**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 December 31, 2007.**





**o
      Transition report
      pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for
      the
      transition period from ___________ to ___________.**








**SECURELOGIC
      CORP.**


(Exact
      name of registrant as specified in its charter)





**NEVADA**
            
            **77-0571784**(State
                or Other Jurisdiction of Incorporation or Organization)
            
            I.R.S.
                Employer Identification Number




**43
      Hamelacha Street**


**Netanya
      42505, Israel** ****


(Address
      of Principal Executive Offices and Zip Code)





Issuer's
      Telephone Number **:
      (866) 838-1102**





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





Securities
      registered pursuant to Section 12(g) of the Act: Common Stock, par value
      $ 0.001 per
      share





Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act. o





Indicate
      by mark (X) whether the issuer (1) has
      filed all reports required to be filed by Section 13 or 15(d) of the Securities
      Exchange Act of 1934 during the preceding 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filing requirements for the past 90 days.





YES
x NO
o





Indicate
      by mark (X) if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-B is not contained herein, and will not be contained, to the best
      of registrant's knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-KSB or any amendment
      to
      this Form 10-KSB. o





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). YES o NO x





Issuer's
      revenues for its most recent fiscal year: $2,745,000.





Aggregate
      market value of the voting stock held by non-affiliates of the registrant,
      based
      upon the closing price of the Common Stock on March 31, 2008:
      $1,388,969.





Number
      of
      shares outstanding of each of the registrant's classes of common stock as of
      March 31, 2008: Common Stock: 55,947,330.





DOCUMENTS
      INCORPORATED BY REFERENCE:





List
      hereunder the following documents if incorporated by reference and the Part
      of
      the 10-KSB into which the document is incorporated.





None








SECURELOGIC
      CORP.


2007
      FORM
      10-KSB ANNUAL REPORT


Table
      of
      Contents





PART
                I
            
            4Item
                1.Business
            
            4Item
                2.Properties
            
            7Item
                3.Legal
                Proceedings
            
            7Item
                4.Submission
                of Matters to a Vote of Security Holders
            
            8PART
                II
            
            8Item
                5.Market
                for the Registrant's Common Equity,Related Stockholder Mattersand Small Business Issuer Purchases of Equity Securities
            
            8Item
                6.Management's
                Discussion and Analysis or Plan of Operations
            
            8Item
                7.Financial
                Statements
            
            14Item
                8.Changes
                in and Disagreements with Accountants on Accounting and FinancialDisclosure
            
            15Item
                8a.Controls
                and Procedures
            
            15Item
                8b.Other
                Information
            
            15PART
                III
            
            16Item
                9.Directors,Executive Officers,
                Promoters, Control Persons; Corporate Governance; Compliance with
                Section
                16(a)of
                theExchange
                Act
            
            16Item
                10.Executive
                Compensation
            
            19Item
                11.Security
                Ownership of Certain Beneficial Owners and Managementand Related Stockholder Matters
            
            25Item
                12.Certain
                Relationships and Related Transactions,
                and Director Independence
            
            27Item
                13.Exhibits
            
            28Item
                14.Principal
                Accountant Fees and Services
            
            30Signatures
            
            32





2





TRADEMARKS/DEFINITIONS





All
      trademarks, service marks or trade names referred to in this Form 10-KSB are
      the
      property of their respective owners. Except as otherwise required by the
      context, all references in this Form 10-KSB to (a) “we,” “us,” “our,” the
“Company” or “SecureLogic” refer to the consolidated operations of SecureLogic
      Corp., a Nevada corporation, (b) “you” refers to the readers of this Form
      10-KSB, and (c) the “Web” refers to the World Wide Web.





FORWARD-LOOKING
      STATEMENTS





The
      Company or management may make or may have made certain forward-looking
      statements, orally or in writing, such as those within Management ’s Discussion and Analysis contained in its various SEC filings .
      Forward-looking statements include statements regarding our plans, objectives,
      goals, strategies, future events, capital expenditures, future results, our
      competitive strengths, our business strategy, our industry trends and other
      statements regarding matters that are not historical facts. These statements
      often include words such as “may,” “believe,” “expect,” “anticipate,” “intend,”
“plan,” “estimate” or similar expressions . The
      Company wishes to ensure that such statements are accompanied by meaningful
      cautionary statements, so as to ensure to the fullest extent possible the
      protections of the safe harbor established in the Private Securities Litigation
      Reform Act of 1995. Such statements are therefore qualified in their entirety
      by
      reference to and are accompanied by the following discussion of certain
      important factors that could cause actual results to differ materially from
      those described in such forward-looking statements. You
      should keep in mind that any forward-looking statement made by us in this report
      speaks only as of the date of this report. None
      of
      the Company ’s forward-looking statements should be relied upon as a prediction of actual
      results . We have
      no duty to, and do not intend to, update or revise the forward-looking
      statements in this report after the date of this report.




3


**PART
      I**





**ITEM
      1. BUSINESS**





We
      were incorporated
      in 1997 as a Nevada corporation and fo rmerly
      provided software products that served the consumer, small business and
      corporate enterprise markets through
      two wholly owned operating subsidiaries. We sold these subsidiaries and changed our name to "Monterey
      Bay
      Tech, Inc." in 2004.





In
      late
      2004, we signed a Letter of Intent to acquire SpaceLogic, Ltd., a privately
      held
      Israeli corporation that
      focused on the airport security screening market and airport
      baggage handling market .
      In
      2005, we executed and closed a Stock Purchase Agreement with SpaceLogic and
      its
      stockholders, pursuant to which we acquired all of the capital stock of
      SpaceLogic in exchange for 33,253,611 newly-issued shares of our common stock,
      representing approximately 60% of our then-outstanding class of common stock,
      and changed our name to SecureLogic
      Corp. As a result, SpaceLogic’s
      wholly owned SecureLogic, Ltd. subsidiary became our indirect subsidiary.




Since
      our
      acquisition of SpaceLogic, we have focused our business primarily on the airport
      security screening market. We **** develop
      and market software products for the command, control and monitoring of complex
      security screening operations





As
      a
      result, however, of the settlement of certain litigation described below under
      Legal Proceedings, and upon the approval by the court and our shareholders,
      the
      SpaceLogic acquisition that closed in May 2005 will be reversed. Following
      these
      approvals, our business operations associated with the airport
      security screening and handling
      markets that were acquired in 2005 will be returned to the previous owners
      and
      the shares of our common stock issued in that acquisition will be returned
      or
      cancelled.





Our
      principal executive offices are located at 43 Hamelacha Street, Netanya, Israel,
      and our telephone is +972-9-885-5565. Our Web site can be found at
      www.secure-logic.net.





Airport
      Security Screening Systems . The
      SecureLogic iScreen product line provides innovative control software systems
      for efficient and effective airport checked baggage screening and passenger
      screening. It automates traditional human screening procedures to enable the
      deployment of large-scale screening operations for airports, border-crossings
      and other complex transfer points. Our iScreen software systems integrate unique
      security methodologies with state-of-the-art screening and baggage handling
      technologies, providing a comprehensive control package for baggage screening
      and passenger screening operations. iScreen ensures efficient and cost-effective
      automation of security screening and baggage handling for an airport ’s checked
      baggage handling operation and enhances the capabilities of airports to meet
      their significant managerial and control challenges.





The
      iScreen software differs from most hold baggage handling and screening systems
      by providing a unique screening process for each individual bag . This
      core
      feature ensures that screening intensity for each checked bag fits the perceived
      risk level for the bag and the passenger associated with the bag. Our
      proprietary algorithms generate unique screening routing directions for each
      bag, according to the specific, individualized risk level parameters which
      can
      be designated by the user, retrieved by the software from internal and external
      sources or any combination thereof. Thus, individual baggage can be assigned
      different security procedures based upon risk
      parameters such as destination, airline or even random bag designation for
      more
      stringent searches. Once a screen level is set for a bag, the system then
      appropriately routes the bag to be processed in accordance with the risk level
      assigned to that bag.




4





Since
      airport screen operations are not uniform, we have developed two different versions of
      iScreen to meet the needs of different airports:





iScreen-Line
      - for fully automated checked baggage screening operations and designed for
      airport terminals utilizing fully automated baggage handling systems ;
      and





iScreen-Node
      - for non-automated hold baggage screening operations and designed for airport
      terminals where checked baggage screening is
      typically conducted in terminal lobbies, as well as for special checked baggage
      screening operations (e.g. for odd-shaped and oversized bags; curbside check-in
      etc.).




Additional
      product applications for iScreen include efficient and effective screening
      of
      baggage in terminals at seaports, border-crossings and other security screening
      operations.





We
      are
      working closely with governmental regulators and airports for the deployment
      of
      iScreen in several major airports. The United States Transportation Security
      Administration (“TSA”) a division of the Department of Homeland Security,
      awarded a Single Source Contract in 2005 to SpaceLogic to install an iScreen
      Node in a major U.S. metropolitan airport for a pilot program. This system
      was fully
      installed for operation in the pilot airport by mid-2007, but the final report
      has not been issued yet.





Automated
      Baggage Handling and Material Handling Systems . We
      provide integrated systems that combine automated equipment controlled by our
      software with the most advanced third party hardware systems, allowing for
      rapid
      implementation of airport baggage handling systems as well as material handling
      systems. Special emphasis is given to high quality and on-time supply of fully
      operational turnkey systems.




FlowX
      - our
      warehouse management system software solution optimizes the logistic operations
      of warehouses, distribution centers, retailers and archives and record storage
      facilities.




Product
      Support and Development **.** We
      employ
      two full-time support personnel who provide technical support services to
      customers by email, on-site consultation, telephone and fax. Support services
      include resolving issues related to the performance of our system and its
      interoperability with user’s existing computer systems and software, solving
      problems with software operation and suggesting solutions to computing issues.
      For product development, we utilize internal resources as well as contractors
      for the development of our software products. For the fiscal years ending
      December 31, 2007 and 2006, we spent approximately $401,000 and $799,000,
      respectively, in research and development costs of our products.





Sales
      and Marketing . The
      SpaceLogic and SecureLogic product suites are sold directly to the
      TSA for U.S. airport use and to foreign airports outside of the U.S by our
      in-house sales and marketing personnel and through joint ventures with strategic
      partners from relevant industries, including possible partnering with
      established airport security vendors and system integrators to supply
      integration, adaptation and system configuration services, as
      required.




5




Competition . We
      believe that we currently have no direct competitors for
      our
      iScreen product lines. We
      have
      numerous competitors for our baggage handling services and systems integration
      business in the form of the various baggage handling equipment providers, system
      integrators, explosive detection system providers and other detection equipment
      manufacturers, such as Siemens, VanDerLande, and FKI. We
      have
      numerous competitors for our warehouse management software product including
      major software vendors such as SAP, Oracle, Manhattan Associates, Catalyst
      and
      Red Prairie.




G overnment  Regulation . We
      are
      not currently subject to direct government regulation, other than pursuant
      to
      securities laws and the regulations thereunder applicable to all publicly owned
      companies, laws and regulations applicable to businesses generally and laws
      and
      regulations applicable to businesses contracting with U.S. and international
      governmental agencies.





