newly developed products such as the PDR-2000 system. During the fourth quarter ended July 31, 2005 a substantial number of PDR-2000 systems, which had been shipped and invoiced in the third quarter ended April 30, 2005, were returned by the utilities for software upgrades to conform to these standards. Consequently the Company issued credits to these utilities, producing the effect of a net reduction in revenues for the 12 months ended July 31, 2005 when compared to the 9 months ended April 30, 2005. This extensive re-design and testing resulted in extended delivery dates to customers. The Company also saw a decrease in military contract orders.

Product cost for the fiscal year ended July 31, 2005 totaled $494,605 a decrease of 45.8% or $418,956 from $913,561 reported for fiscal year ended July 31, 2004. The Company attributes the decrease in product cost as a percentage of sales, a direct relation to the decrease in sales orders.

Gross profit for products for the years ended July 31, 2005 and July 31, 2004 totaled $54,617 and $49,447, respectively, representing 10.0% and 5.1% of product revenue. The increase in gross profit for products is attributed to the product mix and outsourcing.

General and Administrative expenses for the years ended July 31, 2005 and July 31, 2004 totaled $3,324,172 and $5,114,714, respectively. The Company attributes the decrease of $1,790,542 in general and administrative expense, in part, to the decrease in stock-based compensation; however, this decrease was partially off-set by (i) salaries paid to officers in fiscal 2005 which had not been paid in fiscal 2004; (ii) reinstatement of certain employee benefits, which had been suspended in fiscal 2004; and (iii) an increase in expenses related to increased sales and marketing efforts. At a meeting on February 10, 2005, the Company’s shareholders approved a proposal that authorized the Company’s Board to issue from time-to-time an aggregate of 350,000 shares of the Company’s common stock to its directors and employees, including its officers, and on February 10, 2005, the Company’s Board of Directors granted an aggregate of 350,000 shares of the Company’s common stock to its directors and employees, including its officers. Stock grants to the Company’s employees, officers and directors are an expense which is reflected as a part of the Company’s general and administrative cost. The

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

Research and development expenses for the fiscal year ended July 31, 2005 increased $83,354 over fiscal 2004 to $177,338 resulting from upgrades to the PDR 2000, a high speed communications system for use in electric power transmission pilot protection schemes, and the development of a new CM-100 product which were completed during the year.

The Company’s interest income for the fiscal year ended July 31, 2005 totaled $58,154 compared to $7,034 for fiscal year ended July 31, 2004. The totals for fiscal years 2005 and 2004 include interest income derived from the Company’s interest bearing accounts through several banks.

The Company’s interest expense for the fiscal year ended July 31, 2005 totaled $23,371, compared to $1,220,960 for fiscal year ended July 31, 2004. The company’s interest expense for fiscal 2004 includes $1,200,000 of detachable warrants issued with a convertible debt having a beneficial conversion option. The value assigned to these warrants was recorded as interest expense and not amortized.

As a result of the foregoing, the Company reported a net loss from continuing operations of $ 2,987,329 or $ .59 per share for fiscal 2005, compared to a net loss from continuing operations of $ 6,275,886 or $ 4.08 per share for fiscal 2004.

The net loss from discontinued operations for fiscal year ended July 31, 2004 totaled $222,404. The discontinued operations were a result of the sale of the Company’s Atlas Design subsidiary. The decision to sell the component was based on the intensely competitive and highly fragmented nature of the placement services business.

LIQUIDITY AND CAPITAL RESOURCES

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

Accounts receivable have increased from $89,194 at July 31, 2005 to $183,622 at July 31, 2006. This increase of $94,428 is the result of increased sales during the 4^th quarter.

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

INFLATION

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

CRITICAL ACCOUNTING POLICIES

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

Income Recognition

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

Receivables and Allowance for Doubtful Accounts

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

Inventory Valuations, Components and Aging

Inventories are valued at the lower cost or market. Determined by a first-in, first-out (“FIFO”) method.

The Company’s products are used in radio and other transmissions, telephone and telephone exchanges, air and traffic controls, automatic transmission of data for utilities, tele-printing of transmission data such as news and stock market information and for use by electric utilities in monitoring power transmissions lines for faults and/or failures.

The Company currently manufactures and supports over 400 products and assemblies that have been in the market place since 1970. The Company’s inventory represents approximately 10,000 different components and 2,500 assemblies.

The Company presents its inventory in three categories, Finished Goods, Work-in-Process and Raw Materials. Finished Goods represents products that have been completed in connection with specific orders and are awaiting shipment. Finished Goods can consist of produces like the PDR-2000, PTR-1500 and 1000, Gen 1, 98 and 68 series. Work-in-Process represent components that have been requisitioned from the warehouse and are being assembled in the assembly areas. Depending on the configurations required by a customer, products are completed and tested within 8 to 10 business days. Raw Materials represent components in their original packaging stored in a secured warehouse

area, and may consist, in part, of Face plates, PC boards, Digital screen assemblies, Guide rails, Capacitors, Terminals, Power supplies, Process ships, Chassis and racks, Relays, Keypads and Resistors.

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

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

The Company, together with its independent auditors, following inventory analysis and repeated annual testing, established a 3-year rule for maintaining inventory, which requires a write-down policy for inventory parts depending on their age. The inventory is tested annually applying its 3-year rule and the Company classifies as current assets only that amount of inventory it expects to realize in the next one-year operating cycles, the balance of the inventory is classified as non-current. The non-current portion of the inventory consists of the same or like components as the current portion, however, the Company does not project these components being used in production in the next fiscal period. The Company expects to realize the non-current portion of the inventory through its normal sales activity over the next two fiscal years. Any parts which have not been used for 3 years are valued at zero. Any parts, written down to a zero value under the 3-year rule, are maintained in inventory to satisfy the requirements under our long-term warranty programs.

While our inventory value at July 31, 2006 was approximately $ 1.7 million, the total of actual parts held in inventory exceeds $ 4.5 million.

Warranty

The Company provides a twelve-year warranty on its products; the warranty covers parts and labor. The Company, at its option, repairs or replaces products that are found defective during the warranty period providing proper preventive maintenance procedures have been followed by customers. Repairs necessitated by misuse of such products are not covered by our warranty.

In cases of defective products, the customer typically returns them to the Company’s facility in Somerville, New Jersey. The Company’s service personnel will replace or repair the defective items and ship them back to the customer. All servicing is completed at the Company’s main facility and customers are charged a fee for those service items that are not covered by the warranty. We do not offer our customers any formal written service contracts.

Income Taxes

Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the bases of assets and liabilities for financial and income tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes also are recognized for operating losses that are available to offset future federal and state income taxes.

Item 7. FINANCIAL STATEMENT

The financial statements of Conolog Corporation, together with notes and the Independent Auditors Report, are set forth immediately following Item 14 of this Form 10-KSB.

Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

Item 8A. CONTROLS AND PROCEDURES

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

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

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

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

Item 8 B. OTHER INFORMATION

None

PART III

Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

The following table sets forth certain information regarding the officers and directors of the Company as of October 27, 2006.


Name	Age	Position


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

Robert S. Benou has been the Company’s Chairman and Chief Executive Officer since May 1, 2001. He is also the Company’s Chief Financial Officer. From 1968 until May 1, 2001, he served as the Company’s President. Mr. Benou is responsible for material purchasing and inventory control. From June 2001 until August 2005, Mr. Benou served as a director of Henry Bros. Electronics, Inc. (formerly known as Diversified Security Solutions, Inc.), a publicly held company that is a single-source/turn-key provider of technology-based security solutions for medium and large companies and government agencies. Mr. Benou is also a member of the Board of Directors of eXegenics Inc. The common stock of eXegenics Inc. is traded on the OTC Bulletin Board. Mr. Benou is a graduate of Victoria College and holds a BS degree from Kingston College, England and a BSEE from Newark College of Engineering, in addition to industrial management courses at Newark College of Engineering. Robert S. Benou is the father of Marc R. Benou.

Marc R. Benou has been the Company’s President and Chief Operating Officer since May 1, 2001. Mr. Benou joined the Company in 1991 and is responsible for new product development and supervision of sales and marketing. From March 1995 until May 1, 2001, he served as Vice President. Mr. Benou has been on the company’s Board and has served as the Company’s assistant secretary since March 1995. Mr. Benou attended Lehigh and High Point University and holds a BS degree in Business Administration and Management. Marc R. Benou is the son of Robert S. Benou, the Company’s Chairman and Chief Executive Officer.

Louis S. Massad has been a Director of the Company since April 1995. Mr. Massad was Chief Financial Officer and a Director of Henry Bros. Electronics, Inc. (formerly known as Diversified Security Solutions, Inc.). from 2000 until August 2003. From 1997 to 2000, Mr. Massad was a consultant to Diversified Security Solutions, Inc. From 1986 to 1997, Mr. Massad was a Vice President, Chief Financial Officer and Director of Computer Power Inc. Mr. Massad holds a BS and MS degree from Cairo University (Egypt) and an MBA from Long Island University, New York.