Proprietary
      Rights We
      regard
      the protection of our copyrights, service marks, trademarks and trade secrets
      as
      critical to our future success. We rely on a combination of copyright,
      trademark, service mark and trade secret laws and contractual restrictions
      to
      establish and protect proprietary rights in products and services. Software
      products are generally protected against copying pursuant to the U.S Copyright
      Act, international copyright treaties, and license agreements.





We
      regard
      our software as proprietary and attempt to protect it with copyrights, trade
      secret laws, and internal nondisclosure safeguards, as well as restrictions
      on
      disclosure and transferability that are incorporated into software license
      agreements. In connection with copyrights to software, as a general rule, for
      works created after January 1, 1978, copyright protection lasts for the life
      of
      the author plus an additional 70 years. For an anonymous work, a pseudonymous
      work, or a work made for hire, the copyright endures for a term of 95 years
      from
      the year of its first publication or a term of 120 years from the year of its
      creation, whichever expires first in accordance with the provisions of the
      U.S.
      Copyright Act. We license our software products to customers rather than
      transferring title. Despite these restrictions, it may be possible for
      competitors or users to copy aspects of our products or to obtain information
      that we regard as a trade secret. Computer software generally can be patented
      only with difficulty and existing copyright laws afford only limited practical
      protection.





On
      a
      regular basis, we evaluate our development efforts to determine if patent
      protection would be applicable. Patents run for a period of at least 20 years
      from the application date of the patent. We currently have a pending U.S. Patent
      Application No. 10/516,010 for SCREENING SYSTEMS FOR OBJECTS IN TRANSIT as
      well
      as corresponding pending patent applications in Europe, Canada, and PCT (Nos.
      03730442.5, 2,487,563 and PCT/IL03/00488, respectively). During 2007, a patent
      application in Israel (No. 150251) was approved, and the patent was registered.





Suppliers . We
      produce our own software and typically do not depend on suppliers for any part
      of our software product offerings. On occasion, in connection with our systems
      integration business, we purchase third party equipment and services for baggage
      handling such as conveyor sections, switching equipment, control panels, etc.
      Such products are available from numerous third party manufacturers and
      distributors.




6





Employees . As
      of
      December 31, 2007, we employed 19 full-time employees in the following
      departments: seven in project implementation, five in marketing, sales and
      support, four in research and development and three in executive, general and
      administrative.  From
      time
      to time, we also employ independent contractors to support our research and
      development, marketing, sales, support and administrative organizations. We
      have
      never had a work stoppage, and no employees are represented under collective
      bargaining agreements. We consider our relations with our employees to be
      good.




**ITEM
      2. PROPERTIES**





Our
      offices consist of approximately 4,100 square feet of office space in Netanya,
      Israel. This facility is leased from a third party pursuant to a lease expiring
      in December 2008, which is earlier terminable upon nine months notice. The
      annual rent is approximately $45,000. We believe that our current office space
      is sufficient to cover foreseeable future growth.





**ITEM
      3. LEGAL PROCEEDINGS**





Our
      SpaceLogic, Ltd. subsidiary brought an action in 2002 against a former joint
      venture partner for breach of contract in the United States District Court
      for
      the Eastern District of New York, entitled SpaceLogic Ltd. v. Vinci Airports
      US,
      Inc. 02 Civ. 3957 (JS) (ARL) . The
      action sought damages against Vinci Airports US, Inc. in an amount in excess
      of
      $50 million for breach of a joint venture agreement between the parties. The
      defendant has filed a counterclaim against the SpaceLogic subsidiary in the
      amount of $418,000 for alleged breach of the same agreement. The parties entered
      into a settlement agreement pursuant to which Vinci Airports paid $ 250,000
      to SpaceLogic in April 2006 and
      dropped its counterclaim.





In
      November 2006, Michael
      Gardner, a stockholder holding approximately 7.9% of the our outstanding common
      stock, filed a
      complaint in the Supreme Court of New York for the County of New York against
      the Company and certain of its officers and directors. The complaint purported
      to be a shareholder derivative action, alleging breach of fiduciary duties,
      waste and unjust enrichment. On January 22, 2007, the Plaintiff moved for a
      temporary restraining order to prevent the delisting of the common stock from
      the Over-the-Counter Bulletin Board, which was granted. The action was removed
      to the United States District Court for the Southern District of New York.
      The
      parties entered into a settlement and release agreement on December 28, 2007,
      which is pending before the court as of March 31, 2008, and will be subject
      to
      shareholder approval. As more fully described in a Form 8-K filing on January
      2,
      2008, which is incorporated herein by reference, the settlement agreement
      provides for the unwinding of the May 2005 acquisition by the Company of the
      outstanding capital stock and business of SpaceLogic Ltd. and its subsidiary
      SecureLogic Ltd. in exchange for shares of the Company’s common stock. The
      shares of common stock issued in connection with such acquisition will be
      returned or cancelled upon approval of the settlement by the court and
      shareholders.





In
      November 2006, Plaintiffs Treeline Investment Partners and David Jaroslawicz
      filed a complaint (the “Complaint”) in the Supreme Court of New York for New
      York County against Gary Koren and and Killy Koren (collectively, “Defendants”)
      regarding two transactions for the purchase of shares of the Company. On March
      7, 2007, Defendants removed this action to the District Court and on March
      14,
      2007, Defendants moved to dismiss the Complaint for lack of personal
      jurisdiction, insufficiency of service of process, failure to state a claim
      for
      fraud upon which relief can be granted, and for failure to plead fraud with
      particularity. While the Company is not a party to this litigation, the Company
      may be obligated to indemnify Mr. Koren for some or all of his litigation
      expenses. The Company has already advanced a $101,000 indemnification
      payment to Mr. Koren. Whether or not Mr. Koren will ultimately be entitled
      to a
      full or partial indemnification will depend, among other things, on the
      substance and the merit of the claims. This litigation will be settled as part
      of the settlement agreement discussed immediately above.




7





**ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**





None.





**PART
      II**





**ITEM
      5. MARKET FOR REGISTRANT** **’S** **COMMON EQUITY** **,** **RELATED STOCKHOLDER MATTERS** **AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES**





As
      of
      December 31, 2007, there were 59 stockholders of record. The
      Company ’s common
      stock trades on the Over -The-Counter
      Bulletin Board under the symbol: SLGI.





The
      following table sets forth the range of high and low bid prices per share of
      common stock as provided by Yahoo Finance. The quotations shown below reflect
      inter-dealer prices, without mark-up, markdown or commissions and may not
      represent actual transactions.





Common
                StockLow
            
            HighQuarter
                ended:March
                31, 2006
            
            
            0.55
            
            
            1.05June
                30, 2006
            
            
            0.46
            
            
            0.90September
                30, 2006
            
            
            0.14
            
            
            0.65December
                31, 2006
            
            
            0.10
            
            
            0.20March
                31, 2007
            
            
            0.09
            
            
            0.18June
                30, 2007
            
            
            0.06
            
            
            0.11September
                30, 2007
            
            
            0.05
            
            
            0.12December
                31, 2007
            
            
            0.04
            
            
            0.11





The
      Company has never declared, nor has it paid, any cash dividends on its common
      stock.





**ITEM
      6. MANAGEMENT** **’S** **DISCUSSION AND ANALYSIS** **OR
      PLAN** **OF OPERATIONS** ****





During
      2006, we implemented a cost cutting plan, which included executive salary
      reductions, a lay-off of employees, shutting down the ChainLogic subsidiary
      and
      freezing the ChainLogic product line. Those actions were taken in order to
      decrease our burn rate and to focus on the airport security screening market.
      During 2007, we received an award
      of
      a  $2.5
      million contract to install an automated material handling system in Israel.
      Our
      SpaceLogic subsidiary has begun installing this system, and we expect to
      complete the installation by the second quarter of 2008. During 2007, $1.8
      million of revenues relating to the project were recognized. We believe
      that our existing cash together with cash generated from operations may only
      be
      sufficient to support our operations until September 2008. Our
      financial statements have been prepared assuming we will continue as a going
      concern.




8





The
      following table sets forth certain consolidated statements of operations data
      for the periods indicated. These operating results are not necessarily
      indicative of the results for any future period. ****





**Year
                ended December 31****(in
                thousands, except per share amounts)****Consolidated
                Statements of Operations Data:**
            
            **2007**
            
            **2006**Revenues
            
            $
            2,745
            
            $
            1,297Costs
                and expenses:Cost
                of revenues
            
            
            2,014
            
            
            1,075Selling
                and marketing expense
            
            
            352
            
            
            854Research
                and development costs, net
            
            
            401
            
            
            799General
                and administrative expenses
            
            
            1,208
            
            
            1,102Total
                costs and expenses
            
            
            3,975
            
            
            3,830Operating
                loss
            
            
            (1,230
            )
            
            (2,533
            )Financial
                income (expenses), net
            
            
            (11
            )
            
            22Other
                income (expenses)
            
            
            (4
            )
            
            568Loss
                before taxes on income
            
            
            (1,245
            )
            
            (1,943
            )Taxes
                on income
            
            
            (26
            )
            
            (20
            )Net
                loss
            
            
            (1,271
            )
            
            (1,963
            )Basic
                and diluted net income per share
            
            
            (0.023
            )
            
            (0.035
            )





The
      following table sets forth, as a percentage of total revenues, certain
      consolidated statements of operations data for the periods indicated. These
      operating results are not necessarily indicative of the results for any future
      period.





**Year
                ended December 31****(in
                Percentage)****Consolidated
                Statements of Operations Data:**
            
            **2007**
            
            **2006**Revenues
            
            
            100%
            
            
            100%Costs
                and expenses:Cost
                of revenues
            
            
            73%
            
            
            83%Selling
                and marketing expense
            
            
            13%
            
            
            66%Research
                and development costs
            
            
            15%
            
            
            62%General
                and administrative expenses
            
            
            44%
            
            
            85%Total
                costs and expenses
            
            
            145%
            
            
            295%Operating
                loss
            
            
            (45%
            )
            
            (195%
            )Financial
                income (expenses), net
            
            
            (0%
            )
            
            2%Other
                income (expenses)
            
            
            (0%
            )
            
            44%Loss
                before taxes on income
            
            
            (45%
            )
            
            (150%
            )Taxes
                on income
            
            
            (1%
            )
            
            (2%
            )Net
                loss
            
            
            (46%
            )
            
            (151%
            )





9




**Revenues
      and Cost of Revenues**




Total
      revenues for the year ended December 31, 2007 were $2,745,000, an increase
      of
      112% from the year ended December 31, 2006, when total revenues were $1,297,000. This
      increase was mainly due to the receipt of revenues associated with partial
      performance of a project involving the installation of an automated material
      handling system in Israel, that was partly recognized in 2007.




Cost
      of
      revenues for the year ended December 31, 2007 increased by 87% to $2,014,000
      from $1,075,000 for the year ended December 31, 2006. The increase in cost
      of
      revenues was related to the installation project that commenced in 2007.





Gross
      profit increased by 229% for the year ended December 31, 2007 to $731,000 from
      $222,000 for the same period in 2006. The increase in gross profit in 2007
      was
      primarily attributable to the installation project. For the year ended December
      31, 2007, gross profit as a percentage of sales was 27% and for the comparable
      period in 2006 was 17%.