Edward J. Rielly has been a Director of the Company since January 1998. Mr. Rielly is a Senior Application Developer with Household International, a financial corporation. From March 2000 to November 2001, Mr. Rielly was a Senior Consultant with Esavio Corporation. From February 1998 to February 2000, Mr. Rielly was an Application Developer with Chubb Corporation. From 1993 to 1998, Mr. Rielly was an Application Developer with the United States Golf Association. Mr. Rielly is a graduate of Lehigh University and holds a BS in Computer Science.

Thomas R. Fogg joined the Company in 1976 as Chief Engineer responsible for analog and guidance projects. Since 1986, Mr. Fogg has served as Vice President-Engineering; he led the design team in the development of the Company’s commercial products. Mr. Fogg holds a BSEE degree from Lafayette College and a MSEE degree from Rutgers University. Mr. Fogg is a fellow of the Institute of Electrical and Electronic Engineers and has published articles on delay equalization and the use of crystal resonators.

David M. Peison has been a Director of the Company since October 2004. Since 2005, Mr. Peison has been vice president with the emerging markets division of HSBC. From 2002 until 2005, Mr. Peison was with Deutsche Bank’s global markets division in New York City. From 1992 to 2000, Mr. Peison was in a Private Law Practice in Florida and New York City. Mr. Peison holds an MBA from Emory University in Atlanta, Ga., a JD from The Dickinson School of Law of Pennsylvania State University and is admitted to Florida, New York and Massachusetts Bars. Mr. Peison obtained his BA degree from Lehigh University in Bethlehem, Pa.

Directors hold office until the annual meeting of the Company’s stockholders and the election and qualification of their successors. Officers hold office, subject to removal at anytime by the Board, until the meeting of directors immediately following the annual meeting of stockholders and until their successors are appointed and qualified.

Audit Committee.

The Company’s Board of Directors has determined that David M. Peison is the Audit Committee’s Financial Expert and that he is “independent” as the term is used in Item 7(d) (3) (iv) of Schedule 14A under the Securities Exchange Act of 1934, as amended.

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

Section 16(a) Compliance.

Section 16(a) of the Exchange Act, requires our directors and officers, and persons who own more than 10% of our Common Stock, to file with the Securities and Exchange Commission initial reports of beneficial ownership and reports of changes in beneficial ownership of our Common Stock and other equity securities. Our officers, directors and greater than 10% beneficial owners are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file. To our knowledge, based solely on a review of the copies of such reports furnished to us and written representations that no other reports were required, during the fiscal year ended July 31, 2006, all Section 16(a) filing requirements applicable to our officers, directors and greater than 10% beneficial owners were complied with except that Form 4’s for Louis Massad were not timely filed. These Forms have since been filed.

Code of Ethics.

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

Item 10. EXECUTIVE COMPENSATION

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


Annual Compensation									Long-Term Compensation

Name and Principal	Fiscal Year-End 31-Jul		Salary			Bonus			Restricted Stock Awards (3)			Closing Price of Common Stock on the Date of the Restricted Stock Award		Securities Underlying Option/ SARS		Other Compensation


Robert Benou, Chairman		2006	$	341,625		$	140,000	(1)		—		$	—		—	$	18,000	*******
Chief Executive Officer,		2005	$	323,333		$	125,000			85,000	*	$	3.13		—	$	18,000	*******
Chief Financial Officer and Director		2004	$	312,000	*	$	—			390,000		$	4.49		—	$	12,780	*******


Marc Benou, President		2006	$	143,625		$	80,000	(2)		—		$	—		—
Chief Operating Officer,		2005	$	111,000		$	60,000			80,000		$	3.13		—
Secretary and Director		2004	$	98,500	**	$	—			340,000		$	4.49		—


Thomas Fogg		2006	$	40,602		$	—			—		$	—		—
Vice-President -		2005	$	40,602		$	—			20,000		$	3.13		—
Engineering		2004	$	40,602		$	—			—		$	—		—

* For the fiscal year ended July 31, 2004, Robert Benou forgave his entire salary.

** For the fiscal year ended July 31, 2004, Marc Benou forgave $63,500 of his salary.

*** Other compensation consisted of a car allowance.


(1)	The Company paid Robert Benou’s 2006 bonus by July 31, 2006.

(2)	The Company paid $60,000 of Marc Benou’s bonus as of July 31, 2006.The balance of $20,000 was paid in August 2006.

(3)	On April 19, 2006, our stockholders approved the granting of 450,000 shares of our common stock to our directors, officers and employees. As of July 31, 2006, none of these shares were granted.

On July 9, 2002 our stockholders approved our 2002 Stock Option Plan under which up to 190,000 shares of our common stock may be granted to our employees, directors and consultants. To date, no options have been granted under this plan. The exercise price of options granted under the 2002 Stock Option Plan will be the fair market value of our common stock on the date immediately preceding the date on which the option is granted.

EMPLOYMENT AGREEMENTS

Mr. Robert Benou is serving under an employment agreement commencing June 1, 1997 and ending May 31, 2002, which pursuant to its terms, renews for one-year terms until cancelled by either the Company or Mr. Benou. Mr. Benou’s annual base salary as of July 31, 2006 was $360,000 and increases by $20,000 annually on June 1^st of each year. In addition, Mr. Benou is entitled to an annual bonus equal to 6% of the Company’s annual “income before income tax provision” as stated in its annual Form 10-KSB. The employment agreement also entitles Mr. Benou to the use of an automobile and to employee benefit plans, such as; life, health, pension, profit sharing and other plans. Under the employment agreement, employment terminates upon death or disability of the employee and the employee may be terminated by the Company for cause.

Mr. Marc Benou is serving under an employment agreement commencing June 1, 1997 and ending May 31, 2002, which pursuant to its terms, renews for one-year terms until cancelled by either the Company or Mr. Benou. Mr. Benou’s annual base salary as of July 31, 2006 was $148,000 and he receives annual increases of $6,000 on June 1^st of each year. Mr. Benou is entitled to an annual bonus equal to 3% of the Company’s annual “income before income tax provision” as stated in its annual Form 10-KSB. The employment agreement also entitles Mr. Benou to the use of an automobile and to employee benefit plans, such as; life, health, pension, profit sharing and other plans. Under the employment agreement, employment is terminated upon death or disability of the employee and employee may be terminated by the Company for cause.

Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth, as of July 31, 2006, certain information with respect to the beneficial ownership of our common stock by each stockholder known by us to be the beneficial owner of more than 5% of our common stock and by each of our current directors and executive officers. Each person has sole voting and investment power with respect to the shares of common stock, except as otherwise indicated.

This table is prepared based on information supplied to us by the listed security holders, any Schedules 13D or 13G and Forms 3 and 4, and other public documents filed with the SEC.

Under thee rules of the Securities and Exchange Commission, a person is deemed to be a beneficial owner of a security if that person has or shares voting power, which includes the power to vote or direct the voting of the security, or investment power, which includes the power to vote or direct the voting of the security. The person is also deemed to be a beneficial owner of any security of which that person has a right to acquire beneficial ownership within 60 days. Under the Securities and Exchange Commission rules, more than one person may be deemed to be a beneficial owner of the same securities, and a person may be deemed to be a beneficial owner of securities as to which he or she may not have any pecuniary beneficial interest.

Unless otherwise noted, the address for each of the named individuals is c/o Conolog Corporation, 5 Columbia Road, Somerville, New Jersey 08876.

Shares of common stock which an individual or group has a right to acquire within 60 days pursuant to the exercise or conversion of options are deemed to be outstanding for the purpose of computing the percentage ownership of such individual or group, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person shown in the table. The applicable percentage of ownership is based on 7,441,353 shares issued and outstanding.


Name and Title	Amount and Nature of Beneficial Ownership		Percent of Class

Robert S. Benou, Chairman, Chief Executive Officer, Chief Financial Officer and Director	185,900		2.49	%
Marc R. Benou, President, Chief Operating Officer, Secretary and Director	229,000		3.07	%
Thomas Fogg, Vice President – Engineering	0		*
Louis Massad, Director	0		*
Edward J. Rielly, Director	0		*
David M. Peison, Director	20,000		*

All Officers and Directors as a Group (6 persons)	434,900		5.84	%
DKR Soundshore Oasis Holding Fund Limited	1,000,000	(1)	13.43	%
Barclays Global Investors, N.A.	417,709	(2)	5.61	%

* Less than 1%.

(1) The beneficial ownership of DKR Soundshore Oasis Holding Fund Limited does not include (i) 200,000 shares of our common stock issuable upon exercise of a warrant with an exercise price of $1.25 per share because this warrant cannot be exercised until January 20, 2006, and (ii) 400,000 shares of our common stock issuable upon the exercise of a warrant with an exercise price of $1.6892 per share because this warrant cannot be executed until January 18, 2006. DKR Oasis Management Company LP, pursuant to an investment management agreement with DKR Soundshore Oasis Holding Fund Ltd., has voting and investment authority over DKR Soundshore Oasis Holding Fund Ltd. Seth Fisher is the managing partner of Oasis Management Holdings LLC, one of the general partners of DKR Oasis Management Company, LP, and as such has ultimate trading authority over DKR Soundshore Oasis Holding Fund Ltd. Mr. Fischer disclaims beneficial ownership over these securities. The address for DKR Soundshore Oasis Holding Fund Limited is 18 Church Street, Hamilton, HM11 Bermuda.