10




**Operating
      Expenses**




Operating
      expenses consist of (a) research and development expenses, (b) sales and
      marketing expenses and (c) general and administrative expenses. Operating
      expenses for the year ended December 31, 2007 decreased
      by 29% to $1,961,000 from $2,755,000 for the similar period in 2006. Operating expenses as a percentage
      of
      revenue decreased from 212% in 2006 to 71% in 2007. As a result of the
      implementation of FAS123R, which requires the Company to measure all employee
      stock-based compensation awards using a fair value method and record such
      expense in its consolidated financial statements, we recorded non-cash
      compensation-related expenses of $163,000 for the year ended December 31, 2007
      and $388,000 for the similar period in 2006.





Set
      forth
      below are the details related to the component categories of operating
      expenses.




Research
      and Development




Research
      and development expense for the year ended December 31, 2007 decreased by 50%
      to
      $401,000 from $799,000 for the year ended December 31, 2006. Research and
      development expense as a percentage of revenue decreased from 62% in 2006 to
      15%
      in 2007. The decrease in research and development expenses is primarily
      attributable to decreased salary expenses as a result of the implementation
      of
      the cost cutting plans.




Sales
      and Marketing




Sales
      and
      marketing expense for the year ended December 31, 2007 decreased by 59% to
      $352,000 from $854,000 for the year ended December 31, 2006. Sales and marketing
      expense as a percentage of revenue decreased from 66% in 2006 to 13% in 2007.
      The decrease in sales and marketing expenses during 2007 is mainly due to
      implementation of cost cutting plans.




General
      and Administrative




General
      and administrative expense for the year ended December 31, 2007 increased by
      10%
      to $1,208,000 from $1,102,000 for the year ended December 31, 2006. General
      and
      administrative expense as a percentage of revenue decreased from 85% in 2006
      to
      44% in 2007. The
      increase in general and administrative expenses was primarily attributable
      to
      legal expenses related to the Company’s legal proceedings. This increase was
      partially offset by decreased salary expenses as a result of cost cutting plans
      implemented in 2006 and lower non-cash expenses than we recorded in 2006 as
      a result of the implementation of FAS123R.




**Operating
      Loss**




Operating
      loss decreased to a loss of $1,230,000 for year ended December 31, 2007 as
      compared to a loss of $2,533,000 for the year ended December 31, 2006, a
      decrease of $1,303,000. This decrease is related to the commencement of the
      installation project in 2007.





11




**Financial
      income (Expenses)**




Financial
      expenses for the year ended December 31, 2007 were $11,000, compared with
      financial income of $22,000 for the year ended December 31,
      2006.




**Provision
      for Income Taxes**




Taxes
      on
      income for the year ended December 31, 2007 were $26,000, compared to $20,000
      for the year ended December 31, 2006.




**Net
      Loss and Net Loss Per Share**




Net
      loss
      for the year ended December 31, 2007 was $1,271,000 or $0.02 per share as
      compared to a net loss of $1,963,000 or $0.035 per share for the year ended
      December 31, 2006, a decrease of $692,000. This decrease is related to the
      commencement of the installation project in 2007.





**Liquidity
      and Capital Resources**





As
      of
      December 31, 2007, total current assets were $728,000 and total current
      liabilities were $1,706,000. At December 31, 2007, we had a working capital
      deficiency of $978,000 and an accumulated deficit of $8,751,000. As
      of December 31, 2007, the Company had a cash balance of
      $154,000.




Net
      cash
      used in operating activities during the year ended December 31, 2007 was
      $826,000 as compared to net cash used in operating activities of $2,399,000
      in
      the comparable period in 2006. The major effects on  operating
      cash flows for the period relative to the prior period were a net
      loss  of
      $1,271,000 relative to a net loss of $1,963,000 in 2006, a decrease of $75,000
      in trade payables in 2007 compared to an increase of 413,000 in 2006, a decrease
      of $42,000 in other payables in 2007 compared to an increase of $618,000 in
      2006
      and partly offset by depreciation and amortization of $207,000 in 2007 compared
      to $458,000 in 2006.





Net
      cash
      used in investment activities was $1,000 for the year ended December 31, 2007
      as
      compared to net cash used in investment activities of $14,000 for the comparable
      period in 2006.





Net
      cash
      provided by financing activities for the year ended December 31, 2007 was
      $22,000 as compared to zero for the comparable period in 2006. The increase
      was
      mainly a result of receipt of a long term loan in 2007.




The
      Company believes that its existing cash together with cash generated from
      operations should be sufficient to support its operations until September 2008;
      provided that, revenues from our baggage handling, warehouse management and
      materials handling legacy businesses return to historical levels. We have
      undertaken several cost cutting measures designed to reduce our operating
      expenses, including freezing development of our ChainLogic product line,
      employee lay-offs, and a reduction of executive salaries. Additional
      cost-cutting measures may be necessary in the event we do not obtain adequate
      working capital in the near term. Further, we expect that our award of a $2.5
      million contract to install an automated material handling system in
      Israel will provide some working capital during 2008 as installation has
      begun on this project, and some working capital was provided during 2007. The
      system is being installed in Israel by our SpaceLogic subsidiary, and we expect
      to complete the installation by April 2008. However, there can be no assurance
      that, based upon our calendar year 2007 historical results or the
      above-described activities, that we will not require significant amounts of
      additional capital sooner because of either market conditions or management
      decisions. In such a case, we may seek to sell additional equity or debt
      securities or obtain a credit facility. The sale of additional equity or
      convertible debt securities could result in additional dilution to our
      stockholders. The incurrence of indebtedness would result in an increase in
      our
      fixed obligations and could result in borrowing covenants that would restrict
      our operations. Our financial statements have been prepared assuming we will
      continue as a going concern.




12




**Critical
      Accounting Policies and Estimates**




The
      preparation of condensed financial statements in conformity with the accounting
      principles generally accepted in the United States requires us to make estimates
      and assumptions that affect reported amounts of assets and liabilities and
      the
      disclosure of contingent assets and liabilities as of the date of the financial
      statements and the reported amounts of revenues and expenses during the
      reporting period. These estimates and assumptions are based on historical
      experience and various other factors that are believed to be reasonable under
      the circumstances. Actual results could differ materially from those
      estimates under different assumptions.





We
      believe that the following accounting policies are the most critical to our
      financial statements since these policies require significant judgment or
      involve complex estimates relating to our financial condition and operating
      results:





Revenue
      Recognition





1.
      Revenues from Sale of Software and Products. Revenues
      from the sale of
      software are recognized in accordance with Statement of Position 97-2, “Software
      Revenue Recognition”, as amended (“SOP 97-2”). SOP 97-2 generally requires
      revenue earned on software arrangements involving multiple elements to be
      allocated to each element based on the relative fair value of the elements.
      The
      Company has adopted Statement of Position 98-9, “Modification of SOP 97-2,
      Software Revenue Recognition with Respect to Certain Transactions” (“SOP 98-9”).
      SOP 98-9 requires that revenue be recognized under the “residual method” when
      Vendor Specific Objective Evidence (“VSOE”) of fair value exists for all
      undelivered elements and VSOE does not exist for all of the delivered elements.
      Under the residual method any discount in the arrangement is allocated to the
      delivered elements.





Revenues
      from the sale of
      software licenses are
      recognized when delivery of the product has occurred, the fee is fixed or
      determinable, collectibility is probable, vendor specific objective evidence
      exists to allocate total fees to elements of the arrangement and persuasive
      evidence of an arrangement exists.





The
      Company also generated revenues from products sales which are recognized in
      accordance with Staff Accounting Bulletin No. 104 “Revenue Recognition” when
      delivery has occurred and, where applicable, after installation has occurred,
      there is persuasive evidence of an agreement, the fee is fixed or determinable
      and collection of the related receivable is probable and no further obligations
      exist. In cases where delivery has occurred but the required installation has
      not been performed, the Company does not recognize the revenue until the
      installation is completed.





2.
      Revenues from Maintenance Services and Support. Revenues
      from maintenance
      services and support are recognized on a straight-line basis over the term
      of
      the maintenance services and support agreement.





Our
      audited financial statements as of December 31, 2007 contain further discussions
      on our critical accounting policies and estimates.





We
      have
      no off-balance sheet arrangements.




13





RISKS
      AND
      UNCERTAINTIES





Risks
      and
      uncertainties for the Company include, but are not limited to:





Although
      we do not believe that any of our products infringe the proprietary rights
      of
      third parties, there can be no assurance that third parties will not claim
      infringement by our products with respect to past, current or future
      technologies. Any such claim, whether meritorious or not, could be
      time-consuming, result in costly litigation, cause software upgrade delays
      or
      require us to enter into royalty or licensing agreements. Such royalty or
      licensing agreements might not be available on terms acceptable to us or at
      all,
      and as a result, any such claim could have a material adverse effect upon our
      business, results of operations and financial condition.





There
      can
      be no assurance that financing will be available in amounts or on terms
      acceptable to us, if at all. If financing is not available when required or
      is
      not available on acceptable terms, we may be unable to develop or enhance our
      products or services, or, we potentially may not be able to continue
      business activities. Any of these events could have a material and adverse
      effect on our business, results of operations and financial condition.





Our
      future success will depend in part on our continued ability to attract,
      integrate, retain and motivate highly qualified technical and managerial
      personnel and upon the continued service of our senior management and key
      technical personnel. The competition for qualified personnel in our industry
      and
      geographical location is intense and there can be no assurance that we will
      be
      successful in attracting, integrating, retaining and motivating a sufficient
      number of qualified personnel to conduct our business in the future.




**ITEM
                7. FINANCIAL STATEMENTS**
              
              See
                the Index to Financial Statements beginning on page 31.




14




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




None.





**ITEM
      8A. CONTROLS AND PROCEDURES**





***Conclusions
      regarding disclosure controls and procedures.*** Disclosure
      controls and procedures are the Company’s controls and other procedures that are
      designed to ensure that information required to be disclosed by the Company
      in
      the reports that the Company files or submits under the Securities Exchange
      Act
      of 1934 is recorded, processed, summarized and reported, within the time periods
      specified in the Securities and Exchange Commission’s rules and forms.
      Disclosure controls and procedures include, without limitation, controls and
      procedures designed to ensure that information required to be disclosed by
      the
      Company in the reports that it files under the Exchange Act is accumulated
      and
      communicated to the Company’s management, including its Chief Executive
      Officer and
      Chief Financial Officer ,
      as
      appropriate to allow timely decisions regarding required
      disclosure.





Under
      the
      supervision and with the participation of our management, including our
      principal executive officer and principal financial officer, we conducted an
      evaluation of our disclosure controls and procedures, as such term is defined
      under Rule 13a-14(c) promulgated under the Securities Exchange Act of 1934,
      within 90 days of the filing date of this report, and, based on their
      evaluation, the Company’s Chief Executive Officer and Chief Financial
      Officer have
      concluded that these controls and procedures are effective .





***Changes
      in internal control over financial reporting.*** There
      were no changes in our internal control over financial reporting identified
      in
      connection with the evaluation required by paragraph (d) of Exchange Act Rules
      13a-15 or 15d-15 that occurred during our last fiscal quarter that have
      materially affected, or are reasonably likely to materially affect, our internal
      control over financial reporting.





**ITEM
      8B. OTHER INFORMATION**





None.





15




**PART
      III**





**ITEM
      9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS** **,** **CONTROL PERSONS** **AND CORPORATE GOVERNANCE COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
      ACT**





The
      following table sets forth the names and positions of our directors and
      executive officers:





Name
            
            Age
            
            PositionGary
                Koren
            
            59
            
            Chairman
                of the Board, Chief Executive Officer, and PresidentShalom
                Dolev
            
            52
            
            Director,
                Vice President for Security SystemsMichal
                Moses
            
            34
            
            Chief
                Financial OfficerCathal
                Flynn (1)
            
            69
            
            DirectorJosh
                Hurewitz (1)(2)
            
            51
            
            DirectorPaul
                Goodman (2)
            
            46
            
            DirectorMichael
                Klein
            
            56
            
            DirectorIftach
                Yeffet
            
            51
            
            DirectorSean
                Deson (3)
            
            44
            
            Director





(1)
      Member of the Compensation Committee




(2)
      Member of the Audit Committee




(3)
      Sean
      Deson resigned as a director in August 2007.





The
      following sets forth biographical information concerning our directors and
      executive officers for at least the past five years:





GARY
      KOREN -
      Mr.
      Koren is President and Chief Executive Officer of the Company and has been
      the
      Chairman of the Board of Directors since May 2005. He is also the founder of
      our
      SpaceLogic subsidiary and an experienced entrepreneur in the high-tech industry.
      He has been the Chief Executive Officer of SpaceLogic since its inception in
      1998 and a
      director. He has over
      25 years of professional experience in systems engineering. In 1982, Mr.
      Koren
      founded Logistica Systems Ltd., serving as Chief Executive Officer for over
      15
      years. Mr. Koren holds a B.Sc. in Industrial and Management Engineering from
      the
      Technion, the Israel Institute of Technology.





SHALOM
      DOLEV - Shalom Dolev is SecureLogic’s Vice President for Security
      Systems and a
      director since May 2005 .
      Mr.
      Dolev has over 20 years experience in the field of airport security and is
      an
      expert in security methodologies, with special emphasis in security technologies
      for airport baggage handling. From 1992 to 1999, he served as a consultant
      for
      various manufacturers of explosive detection equipment, including Vivid and
      Magal. From 1985 to 1992, he was head of the Branch for Counter Terrorism and
      Sabotage of the Israeli Security Agency. From 1982 to 1985, Mr. Dolev was the Security
      Officer of the Security Division of Ben Gurion International Airport, Israel.
      He
      holds a B.Sc. in Electronics Engineering from the Tel Aviv
      University.




16





CATHAL
      (“IRISH”) FLYNN - Rear Admiral Cathal L. (Irish) Flynn, USN (Ret.) ,
      has
      been a director since May 2005 and has
      acted as a consultant to SpaceLogic since 2003 . Admiral
      Flynn has had a long and distinguished career as a naval officer as well as
      in
      civilian and government life. In the Navy, Admiral Flynn rose to the rank of
      Rear Admiral and commanded many special operations units of the U.S. Navy as
      well as serving as Deputy Assistant Secretary of Defense for Special Operations.
      Following his retirement from the Navy in 1990, Admiral Flynn joined Science
      Applications International Corporation where he performed studies, analyses
      and
      identified applications for advanced technology in military special operations,
      counter-terrorism, and aviation security. From 1993 to 2000, Admiral Flynn
      was
      the Associate Administrator for Civil Aviation Security in the Federal Aviation
      Administration .
      In
      2002, he was awarded a Lifetime Award for Service to the Aviation Security
      Community by Aviation Security International. During his term of service, the
      FAA introduced far-reaching changes of regulations to improve air carrier and
      airport security programs within the United States and abroad. Admiral Flynn
      is
      a graduate of the University of Dublin, Trinity College.





MICHAL
      MOSES - Ms. Moses joined the Company in
      September 2007
      as
      its Chief Financial Officer .
      Prior
      to her employment at SecureLogic, she served as the Controller of Bitband
      Technologies Ltd., a wholly owned subsidiary of Bitband, Inc. From 2002 to
      2005,
      Ms. Moses served as Corporate Controller of Orad Hi-Tech Systems (“Orad”). Orad
      is a publicly traded company on the Frankfurt Stock Exchange and AIM of the
      London Stock Exchange. Ms. Moses began her career as an accountant at the
      accounting firm of Luboshitz - Kasirer (currently an Ernst & Young
      representative in Israel). Ms. Moses holds a B.A. with distinction in Accounting
      and Economics from Tel Aviv University, an M.B.A. with distinction in finance
      from Tel-Aviv University, and is a Certified Public Accountant in
      Israel.




JOSH
      HUREWITZ  -
      Josh
      Hurewitz, P.h.D, has been a director since September 2007 and, since
      2004, Dr. Hurewitz has been a management consultant, providing strategy and
      marketing consulting services to companies across a wide range of industries
      including the aviation, communications, and security industries among others.
      From 2000-2004, Dr. Hurewitz was the Senior Director, Corporate Business
      Development for ARINC Incorporated, a world leader in transportation
      communications and systems engineering that develops and operates communications
      and information processing systems and provides systems engineering and
      integration solutions to eight key industries: airports, aviation, aerospace
      and
      defense, government, healthcare, networks, security, and transportation. Dr.
      Hurewitz received his B.Sc. in plant genetics and M.B.A. with a concentration
      in
      quantitative analysis, operations and marketing from Cornell University, and
      an
      M.A. and Ph.D in plant science/biochemistry from Rutgers University.




PAUL
      GOODMAN - Paul Goodman has been
      a director since 1998 and has
      been a partner in the New York City law firm of Cyruli, Shanks & Zizmor,
      LLP, and its predecessor firms for over 10 years. He concentrates on
      representing software and Web companies in a wide range of business and
      financing transactions. He has represented Aladdin since its inception. In
      addition to a J.D., Mr. Goodman holds a B.A. and M.A. degree in Computer
      Science. He was a former member of the Computer Science faculty of Queens
      College and is the author of five books on microcomputer
      programming.





IFTACH
      YEFFET - Iftach Yeffet is the Chief O perations
      Officer of our SpaceLogic, Ltd. Subsidiary and a director of the Company since
      November 2006. Mr. Yeffet has over 15 years experience in financial and
      commercial high-tech management, as well as project management of large baggage
      handling systems. Mr. Yeffet has a Bachelors Degree in Economics and Accounting
      from the Hebrew University in Jerusalem, Israel.




17





MICHAEL
      KLEIN - Michael Klein is the Vice President of Automated Systems of our
      SpaceLogic, Ltd. Subsidiary and a director of the Company since November 2006.
      Mr. Klein has an extensive background and experience in sales ,
      marketing and
      implementation in the area of baggage and cargo handling .
      He has
      managed the sales and implementation of major automated storage and retrieval
      systems, involving cooperation with world industry leaders .
      Mr.
      Klein has a Bachelors Degree in Mechanical Engineering from the Technion, Israel
      and an MBA degree from INSEAD in Fontainebleau, France.





**Compliance
      with Section 16(a) of the Securities Exchange Act of 1934**





Section
      16(a) of the Securities Exchange Act of 1934 requires the Company ’s directors and executive officers and persons who own more than ten percent
      of a
      registered class of the Company ’s equity
      securities to file with the SEC initial reports of ownership and reports of
      changes in ownership of common stock and other equity securities of the Company.
      Officers, directors and greater than ten percent shareholders are required
      by
      SEC regulations to furnish the Company with copies of all Section 16(a) forms
      they file. To the Company ’s knowledge, based solely on the review of copies of such reports furnished to
      the
      Company during the year ended December 31, 2007, all Section 16(a) filing
      requirements applicable to the Company ’s officers, directors and greater than ten percent shareholders were filed as
      required.





**Code
      of Ethics**





On
      March
      15, 2005, the Company adopted a Code of Ethics that applies to our principal
      executive officer, principal financial officer, principal accounting officer
      or
      controller, or persons performing similar functions. For purposes of this Item,
      the term “Code of Ethics” means written standards that are reasonably designed
      to deter wrongdoing and to promote: honest and ethical conduct, including the
      ethical handling of actual or apparent conflicts of interest between personal
      and professional relationships; full, fair, accurate, timely, and understandable
      disclosure in reports and documents that the issuer files with, or submits
      to,
      the SEC and in other public communications made by the Company; compliance
      with
      applicable governmental laws, rules and regulations; the prompt internal
      reporting of violations of the code to the Board of Directors or another
      appropriate person or persons; and, accountability for adherence to the code.
      A
      copy of the Code of Ethics can be found as Exhibit 99 to our Form
      10-KSB for the
      fiscal year ended December 31, 2005 and filed with the Securities and Exchange
      Commission on April 14, 2005.




**Audit
      Committee Financial Expert**




The
      Board
      of Directors has a standing Audit Committee. As a result of the resignation
      of
      Mr. Deson, the Audit Committee does not presently have a financial expert,
      but
      is considering potential candidates in this regard.





18




**ITEM
      10. EXECUTIVE COMPENSATION**





The
      following table sets forth the compensation earned by our Chief Executive
      Officer and all our other executive officers who earned in excess of $100,000
      in
      total compensation, including salary and bonus (collectively the “Named
      Executive Officers”) for services rendered to us during the fiscal
      year.





**Summary
      Compensation Table** (1)





Name
                and Principal Position
            
            Year
            
            Salary
              ($)
            
            Nonqualified
                Deferred Compensation Earnings
              ($)(2)
            
            All
                Other Compensation
              ($)(3)
            
            Total
                ($)GARY
                KOREN, Chief Executive Officer
            
            
            2007
            
            $
            119,591
            
            $
            9,962
            
            $
            16,795
            
            $
            146,348SHALOM
                DOLEV,Vice
                President for Security Systems
            
            
            2007
            
            $
            81,508
            
            $
            0
            
            $
            25,073
            
            $
            106,581





(1)
      The
      column for “Bonus”, “Stock Awards”, “Option Awards”, and “Non-Equity Incentive
      Plan Compensation” have been omitted because there is no such compensation to be
      reported.





(2)
      Represents Company deposits in a pension fund plan for executive
      officers.





(3)
      Represents payments made for the use of a company car, insurance, and continuing
      education pursuant to the employment agreements described below.