(2) The information for Barclays Global Investors, N.A. is based on information contained in a Schedule 13G filed with the Securities and Exchange Commission on February 16, 2005. The principal business address for Barclays Global Investors, N.A. is 45 Fremont Street, San Francisco, CA 94105.

Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Loan from officers represent advances made by an officer of the company. The advances are due one year after the date of receipt and bear interest at a rate of 4% per annum. There were no advances made by the officer during the years ended July 31, 2006 and 2005, respectively. A Repayment to an officer in the amount of $77,427 was made during the fiscal year ended July 31, 2005 for prior years’ loans. There was no loan repayment balances due to officers at July 31, 2006.

Item 13. EXHIBITS


(a)	Exhibits.

	Index of Exhibits

Exhibit No.	Description of Exhibits

3.1	Certificate of Incorporation - incorporated by reference to the Registrant’s Exhibit 3.01 to Registration Statement on Form S-1 (File No. 2-31302).

3.1.1	Certificate of Amendment of Certificate of Incorporation - incorporated by reference to Exhibit 3.02 to the Registrant’s Registration Statement on Form S-1 (File No. 2-31302).

3.1.2	Certificate of Amendment of Certificate of Incorporation incorporated by reference to Exhibit 4 to the Registrant’s Current Report on Form 8-K for July 1971.

3.1.2	Certificate of Amendment of Certificate of Incorporation incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 10QSB for April 30, 2006.


3.1.3	Certificate of Ownership and Merger with respect to the merger of Data Sciences (Maryland) into the Registrant and the change of Registrant’s name from “Data Sciences Incorporated” to “DSI Systems, Inc.” - incorporated by reference to Exhibit 3.03(a)to the Registrant’s Registration Statement on Form S-1 (File No. 2-31302).

3.1.4	Certificate of the Designation, Preferences and Relative, Participating, Option or Other Special Rights and Qualifications, Limitations or Restrictions thereof of the Series A Preferred Stock (par value $.50) of DSI Systems, Inc. - incorporated by reference to Exhibit 3.04 to the Registrant’s Registration Statement on Form S-1 (File No. 2-31302).

3.1.5	Certificate of the Designation, Preferences and Relative, Participating, Option or Other Special Rights and Qualifications, Limitations or Restrictions thereof of the Series B Preferred Stock (par value $.50) of DSI Systems, Inc. - incorporated by reference to Exhibit 1 to the Registrant’s Current Report on Form 8-K for November 1972.

3.1.6	Certificate of Ownership and Merger respecting merger of Conolog Corporation into the Registrant and the changing of the Registrant’s name from “DSI Systems, Inc.” to “Conolog Corporation” - incorporated by reference to Exhibit 3 to the Registrant’s Current Report on Form 8-K for June 1975.

3.2	Amended By-Laws - incorporated by reference to Exhibit 3(h) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended July 31, 1981.

4.1	Specimen Certificate for shares of Common Stock (1)

10.1	Employment Agreement dated June 1, 1997 between Robert Benou and Conolog Corporation (2)

10.2	Employment Agreement dated June 1, 1997 between Marc Benou and Conolog Corporation (2)

10.3	Conolog Corporation 2002 Stock Option Plan (3)

10.4	Subscription Agreement dated as of January 19, 2006, among Conolog Corporation and the subscribers named therein (4)

10.5	Form of Warrant (issued by Conolog Corporation pursuant to the January 19, 2006 Subscription Agreement) (4)

10.6	Form of Brokers Warrant (issued by Conolog Corporation pursuant to the January 19, 2006 Subscription Agreement) (4)

14.1	Code of Ethics (4)

21.1	List of Subsidiaries*

23.1	Consent of Bagell, Josephs, Levine and Company LLC*

31.1	Rule 13a-14a/15d-14a Certification of Robert Benou*

31.2	Rule 13a-14a/15d-14a Certification of Marc Benou*

32.	Section 1350 Certification*


* Filed herewith

	(1)	Incorporated by reference to Registrant’s Registration Statement on Form S-1 (File No. 33-92424).

	(2)	Incorporated by reference to the Registrant’s Registration Statement on Form S-1 (File No. 0-8174) as filed on September 12, 1997.

	(3)	Incorporated by reference to the Registrant’s Proxy Statement pursuant to Section 14(a) of the Securities Exchange Act of 1934 filed on June 25, 2003.

	(4)	Incorporated by reference to the 8-K filed with the Securities and Exchange Commission on February 2, 2006

Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Bagell, Josephs, Levine & Company LLC was retained by the Company on September 21, 2004 to serve as its principal accountant. Prior to that date, Bagell, Josephs, Levine & Company LLC did not perform any services nor receive any fees from the Company.