**Employment
      Contracts and Arrangements, and Termination of Employment and Change-in-Control
      Arrangements** **and Equity Incentive Plans**





The
      Company has employment agreements with its named executive officers. These
      agreements and subsequent salary reductions are described below. The Company
      and
      its subsidiary SpaceLogic Ltd. are parties to all agreements described below
      with named executive officers. The Company entered into an employment agreement
      in May 2005 with Gary Koren to be the Company’s Chief Executive Officer with a
      term expiring on May 10, 2008 unless earlier terminated. Pursuant to the terms
      of the agreement, Mr. Koren’s base salary was set at $19,000 per month, subject
      to annual or other increases as determined by the Company’s Board of Directors.
      Mr. Koren is entitled to participate in all benefit programs and plans of the
      Company as are awarded to the Company’s other senior executives and as is
      customary for Israeli executives. In addition, Mr. Koren is eligible to receive
      (i) discretionary bonuses as determined by the Company’s Board of Directors, in
      accordance with performance criteria and (ii) bonuses based upon the Company’s
      performance in accordance with performance criteria as agreed to by Mr. Koren
      and the Company’s Board of Directors. In the event of death, the Company will
      pay Mr. Koren’s estate any remaining unpaid portion of his base salary. In the
      event of “total disability”, as that term is defined in the agreement, the
      Company has the right to terminate Mr. Koren’s employment upon giving 10 days
      written notice and payment of any unpaid base salary as of the end of such
      period, subject to a decrease to the extent of any payments received under
      any
      health and accident or salary continuation insurance policies for which the
      Company pays premiums. In the event that Mr. Koren’s employment is terminated by
      the Company without cause, or by him for just cause, as those terms are defined
      in the agreement, the Company will continue to pay his base salary until the
      end
      of the term of the agreement. Mr. Koren is also subject to customary
      non-competition covenants for a period of one year after the termination of
      the
      agreement.




19





The
      Company entered into an employment agreement in May 2005 with Shalom Dolev
      to be
      the Company’s Vice President of Security Systems with a term expiring on May 10,
      2008 unless earlier terminated. Pursuant to the terms of the agreement, Mr.
      Dolev’s base salary was set at $36,000 per year, subject to annual or other
      increases as determined by the Company’s Board of Directors. Mr. Dolev is
      entitled to participate in all benefit programs and plans of the Company as
      are
      awarded to the Company’s other executives. In the event of death, the Company
      will pay Mr. Dolev’s estate any remaining unpaid portion of his base salary. In
      the event of “total disability”, as that term is defined in the agreement, the
      Company has the right to terminate Mr. Dolev’s employment upon giving 90 days
      written notice and payment of any unpaid base salary as of the end of such
      period, subject to a decrease to the extent of any payments received under
      any
      health and accident or salary continuation insurance policies for which the
      Company pays premiums. In the event that Mr. Dolev’s employment is terminated by
      the Company without cause, or by him for just cause, as those terms are defined
      in the agreement, the Company will continue to pay his base salary. Mr. Dolev
      is
      also subject to customary non-competition covenants for a period of one year
      after the termination of the agreement.





In
      addition to Mr. Dolev’s employment agreement with the Company, Mr. Dolev entered
      into a services agreement with the Company’s SpaceLogic Ltd., subsidiary in May
      2005 to perform services for SpaceLogic Ltd. consistent with the functions
      of
      Vice President for Security Systems. SpaceLogic Ltd. will pay Mr. Dolev a
      monthly fee of $14,174 for services rendered under the agreement. This monthly
      fee is to be paid in New Israeli Shekels (“NIS”) at a minimum exchange rate of
      4.40 NIS per dollar. The minimum term (the “Minimum Term”) of the agreement is
      for three years and may be terminated by either party without cause after 32
      months following the effective date of the agreement (January 1, 2005). If
      Mr.
      Dolev terminates his employment with SpaceLogic Ltd. for just cause prior to
      the
      end of the Minimum Term, as that term is defined in the agreement, SpaceLogic
      Ltd. will pay Mr. Dolev all unpaid consideration he is entitled to receive
      under
      the agreement for the remainder of the Minimum Term. In the event that Mr.
      Dolev
      is determined by a competent authority to be an employee of SpaceLogic Ltd.,
      Mr.
      Dolev’s monthly fee will be reduced to $11,426. In addition, Mr. Dolev is
      provided the use of a company car, including the payment of maintenance, gas
      and
      insurance expenses. SpaceLogic Ltd. in its discretion may award Mr. Dolev an
      annual performance bonus. Mr. Dolev is also subject to customary non-competition
      covenants for a period of one year after the termination of the
      agreement.





The
      following table describes the history of the salary reductions of the Named
      Executive Officers. The Company’s Board of Directors determined to make three
      salary reductions for named executive officers (December 2005, May 2006, and
      July 2006). Only with respect to the December 2005 reduction did the Company
      sign a written agreement with the executives.





Name
            
            Amount
                of Salary Reduction December 2005
            
            Amount
                of Salary Reduction May 2006
            
            Amount
                of Salary Reduction July 2006
            
            Annual
                Salary after Three ReductionsGary
                Koren
            
            $
            1,200
            
            
            -
            
            $
            113,400
            
            $
            113,400Shalom
                Dolev
            
            $
            51,333
            
            
            -
            
            $
            51,667
            
            $
            77,000




20




In
      December 2005, SpaceLogic Ltd. and Mr. Koren entered into a letter agreement,
      pursuant to which, Mr. Koren agreed to reduce his monthly compensation to
      $18,890  for
      a
      period of 12 months, subject to a six month extension (the “Extension Period”)
      by SpaceLogic Ltd., which was exercised. In consideration for this adjustment
      of
      base compensation, Mr. Koren was awarded options to purchase 2,000 shares of
      the
      Company’s common stock at an exercise price of $1.50 and vesting ratably over a
      twelve month period and which are exercisable for three years after the vesting
      date or within two months of the end of employment. In the event the Company
      elects the Extension Period, Mr. Koren will receive options to purchase
      additional shares of the Company’s common stock equal to 50% of the original
      option grant under the letter agreement, though the Board of Directors
      determined not to grant Mr. Koren such additional options. At the end of the
      period of reduced compensation, Mr. Koren’s base compensation will return to the
      amount stated in the services agreement. In the event Mr. Koren’s employment is
      terminated by SpaceLogic without cause or by him for just case, as those terms
      are defined in the services agreement, any payments owed to Mr. Koren shall
      be
      payable at his base compensation rate under the services agreement and not
      at
      the reduced rate under the letter agreement.





In
      December 2005, SpaceLogic Ltd. and Mr. Dolev entered into a letter agreement,
      pursuant to which, Mr. Dolev agreed to reduce his monthly compensation to
      $12,906 for a period of 12 months, subject to a six month extension (the
“Extension Period”) by SpaceLogic Ltd., which was exercised. In consideration
      for this adjustment of base compensation, Mr. Dolev was awarded options to
      purchase 77,000 shares of the Company’s common stock at an exercise price of
      $1.50 and vesting ratably over a twelve month period and which are exercisable
      for three years after the vesting date or within two months of the end of
      employment. In the event the Company elects the Extension Period, Mr. Dolev
      will
      receive options to purchase additional shares of the Company’s common stock
      equal to 50% of the original option grant under the letter agreement, though
      the
      Board of Directors determined not to grant Mr. Dolev such additional options.
      At
      the end of the period of reduced compensation, Mr. Dolev’s base compensation
      will return to the amount stated in the services agreement. In the event Mr.
      Dolev’s employment is terminated by SpaceLogic without cause or by him for just
      case, as those terms are defined in the services agreement, any payments owed
      to
      Mr. Dolev shall be payable at his base compensation rate under the services
      agreement and not at the reduced rate under the letter agreement.





In
      1999,
      the Company, through its predecessor entity, Aladin Systems Holding, Inc.,
      adopted a stock option plan ("1999 Stock Option Plan"), which allows for the
      issuance of incentive stock options and non-qualified stock options to purchase
      shares of the Company's common stock. The option plan has authorized 3,000,000
      shares of which 1,292,447 remain available for granting as of December 31,
      2007.
      Under the option plan, incentive stock options may be granted to employees,
      directors, and officers of the Company and non-qualified stock options may
      be
      granted to consultants, employees, directors, and officers of the Company.
      Options granted under the option plan are for periods not to exceed ten years,
      and must be issued at prices not less than 100% of the fair market value of
      the
      stock on the date of grant. Options granted to shareholders who own greater
      than
      10% of the outstanding stock are for periods not to exceed five years and must
      be issued at prices not less than 110% of the fair market value of the stock
      on
      the date of grant. Options granted under the option plan generally vest within
      4
      years. During the year ended December 31, 2007 the Company did not grant options
      under the 1999 Stock Option Plan. The exercise price of each option grant is
      estimated using the value of the closing price of the Company's common stock
      on
      the date of the grant.




21





In
      2005,
      the Company adopted a new stock option plan ("2005 Stock Option/Stock Issuance
      Plan"), which allows for the issuance of incentive stock options and
      non-qualified stock options to purchase shares of the Company’s common stock.
      The option plan has authorized 3,000,000 shares of which 1,934,750 remained
      available for granting at December 31, 2007. Under the option plan, incentive
      stock options may be granted to employees, directors, and officers of the
      Company and non-qualified stock options may be granted to consultants,
      employees, directors, and officers of the Company. Options granted under the
      option plan are for periods not to exceed ten years, and must be issued at
      prices not less than 100% of the fair market value of the stock on the date
      of
      grant. Options granted to shareholders who own greater than 10% of the
      outstanding stock are for periods not to exceed five years and must be issued
      at
      prices not less than 110% of the fair market value of the stock on the date
      of
      grant. Options granted under the option plan generally vest within 4 years.
      During the year ended December 31, 2007 the Company did not grant options under
      the 2005 Stock Option Plan. The exercise price of each option grant is estimated
      using the value of the closing price of the Company's common stock on the date
      of the grant.




**Outstanding
      Equity Awards at Fiscal Year-End**





The
      following table provides information on all restricted stock and stock option
      awards held by our Named Executive Officers as of December 31, 2007.
      All outstanding equity awards are in shares of our common
      stock.




Option
                Awards
            
            Stock
                AwardsName
            
            Number
                of
              Securities
                Underlying Unexercised Options (#)
              Exercisable
            
            Number
                of Securities Underlying Unexercised Options (#)
              Unexercisable
            
            Equity
                Incentive Plan Awards: Number of Securities Underlying Unexercised
                Unearned Options
              (#)
            
            Option
                Exercise Price
              ($)
            
            Option
                Expiration Date
            
            Number
                of Shares or Units of Stock That Have Not Vested
              (#)
            
            Market
                Value of Shares or Units of Stock That Have Not Vested
              ($)
            
            Equity
                Incentive Plan Awards: Number of Unearned Shares, Units or Other
                Rights
                That Have Not Vested
              (#)
            
            Equity
                Incentive Plan Awards: Market or Payout Value of Unearned Shares,
                Units or
                Other Rights That Have Not Vested
              ($)GARY
                KOREN
            
            
            52,000
            
            
            0
            
            
            0
            
            
            0
            
            
            June,
                2009
            
            
            —
            
            
            —
            
            
            —
            
            
            —SHALOM
                DOLEV
            
            
            127,000
            
            
            0
            
            
            0
            
            
            0
            
            
            June,
                2009
            
            
            —
            
            
            —
            
            
            —
            
            
            —





22





**Director
      Compensation**





The
      following Director Compensation table sets forth information concerning
      compensation for services rendered by directors of the Company for fiscal year
      2007.





Name
            
            Fees
                Earned or
              Paid
                in
              Cash
              ($)
                (1)
            
            Stock
              Awards
              ($)
            
            Option
              Awards
              ($)
            
            Non-Equity
              Incentive
                Plan
              Compensation
              ($)
            
            Change
                in
              Pension
              Value
                and
              Nonqualified
              Deferred
              Compensation
              Earnings
            
            All
                Other
              Compensation
              ($)
            
            Total
              ($)MICHAEL
                KLEIN
            
            $
            45,899
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            3,823
            
            $
            26,772
            (2)
            $
            76,494IFTACH
                YEFFET
            
            $
            47,482
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            3,957
            
            $
            36,352
            (2)
            $
            87,791SEAN
                DESON
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            0CATHAL
                (“IRISH”) FLYNN
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            2,484
            
            $
            2,484
            (3)PAUL
                GOODMAN
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            18,355
            
            $
            18,355
            (4)JOSH
                HUREWITZ
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            0





(1)
      Represents salary as an executive officer of SpaceLogic Ltd. pursuant to the
      employment agreements described below.




(2)
      Represents payments made for the use of a company car, insurance, continuing
      education and others, pursuant to the employment agreements described
      below.




(3)
      Admiral Cathal Flynn has provided consulting services to the Company. He was
      paid $2,484 for reimbursement of travel expenses.




(4)
      Paul
      Goodman has provided legal services to the Company since 1999 and was the
      Company’s corporate attorney during 2006. The fees paid to Mr. Goodman (or firms
      to which he is associated) were $15,000 for 2007. He was also paid $1,855 for
      reimbursement of expenses.




In
      addition, the Company has employment agreements with two directors who are
      also
      Named Executive Officers. These agreements and subsequent salary reductions
      are
      described below. The Company and its subsidiary SpaceLogic Ltd. are parties
      to
      all agreements described below with these executive officers.





Effective
      January 2005, SpaceLogic Ltd. entered into an employment agreement with Michael
      Klein pursuant to serve as SpaceLogic Ltd’s Chief Operating Officer and
      Marketing and Sales Director of its Baggage Handling business. Mr. Klein’s job
      title was later changed to Vice President of Automated Systems. The initial
      term
      of the agreement is for three years, after which it may be terminated by either
      party upon 120 days advance notice. SpaceLogic Ltd. will pay Mr. Klein a monthly
      salary of $15,000 to be paid in NIS at a minimum exchange rate of 4.40 NIS
      per
      dollar. Mr. Klein’s salary will be reviewed annually by the Board of Directors
      of SpaceLogic Ltd. and may be increased if the Company’s performance has
      substantially improved as decided in the sole discretion of the SpaceLogic
      Ltd.
      Board of Directors. During the term of Mr. Klein’s employment, Mr. Klein will be
      entitled to Manager’s Insurance in an amount equal to 15.83% of his base salary,
      which will be paid monthly to the Manager’s Insurance Plan directly by the
      Company as follows: (i) 8.33% in connection with severance compensation, (ii)
      5%
      in connection with pension plan contributions, and (iii) 2.5% with respect
      to
      disability compensation. An additional 5% of Mr. Klein’s monthly gross salary
      will be deducted as part of his contribution to Manager’s Insurance. Ownership
      of the Manager’s Insurance policy will be automatically transferred to Mr. Klein
      upon termination of his employment with SpaceLogic Ltd., unless his employment
      was terminated by SpaceLogic Ltd. for cause, as that term is defined in the
      employment agreement. Further, the Company will contribute to a Continuing
      Education Fund for the benefit of Mr. Klein, an amount equal to 7.5% of his
      monthly gross salary up to the maximum amount which is recognized by the
      applicable Israeli tax authority, subject to Mr. Klein’s contribution of an
      additional 2.5% of his monthly gross salary. In addition, Mr. Klein is provided
      the use of a company car, including the payment of maintenance, gas and
      insurance expenses. SpaceLogic Ltd’s Board of Directors in its discretion may
      award Mr. Klein an annual performance bonus.




23





Effective
      January 2005, SpaceLogic Ltd. entered into an employment agreement with Iftach
      Yeffet pursuant to serve as SpaceLogic Ltd’s Chief Financial Officer. His job
      title was later changed to Chief Operating Officer. The initial term of the
      agreement is for three years, after which, it may be terminated by either party
      without cause after 32 months upon 120 days advance notice. SpaceLogic Ltd.
      will
      pay Mr. Yefet a monthly salary of $15,000 to be paid in NIS at a minimum
      exchange rate of 4.40 NIS per dollar. During the term of Mr. Yeffet’s
      employment, Mr. Yeffet will be entitled to Manager’s Insurance in an amount
      equal to 15.83% of his base salary, which be paid monthly to the Manager’s
      Insurance Plan directly by the Company as follows: (i) 8.33% in connection
      with
      severance compensation, (ii) 5% in connection with pension plan contributions,
      and (iii) 2.5% with respect to disability compensation. An additional 5% of
      Mr.
      Yeffet’s monthly gross salary will be deducted as part of his contribution to
      Manager’s Insurance. Ownership of the Manager’s Insurance policy will be
      automatically transferred to Mr. Yeffet upon termination of his employment
      with
      SpaceLogic Ltd., unless his employment was terminated by SpaceLogic Ltd. for
      cause, as that term is defined in the employment agreement, in which case he
      will not be entitled to the severance compensation. Further, the Company will
      contribute to a Continuing Education Fund for the benefit of Mr. Yeffet, an
      amount equal to 7.5% of his monthly gross salary up to the maximum amount which
      is recognized by the applicable Israeli tax authority. In addition, Mr. Yeffet
      is provided the use of a company car, including the payment of maintenance,
      gas
      and insurance expenses. SpaceLogic Ltd’s Board of Directors in its discretion
      may award Mr. Yeffet an annual performance bonus. Mr. Yeffet is also subject
      to
      customary non-competition covenants for a period of 18 months after the
      termination of his employment and/or he ceases to be a director of SpaceLogic
      Ltd. or holder of 5% of the outstanding common stock of SpaceLogic Ltd. Mr.
      Yeffet will also benefit from Recuperating Benefits in accordance with Israeli
      market standards.





The
      following table describes the history of the salary reductions of certain
      directors who are executives of the Company or its subsidiaries. The Company’s
      Board of Directors determined to make three salary reductions for these
      executives (December 2005, May 2006, and July 2006). Only with respect to the
      December 2005 reduction did the Company sign a written agreement with the
      executives.





Name
            
            Amount
                of Salary Reduction December 2005
            
            Amount
                of Salary Reduction May 2006
            
            Amount
                of Salary Reduction July 2006
            
            Annual
                Salary after Three ReductionsIftach
                Yeffet
            
            $
            63,000
            
            $
            15,000
            
            $
            51,000
            
            $
            51,000Michael
                Klein
            
            $
            63,000
            
            $
            18,000
            
            $
            49,500
            
            $
            49,500





24




In
      December 2005, SpaceLogic Ltd. and Mr. Klein entered into a letter agreement,
      pursuant to which, Mr. Klein agreed to reduce his monthly compensation to $9,750
      for a period of 12 months, subject to a six month extension (the “Extension
      Period”) by SpaceLogic Ltd., which was exercised. In consideration for this
      adjustment of base compensation, Mr. Klein was awarded options to purchase
      94,500 shares of the Company’s common stock at an exercise price of $1.50 and
      vesting ratably over a twelve month period and which are exercisable for three
      years after the vesting date or within two months of the end of employment.
      In
      the event the Company elects the Extension Period, Mr. Klein will receive
      options to purchase additional shares of the Company’s common stock equal to 50%
      of the original option grant under the letter agreement, though the Board of
      Directors determined not to grant Mr. Klein such additional options. At the
      end
      of the period of reduced compensation, Mr. Klein’s base compensation will return
      to the amount stated in the services agreement. In the event Mr. Klein’s
      employment is terminated by SpaceLogic without cause or by him for just case,
      as
      those terms are defined in the services agreement, any payments owed to Mr.
      Klein shall be payable at his base compensation rate under the services
      agreement and not at the reduced rate under the letter agreement.





In
      December 2005, SpaceLogic Ltd. and Mr. Yeffet entered into a letter agreement,
      pursuant to which, Mr. Yeffet agreed to reduce his monthly compensation to
      $9,750 for a period of 12 months, subject to a six month extension (the
“Extension Period”) by SpaceLogic Ltd., which was exercised. In consideration
      for this adjustment of base compensation, Mr. Yeffet was awarded options to
      purchase 94,500 shares of the Company’s common stock at an exercise price of
      $1.50 and vesting ratably over a twelve month period and which are exercisable
      for three years after the vesting date or within two months of the end of
      employment. In the event the Company elects the Extension Period, Mr. Yeffet
      will receive options to purchase additional shares of the Company’s common stock
      equal to 50% of the original option grant under the letter agreement, though
      the
      Board of Directors determined not to grant Mr. Yeffet such additional options.
      At the end of the period of reduced compensation, Mr. Yeffet’s base compensation
      will return to the amount stated in the services agreement. In the event Mr.
      Yeffet’s employment is terminated by SpaceLogic without cause or by him for just
      case, as those terms are defined in the services agreement, any payments owed
      to
      Mr. Yeffet shall be payable at his base compensation rate under the services
      agreement and not at the reduced rate under the letter agreement.




**ITEM
      11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
      MANAGEMENT** **AND RELATED STOCKHOLDER MATTERS**





The
      following tables shows all directors and officers of the Company and all persons
      known to the Company to be the beneficial owner of more than five percent of
      the
      Company’s common stock as of March 31, 2008.





Name
                of Beneficial Owner
            
            Amount
                and Nature ofBeneficial
                Ownership (1)
            
            Percent
                ofClassEXECUTIVE
                OFFICERS AND DIRECTORSGary
                Koren (2)
            
            
            16,990,398
            
            
            30.4%Shalom
                Dolev (3)
            
            
            3,636,967
            
            
            6.5%Iftach
                Yeffet (4)
            
            
            3,724,156
            
            
            6.7%Cathal
                Flynn (5)
            
            
            300,000
            
            
            *Paul
                Goodman (6)
            
            
            290,000
            
            
            *Michael
                Klein (7)
            
            
            7,486,490
            
            
            13.4%All
                directors and executive officersas
                a group (6 persons)
            
            
            32,428,011
            
            
            58.0%OTHER
                5% STOCKHOLDERSTony
                Gross (8)
            
            
            3,676,906
            
            
            6.6%All
                directors, executive officers and 5% stockholders as a group (7
                persons)
            
            
            36,104,917
            
            
            64.5%




*
      Less
      than 1%




25




(1)
      Calculated pursuant to Rule 13d-3(d) of the Exchange Act. Under Rule 13d-3(d),
      shares not outstanding which are subject to options, warrants, rights or
      conversion privileges exercisable within 60 days are deemed outstanding for
      the
      purpose of calculating the number and percentage owned by such person, but
      are
      not deemed outstanding for the purpose of calculating the percentage owned
      by
      each other person listed.




(2)
      Includes 52,000 shares of Common Stock subject to options that were exercisable
      as of March 31, 2008.




(3)
      Includes 127,000 shares of Common Stock subject to options that were exercisable
      as of March 31, 2008.