Audit Fee

Bagell Josephs Levine & Company LLC billed the Company in the aggregate amount of $38,600 and $30,000 for professional services rendered for their audit of our annual financial statements and their reviews of the financial statements included in our Forms 10-QSB for the years ended July 31, 2006 and 2005, respectively.

Audit-Related Fees

No fees were billed for the years ended July 31, 2006 and 2005 for assurance and related services by Bagell, Josephs, Levine & Company LLC that are reasonably related to the performance of the audit or review of the Company’s financial statements and are not reported under the category Audit Fees described above.

Tax Fees

No fees were billed for the years ended July 31, 2006 and 2005 for tax compliance, tax advice, or tax planning services by Bagell, Josephs, Levine & Company LLC that are reasonably related to the performance of the audit or review of the Company’s financial statements and are not reported under the category Audit Fees described above.

All Other Fees

No fees were billed to the company by Bagell, Joseph, Levine & Company LLC for the years ended July 31, 2006 and 2005 for services not described above.

It is the policy of the Company’s Board of Directors that all services other than audit, review or attest services, must be pre-approved by the Board of Directors. All of the services described above were approved by the Board of Directors.

SIGNATURES

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


Conolog Corporation

	By: /s/ Robert S. Benou

October 27, 2006	Chairman, Chief Executive Officer

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

October 27, 2006	/s/Robert S. Benou

	Chairman, Chief Executive Officer and
	Chief Financial Officer

October 27, 2006	/s/Marc R. Benou

	President, Chief Operating Officer, Secretary and
	Director

October 27, 2006	/s/Louis S. Massad

	Director

October 27, 2006	/s/Edward J. Rielly

	Director

October 27, 2006	/s/David M. Peison

	Director

Conolog Corporation and Subsidiaries

Consolidated Financial Statements

July 31, 2006 and 2005

Annual Report on Form 10-KSB

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

Consolidated Financial Statements

Years Ended July 31, 2006 and 2005

Conolog Corporation and Subsidiaries

Somerville, New Jersey

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


		Page

The following consolidated financial statements of the registrant are included in Item 14:

	Report Of Independent Registered Public Accounting Firm	F-1

	Consolidated Balance Sheets as of July 31, 2006 and 2005	F-2 - F-3

	Consolidated Statements of Operations for the years ended July 31, 2006 and 2005	F-4

	Consolidated Statements of Stockholders’ Equity for the years ended July 31, 2006 and 2005	F-5

	Consolidated Statements of Cash Flows for the years ended July 31, 2006 and 2005	F-6 - F-7

Notes to Consolidated Financial Statements		F-8- F-20

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

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

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors
Conolog Corporation
Somerville, New Jersey

We have audited the accompanying consolidated balance sheets of Conolog Corporation and Subsidiaries (the “Company”) as of July 31, 2006 and 2005 and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinions.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Conolog Corporation and its Subsidiaries as of July 31, 2006 and 2005, and the results of its operations, changes in stockholders’ equity, and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

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

October 27, 2006


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

F-1

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


ASSETS
	2006			2005


Current Assets:
Cash and cash equivalents	$	238,137		$	1,936,655
Certificate of Deposit		2,622,812			2,534,417
Accounts receivable - net of allowance		183,622			89,194
Prepaid expenses		26,376			23,755
Accounts receivable - other		4,377			—
Current portion of note receivable		14,864			14,864
Inventory		600,000			900,000
Other current assets		146,364			252,599


Total Current Assets		3,836,552			5,751,484



Property, Plant and Equipment:
Machinery and equipment		1,341,961			1,324,504
Furniture and fixtures		423,342			423,342
Automobiles		34,097			34,097
Computer software		147,203			147,203
Leasehold improvements		30,265			30,265

Total Property, Plant and Equipment		1,976,868			1,959,411
Less: accumulated depreciation and amortization		(1,906,895	)		(1,868,405	)

Net Property, Plant and Equipment		69,973			91,006


Other Assets:
Inventory, net of current portion		1,123,681			970,212
Deferred financing fees, net of amortization		153,313			—
Note receivable, net of current portion		110,243			125,106


Total Other Assets		1,387,237			1,095,318


TOTAL ASSETS	$	5,293,762		$	6,937,808

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

F-2

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


LIABILITIES & STOCKHOLDERS’ EQUITY
	2006			2005


Current Liabilities:
Accounts payable	$	125,843		$	46,650
Accrued expenses		60,910			248,643
Accrued legal fees		—			175,000

Total Current Liabilities		186,753			470,293


Non-Current Liabilities:
Convertible Debenture - net of discount of $ 391,580		858,420			—