(4)
      Includes 94,500 shares of Common Stock subject to options that were exercisable
      as of March 31, 2008.




(5)
      Includes 300,000 shares of Common Stock subject to options that were exercisable
      as of March 31, 2008.




(6)
      Includes 250,000 shares of Common Stock subject to options that were exercisable
      as of March 31, 2008.




(7)
      Includes 94,500 shares of Common Stock subject to options that were exercisable
      as of March 31, 2008.




(8)
      Includes 47,250 shares of Common Stock subject to options that were exercisable
      as of March 31, 2008.




26





**Equity
      Compensation Plan Information as of December 31, 2007**




The
      following table sets forth information as of the end of the Company’s 2007
      fiscal year with respect to compensation plans under which the Company is
      authorized to issue shares.




**Plan
                Category**
            
            **Number of Shares to Be**
              **Issued Upon Exercise of**
              **Outstanding
                Options**
            
            **Weighted-Average**
              **Exercise
                Price of**
              **Outstanding Options ($)**
            
            **Number of Shares**
              **Remaining Available for**
              **Future
                Issuance under**
              **Equity
                Compensation**
              **Plans
                (Excluding**
              **Securities
                in 1(st)**
              **Column)**Equity
                compensation plan approved by security holders (1)
            
            
            1,724,936
            
            $
            1.09
            
            
            3,227,197Equity
                compensation plans not approved by security holders (2)
            
            
            —
            
            
            —
            
            
            —Total
            
            
            1,724,936
            
            $
            1.09
            
            
            3,227,197







(1)
            Represents
                securities issuable pursuant to the Company’s 1999 Stock Option Plan and
                2005 Equity Incentive Plan.





(2)
            The
                Company does not maintain any equity compensation plans that have
                not been
                approved by its stockholders.




In
        1999,
        the Company adopted the 1999 Stock Option Plan, which allows for the issuance
        of
        incentive stock options and non-qualified stock options to purchase shares
        of
        the Company's common stock. The 1999 Stock Option Plan has authorized for
        issuance 3,000,000 shares of common stock, of which 1,292,447 remain available
        for granting at December 31, 2007.
  In
        2005,
        the Company adopted the 2005 Stock Option/Stock Issuance Plan, which allows
        for
        the issuance of incentive stock options and non-qualified stock options to
        purchase shares of the Company's common stock. The 2005 Stock Option/Stock
        Issuance Plan has authorized for issuance 3,000,000 shares of common stock,
        of
        which 1,934,750 remained available for granting at December 31,
        2007.




**ITEM
      12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS** **,
      AND DIRECTOR INDEPENDENCE**


**Related
      Party Transactions**




Paul
      Goodman, a director of the Company, has provided legal services to the Company
      since 1999 and was the Company ’s corporate attorney through 2006. The fees paid to Mr. Goodman (or firms to
      which
      he is associated) were $17,000 and $62,000 for 2007 and 2006, respectively.




Admiral
      Cathal Flynn, a director of the Company, has provided consulting services to
      the
      Company. The fees paid to Admiral Flynn were $2,500 and $42,000 for 2007 and
      2006, respectively.




27




In
      December, 2005, the Company entered into a Consulting Agreement with Baytree
      Capital Associates, LLC. Sean Deson, a former Director of the Company, is a
      Managing Director of Baytree Capital Associates, LLC. This agreement was
      terminated in the fourth quarter of 2006, and we did not pay Baytree Capital
      Associates, LLC any money under this Agreement.




**Director
      Independence**





The
      Company has selected the definition of “independent director” used by the rules
      of the American Stock Exchange (“AMEX”) applicable to Smaller Reporting
      Companies (as defined under SEC rules) in determining whether members of the
      Company’s Board of Directors and board committees are considered independent
      from the Company. The Company’s Board of Directors has determined that Paul
      Goodman is independent under these standards for purposes of membership on
      the
      full Board of Directors as well as the board committees (Audit Committee and
      Compensation Committee) on which he serves, except that Mr. Goodman is not
      considered independent for purposes of Audit Committee standards as a result
      of
      payments made to Mr. Goodman or firms to which he is associated in connection
      with legal services performed for the Company.





**ITEM
      13: EXHIBITS**





The
      following exhibits are filed as part of, or incorporated by reference into
      this
      Report:





Exhibit
            
            Contents3.1
            
            Articles
                of Incorporation of the Registrant.*3.2
            
            Certificate
                of Amendment to the Articles of Incorporation of the
                Registrant.*3.3
            
            By-Laws
                of Registrant.*4.1
            
            Sample
                Stock Certificate of the Registrant.*10.1
            
            1999
                Stock Option Plan (Incorporated by reference to Exhibit 4.1 to the
                Registrant’s Registration Statement on Form S-8 (Commission File Number
                333-46712) filed with the SEC on September 27,
                2000).***10.2
            
            2005
                Equity Compensation Plan (incorporated by reference to the Company’s
                definitive proxy statement filed with the SEC on April 5,
                2005).***10.3
            
            Executive
                Employment Agreement between Monterey Bay Tech, Inc. and Gary Koren
                dated
                May 10, 2005.***10.4
            
            Executive
                Employment Agreement between Monterey Bay Tech, Inc. and Shalom Dolev
                dated May 10, 2005.***10.5
            
            Employment
                Agreement between SpaceLogic Ltd. and Michael Klein dated February
                17,
                2005.***10.6
            
            Employment
                Agreement between SpaceLogic Ltd. and Iftach Yeffet dated April 20,
                2005.***(1)10.7
            
            Services
                Agreement between SpaceLogic Ltd. and Shalom Dolev dated May 10,
                2005.***10.8
            
            Letter
                Agreement between SpaceLogic Ltd. and Shalom Dolev effective December
                1,
                2005.***10.9
            
            Letter
                Agreement between SpaceLogic Ltd. and Gary Koren effective December
                1,
                2005.***




28




10.10
            
            Letter
                Agreement between SpaceLogic Ltd. and Iftach Yeffet effective December
                1,
                2005.***10.11
            
            Letter
                Agreement between SpaceLogic Ltd. and Michael Klein effective December
                1,
                2005.***10.12
            
            Form
                of Option Agreement.***14
            
            Code
                of Ethics.**21.1
            
            Subsidiaries
                of Registrant23.1
            
            Consent
                of Brightman Almagor & Co31.1
            
            Certification
                of Chief Executive Officer, as required by Rule 13a-14(a) of the
                Securities Exchange Act of 193431.2
            
            Certification
                of Chief Financial Officer, as required by Rule 13a-14(a) of the
                Securities Exchange Act of 193432.1
            
            Certification
                of Chief Executive Officer and Chief Financial Officer, as required
                by
                Rule 13a-14(b) of the Securities Exchange Act of 1934*
                Incorporated into this Report by reference to the Registrant’s
                RegistrationStatement
                on Form 10 dated November 15, 1999.**Incorporated
                into this Report by reference to Exhibit 99 to the Registrant’s Annual
                Report onForm-10KSB filed April14,
                2005.***
                Management or Director contract or arrangement.(1)
                Translation from Hebrew to English to be subsequently
                filed





29


**ITEM
      14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**





The
      following table sets forth the aggregate fees and services billed by Grant
      Thornton LLP, Brightman Almagor & Co. and Burr, Pilger & Mayer, LLP for
      the fiscal years ended December 31, 2007 and 2006:





2007
            
            2006Grant
                Thornton LLPAuditFees
            
            $
            0
            
            $
            0Audit-Related
                Fees
            
            
            0
            
            
            0Tax
                Fees
            
            
            0
            
            $
            25,000All
                Other Fees
            
            
            0
            
            
            0Total
                fees from Grant Thornton LLP
            
            $
            0
            
            $
            25,000Brightman
                Almagor & Co., a member firm of Deloitte Touche
                TohmatsuAudit
                fees
            
            $
            35,000
            
            $
            32,000Audit-Related
                Fees
            
            
            0
            
            
            0Tax
                Fees
            
            
            0
            
            
            0All
                Other Fees
            
            
            0
            
            
            0Total
                fees from Brightman Almagor & Co.
            
            $
            35,000
            
            $
            32,000Burr,
                Pilger & Mayer, LLPAuditFees
            
            
            0
            
            
            0Audit-Related
                Fees
            
            
            0
            
            
            0Tax
                Fees
            
            $
            12,600
            
            
            0All
                Other Fees
            
            
            0
            
            
            0Burr,
                Pilger & Mayer, LLP
            
            $
            12,600
            
            
            0





*Pre-approval
      Policy.* The
      Audit Committee has established a policy governing our use of independent
      auditors for non-audit services. Under the policy, the Audit Committee is
      required to pre-approve all audit and non-audit services performed by our
      independent auditors in order to ensure that the provision of such services
      does
      not impair the auditors’ independence. The Audit Committee pre-approves certain
      Audit, Audit-Related Services and Tax Services, subject to certain fee levels.
      Any proposed services that are not a type of service that has been pre-approved
      or that exceed pre-approval cost levels require specific approval by the Audit
      Committee in advance. The Audit Committee periodically revises the lists of
      pre-approved service types set forth in the policy as required. In fiscal years
      2007 and 2006, all fees identified above under the captions “Audit Fees,”
“Audit-Related Fees,” “Tax Fees” and “All Other Fees” that were billed by to our
      independent auditors were approved by the Audit Committee in accordance with
      SEC
      requirements.





30





**INDEX
                TO FINANCIAL STATEMENTS**
            
            **Page****Report
                of Independent Registered Public Accounting Firm**
            
            **F-1****Consolidated
                Balance Sheets**
            
            **F-2****Consolidated
                Statements of Operations**
            
            **F-3****Statements
                of Shareholders' Deficiency and Comprehensive
                Loss**
            
            **F-4****Consolidated
                Statements of Cash Flows**
            
            **F-5****Notes
                to Financial Statements**
            
            **F-6-25**





31




REPORT
      OF
      INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




**To
      the Shareholders of**





**SECURELOGIC
      CORP.**





We
      have
      audited the accompanying consolidated balance sheet of Securelogic
      Corp. ("the
      Company") and its subsidiaries as of December 31, 2007 and 2006, and the related
      consolidated statements of operations, changes in shareholders' deficiency
      and comprehensive **** loss
      and
      cash flows for each of the three years in the period ended December 31, 2007.
      These financial statements are the responsibility of the Company's management.
      Our responsibility is to express an opinion on these financial statements based
      on our audits.




We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. The Company is not required to
      have, nor were we engaged to perform, an audit of its internal control over
      financial reporting. Our audit included consideration of internal control over
      financial reporting as a basis for designing audit procedures that are
      appropriate in the circumstances, but not for the purpose of expressing an
      opinion on the effectiveness of the Company’s internal control over financial
      reporting. Accordingly, we express no such opinion. An audit also includes
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the financial statements, assessing the accounting principles used and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audit provides a
      reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above, present
      fairly, in all material respects, the consolidated financial position of the
      Company and its subsidiaries as of December 31, 2007, and the consolidated
      results of their operations and their cash flows for each of the two years
      in
      the period then ended, in conformity with U.S. generally accepted accounting
      principles.