Total Liabilities		1,045,173			470,293


Stockholders’ Equity
Preferred stock, par value $.50; Series A; 4% cumulative; 162,000 shares authorized; 155,000 shares issued and outstanding at July 31, 2006 and 2005, respectively.		77,500			77,500
Preferred stock, par value $.50; Series B; $.90 cumulative; 2,000,000 shares authorized; 1,197 shares issued and outstanding at July 31, 2006 and 2005, respectively.		597			597
Common stock, par value $0.01; 30,000,000 shares authorized; 7,441,353 and 7,417,847 shares issued and outstanding at July 31, 2006 and 2005 respectively including 220 shares held in treasury.		74,414			74,172
Contributed capital		35,954,019			35,425,721
Retained (deficit)		(31,726,207	)		(28,391,938	)
Treasury shares at cost		(131,734	)		(131,734	)
Deferred compensation		—			(547,750	)
Prepaid consulting		—			(39,053	)


Total Stockholders’ Equity		4,248,589			6,467,515


TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	5,293,762		$	6,937,808

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

F-3

CONOLOG CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JULY 31, 2006 AND 2005


	2006			2005

OPERATING REVENUES
Product revenue	$	547,767		$	549,222

COST OF PRODUCT REVENUES
Materials used for current years’ production		282,932			494,605
Write down of obsolete inventory parts		245,326			—

Total Cost of Product Revenues		528,258			494,605

GROSS PROFIT		19,509			54,617


OPERATING EXPENSES
General and administrative costs		2,159,037			2,498,039
Professional fees		552,434			374,292
Selling and trade shows		314,100			274,503
Research and development		376,713			177,338

Total Operating Expenses		3,402,284			3,324,172


LOSS BEFORE OTHER INCOME (EXPENSE)		(3,382,775	)		(3,269,555	)


OTHER INCOME (EXPENSE)
Interest income		135,841			58,154
Interest (expense)		(83,680	)		(23,371	)
Other income		525			720

Total Other Income		52,686			35,503


LOSS FROM OPERATIONS BEFORE INCOME TAX BENEFIT		(3,330,089	)		(3,234,052	)
Benefit from income taxes		—			246,723


NET LOSS APPLICABLE TO COMMON SHARES	$	(3,330,089	)	$	(2,987,329	)


NET LOSS PER COMMON SHARE	$	(0.45	)	$	(0.59	)


WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING		7,425,822			5,024,671

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

F-4

CONOLOG CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDED JULY 31, 2006 AND 2005


	Series A				Series B													Contributed			Retained												Total
	Preferred Stock				Preferred Stock				Common Stock						Contributed			Capital -			Earnings			Treasury			Deferred			Prepaid			Stockholders’
	Shares		Amount		Shares		Amount		Shares			Amount			Capital			Warrants			(Deficit)			Stock			Compensation			Consulting			Equity


Balance at July 31, 2004		155,000	$	77,500		1,197	$	597		2,878,781		$	28,795		$	25,895,647		$	1,599,401		$	(25,400,429	)	$	(131,734	)	$	—		$	(124,670	)	$	1,945,107


Conversion of debt		—		—		—		—		1,032,076			10,321			1,083,679			—			—			—			—			—			1,094,000
Common shares issued for cash		—		—		—		—		2,569,355			25,686			3,049,649			—			—			—			—			—			3,075,335
Costs directly related to stock subscriptions		—		—		—		—		—			—			(1,093,781	)		—			—			—			—			—			(1,093,781	)
Warrants issued for common stock shares		—		—		—		—		—			—			(1,187,928	)		3,857,593			—			—			—			—			2,669,665
Warrants converted to common stock shares		—		—		—		—		470,000			4,700			2,391,501			(1,599,401	)		—			—			—			—			796,800
Shares issued for services to be provided		—		—		—		—		117,000			1,170			333,181			—			—			—			—			(334,351	)		—
Amortization of consultant services		—		—		—		—		—			—			—			—			—			—			—			419,968			419,968
Common shares issued to officers, directors and employees		—		—		—		—		350,000			3,500			1,092,000			—			—			—			(1,095,500	)		—			—
Amortization officers, directors and employee compensation		—		—		—		—		—			—			—			—			—			—			547,750			—			547,750
Exchange lots / escheatment		—		—		—		—		635			—			—			—			—			—			—			—			—
Net loss for the Year		—		—		—		—		—			—			—			—			(2,987,329	)		—			—			—			(2,987,329	)
Dividends		—		—		—		—		—			—			4,180			—			(4,180	)		—			—			—			—


Balance at July 31, 2005		155,000	$	77,500		1,197	$	597		7,417,847		$	74,172		$	31,568,128		$	3,857,593		$	(28,391,938	)	$	(131,734	)	$	(547,750	)	$	(39,053	)	$	6,467,515


Original Discount on Convertible Debenture		—		—		—		—		—			—			482,710			—			—			—			—			—			482,710
Shares issued for services to be provided		—		—		—		—		50,000			500			41,150			—			—			—			—			—			41,650
Amortization of consultant services		—		—		—		—		—			—			—			—			—			—			—			39,053			39,053
Amortization officers, directors and employee compensation		—		—		—		—		—			—			—			—			—			—			547,750			—			547,750
Exchange lots / escheatment		—		—		—		—		(26,494	)		(258	)		258			—			—			—			—			—			—
Net loss for the Year		—		—		—		—		—			—			—			—			(3,330,089	)		—			—			—			(3,330,089	)
Dividends		—		—		—		—		—			—			4,180			—			(4,180	)		—			—			—			—

Balance at July 31, 2006		155,000	$	77,500		1,197	$	597		7,441,353		$	74,414		$	32,096,426		$	3,857,593		$	(31,726,207	)	$	(131,734	)	$	—		$	—		$	4,248,589

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

F-5

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


	2006			2005

CASH FLOWS FROM OPERATING ACTIVITIES
Net loss from continuing operations	$	(3,330,089	)	$	(2,987,329	)
Adjustments to reconcile net loss to net cash (used in) continuing operations:
Depreciation		38,490			50,530
Amortization of deferred compensation		547,750			547,750
Amortization of prepaid consulting expense		39,053			419,968
Shares issued for services		41,650			—
Amortization of discount on debenture		91,130			—
Amortization of deferred financing fees		21,902			—
Write down of obsolete inventory		245,326			—
Gain on sale of equipment		—			(400	)
Changes in assets and liabilities
(Increase) decrease in accounts receivable		(94,428	)		58,977
(Increase) in accounts receivable - other		(4,377	)		—
(Increase) in prepaid expenses		(2,621	)		—
(Increase) Decrease in inventories		(98,795	)		54,205
(Increase) decrease in other current assets		106,235			(232,255	)
Increase (decrease) in accounts payable		79,193			(162,925	)
Increase (decrease) in accrued expenses and other liabilities		(362,734	)		270,047

Net cash (used in) continuing operations		(2,682,315	)		(1,981,432	)


CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of equipment		—			400
Purchase of equipment and leasehold improvements		(17,457	)		(46,926	)
Purchase of certificate of deposit		(2,622,812	)		(2,534,417	)
Redemption of certificate of deposit		2,534,417			—

Net cash (used in) investing activities		(105,852	)		(2,580,943	)


CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of loan from officer		—			(77,427	)
Proceeds from issuance of convertible debenture		1,250,000			—
(Increase) in deferred financing fees		(175,215	)		—
Proceeds from issuance of stock, net of issuance costs		—			4,651,219
Proceeds from issuance of stock and warrants		—			796,800
Proceeds from note receivable		14,864			8,670

Net cash provided by financing activities		1,089,649			5,379,262

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

F-6

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

- Continued


	2006			2005

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(1,698,518	)		816,887

CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR		1,936,655			1,119,768


CASH AND CASH EQUIVALENTS - END OF YEAR	$	238,137		$	1,936,655


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID DURING THE YEAR FOR:
Interest expense	$	27,740		$	23,371

SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Debt converted to equity	$	—		$	1,094,000

Common stock issued for services to be provided	$	41,650		$	334,350

Common stock issued for deferred compensation	$	—		$	1,095,500

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

F-7

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


NOTE 1-	NATURE OF ORGANIZATION

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

NOTE 2-	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

	Principles of Consolidation

	The consolidated financial statements include the accounts of Conolog Corporation and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated.

	Cash and Equivalents

	For the purpose of the statements of cash flows, cash equivalents include time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less. The Company maintains cash and cash equivalents balances at financial institutions and are insured by the Federal Deposit Insurance Corporation up to $100,000. At times during the year, balances in certain bank accounts may exceed the FDIC insured limits.

	Certificates of Deposit

	At July 31, 2006 and 2005, the Company had one year certificates of deposit totaling $2,622,812 and $2,534,417, with interest at a rate of 4.18% and 3.25% and maturing March 2006 and August 2006, respectively.

	Inventories

	Inventories are valued at the lower of cost (determined on a first-in, first-out basis) or market.

	Accounts Receivable

	Accounts Receivable are recorded at net realizable value.

	The Company provides credit in the normal course of business. The Company performs ongoing credit evaluations of its customers and maintains allowances for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information.

F-8