The
      accompanying financial statements have been prepared assuming that the Company
      will continue as a going concern. As discussed in Note 1C to the financial
      statements, the Company has suffered recurring losses from operations and has
      a
      shareholders' deficiency that raises doubt about its ability to continue as
      a
      going concern. Management's plans concerning these matters are also described
      in
      Note 1C. The accompanying financial statements do not include any adjustments
      that might result from the outcome of this uncertainty.








Brightman
      Almagor & Co.


Certified
      Public Accountants


A
      member
      firm of Deloitte Touche Tohmatsu








Tel-Aviv,
                IsraelApril
                9, 2008





F-1





**SECURELOGIC
      CORP.**


**(FORMERLY:
      MONTEREY BAY TECH. INC.)**


**CONSOLIDATED
      BALANCE SHEET**


**(U.S.
      dollars in thousands, except share data)**




**Note**
            
            **December
                  31,**
                **2007**CURRENT
                ASSETS:Cash
                and cash equivalents
            
            
            3
            
            $
            154Short-term
                bank deposits
            
            
            4
            
            
            260Trade
                receivables
            
            
            
            
            
            203Work
                in process
            
            
            
            
            
            89Other
                accounts receivable
            
            
            5
            
            
            22728LONG-TERM
                DEPOSITS:Long-term
                deposit
            
            
            
            
            
            7Severance
                pay funds
            
            
            2
            
            
            241248PROPERTY
                AND EQUIPMENT, NET
            
            
            6
            
            
            140$
            1,116CURRENT
                LIABILITIES:Trade
                payables
            
            
            
            
            $
            341Other
                accounts payable
            
            
            7
            
            
            490Deferred
                revenues
            
            
            
            
            
            146Deferred
                tax liability
            
            
            
            
            
            7291,706LONG-TERM
                LIABILITIES:Long-term
                loans
            
            
            8
            
            
            14Accrued
                severance pay
            
            
            2
            
            
            893907GUARANTEES,
                CHARGES, CONTINGENCIES AND COMMITMENTS
            
            
            10SHAREHOLDERS'
                DEFICIENCYShare
                capital
            
            
            11Common
                stock of $ 0.001 par value -Authorized:
                100,000 shares;issued
                and outstanding: 55,947,330 shares
            
            
            
            
            
            56additional
                paid-in capital
            
            
            
            
            
            7,366Accumulated
                other comprehensive income:Foreign
                currency translation adjustments
            
            
            
            
            
            (95
            )Accumulated
                deficit
            
            
            
            
            
            (8,824
            )(1,497
            )$
            1,116





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




F-2


**SECURELOGIC
      CORP.**


**(FORMERLY:
      MONTEREY BAY TECH. INC.)**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**(U.S.
      dollars in thousands, except share and per share
      data)**





**For
                the year ended**
              **December,
                31****Note**
            
            **2007**
            
            **2006**Revenues
            
            
            
            
            $
            2,745
            
            $
            1,297Cost
                of revenues
            
            
            
            
            
            2,014
            
            
            1,075Gross
                profit
            
            
            
            
            
            731
            
            
            222Research
                and development costs, net
            
            
            12A
            
            
            401
            
            
            799Selling
                and marketing expenses
            
            
            
            
            
            352
            
            
            854General
                and administrative expenses
            
            
            
            
            
            1,208
            
            
            1,1021,961
            
            
            2,755Operating
                loss
            
            
            
            
            
            (1,230
            )
            
            (2,533
            )Financial
                income (expenses), net
            
            
            
            
            
            (11
            )
            
            22Other
                income (expenses)
            
            
            12B
            
            
            (4
            )
            
            568Loss
                before taxes on income
            
            
            
            
            
            (1,245
            )
            
            (1,943
            )Taxes
                on income
            
            
            9
            
            
            (26
            )
            
            (20
            )Net
                loss
            
            
            
            
            $
            (1,271
            )
            $
            (1,963
            )Basic
                and diluted net loss per share
            
            
            
            
            
            (0.023
            )
            
            (0.035
            )Weighted
                average number of common shares used in computing basic and diluted
                net
                loss per share
            
            
            
            
            
            55,947,330
            
            
            55,880,664




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





F-3


**SECURELOGIC
      CORP.**


**(FORMERLY:
      MONTEREY BAY TECH. INC.)**


**STATEMENTS
      OF SHAREHOLDERS’ DEFICIENCY AND COMPREHENSIVE LOSS**


**(U.S.
      dollars in thousands, except share data)**





**Number
                of****common**
            
            
            
            
            
            **Accumulated**
            
            
            
            
            
            **Total****shares**
            
            
            
            **Additional**
            
            **other**
            
            
            
            
            
            **shareholders'******$0.001****
              **par
                value**
            
            ****Share****
              **capital**
            
            **paid-in**
              **capital**
            
            ****comprehensive****
              **income**
            
            ****Accumulated****
              **deficit**
            
            ****Comprehensive****
              **loss**
            
            ****Equity****
              **(deficiency)**Balance
                as of December 31, 2006
            
            
            55,947,330
            
            $
            56
            
            $
            7,
                203
            
            $
            (20
            )
            $
            (7,553
            )
            
            
            
            $
            (314
            )Stock
                based compensation
            
            
            -
            
            
            -
            
            
            163
            
            
            -
            
            
            -
            
            
            -
            
            
            163Foreign
                currency translationadjustments
            
            
            -
            
            
            -
            
            
            -
            
            
            (75
            )
            
            -
            
            
            (75
            )
            
            (75
            )Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,271
            )
            
            (1,271
            )
            
            (1,271
            )Comprehensive
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            $
            (1,346
            )
            
            -Balance
                as of December 31, 2007
            
            
            55,947,330
            
            $
            56
            
            $
            7,
                366
            
            $
            (95
            )
            $
            (8,824
            )
            
            
            
            $
            (1,497
            )





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




F-4


**SECURELOGIC
      CORP.**


**(FORMERLY:
      MONTEREY BAY TECH, INC.)**


**STATEMENTS
      OF CASH FLOWS**


**(U.S.
      dollars in thousands)**





**For
                the year ended**
              **December,
                31****2007**
            
            **2006**Cash
                flows from operating activities:Net
                loss
            
            $
            (1,271
            )
            $
            (1,963
            )Depreciation
                and amortization
            
            
            207
            
            
            458Accrued
                severance pay, net
            
            
            25
            
            
            83Loss
                from sale of equipment
            
            
            4
            
            
            3Impairment
                of long-lived assets
            
            
            10
            
            
            45Decrease
                (increase) in trade receivables
            
            
            12
            
            
            (114
            )Decrease
                in other accountsreceivable
                and prepaid expenses
            
            
            54
            
            
            78Increase
                in work in process
            
            
            (80
            )
            
            (6
            )Decrease
                in long term receivables
            
            
            13
            
            
            3Increase
                (decrease) in trade payables
            
            
            75
            
            
            (413
            )Increase
                (decrease) in other payables
            
            
            42
            
            
            (618
            )Increase
                indeferred
                revenues
            
            
            85
            
            
            50Decrease
                in long term loan payable
            
            
            (2
            )
            
            (5
            )Net
                cash used in operating activities
            
            
            (826
            )
            
            (2,399
            )Cash
                flows from investing activities:Purchase
                of property and equipment
            
            
            (61
            )
            
            (5
            )Repayment
                of notes receivables
            
            
            -
            
            
            130Proceeds
                from sales of equipment
            
            
            5
            
            
            7Short-term
                bank deposits, net
            
            
            (75
            )
            
            (25
            )Long-term
                bank deposits, net
            
            
            130
            
            
            (121
            )Net
                cash used in investing activities
            
            
            (1
            )
            
            (14
            )Cash
                flows from financing activities:Repayment
                of long-term credit
            
            
            (3
            )
            
            -Receipt
                of a long term loan
            
            
            25
            
            
            -Net
                cash provided by financing activities
            
            
            22
            
            
            -Effect
                of exchange rate changes on cash balance
            
            
            33
            
            
            12Net
                change in cash and cash equivalents
            
            
            (772
            )
            
            (2,401
            )Cash
                and cash equivalents at the beginningof
                the period
            
            
            926
            
            
            3,327Cash
                and cash equivalents at the endof
                the period
            
            $
            154
            
            $
            926





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





F-5




**SECURELOGIC
        CORP.**
 **(FORMERLY:
        MONTEREY BAY TECH. INC.)**
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **(U.S.
        dollars in thousands, except share and per share
        data)**




**NOTE
      1**  **-**  **GENERAL**




**A**.
            SecureLogic
                  Corp. (formerly: Monterey Bay Tech, Inc.) (“the Company” or “SecureLogic”
                  was incorporated in Nevada. The Company and its subsidiaries (“the Group”)
                  have been involved in Airport Baggage Handling Systems, as well
                  as
                  Automated Materials Handling Systems. The Company has sold Warehouse
                  Management Systems (“WMS”) using its proprietary software for several
                  years.





The
      Company develops and markets systems that optimize the screening of bags and
      people through airports, seaports, border-crossings, or any other security
      screening operation. The Company’s systems integrate unique security
      methodologies with state-of-the-art screening and baggage handling technologies,
      providing a comprehensive baggage screening and passenger screening security
      solution.




**B.**
            **Reverse
                Acquisition**




On
      May
      10, 2005, the Company amended its Articles of Incorporation to change its name
      from Monterey Bay Tech, Inc. to "SecureLogic Corp.”




On
      May
      12, 2005, pursuant to the terms of a Stock Purchase Agreement dated February
      17,
      2005 by and between the Company, SpaceLogic, Ltd., an Israeli corporation
      (“SpaceLogic”) and the shareholders of SpaceLogic, the Company acquired all of
      the issued and outstanding shares of SpaceLogic, in exchange for a total of
      33,253,611 newly issued shares of the Company’s common stock, which represented
      59.8% of the Company’s common shares.





The
      acquisition was accounted for as a reverse acquisition. As the shareholders
      of
      SpaceLogic (as a group) received the largest ownership interest in the Company,
      SpaceLogic was determined to be the "accounting acquirer" in the reverse
      acquisition. As a result, the historical financial statements of the Company
      were replaced with the historical financial statements of
      SpaceLogic.




On
      May
      11, 2005, the Company issued 4,407,704 newly issued shares of common stocks
      and
      four-year warrants to purchase 4,407,704 shares of the Company’s common stock at
      a price of $1.50 per share, to a total of nine accredited and/or sophisticated
      investors who paid, in the aggregate, a total of $2,000. In addition, the
      Company issued 3,305,780 shares to consultants in connection with the reverse
      acquisition in consideration of financial advisory services provided in
      connection with the transaction and 1,663,933 shares paid to an Israeli
      consultant representing 5% of the consideration paid to the SpaceLogic
      shareholdersas a finder's fee.




On
      February 2005, SpaceLogic, obtained a secured bridge loan of $500 from two
      investors, bearing interest at a rate of 6% per annum and a commitment to issue
      110,000 common shares of the Company. Substantially all of SpaceLogic's assets,
      including its intellectual property, are secured the bridge loan. The bridge
      loan and the interest were paid back on May 12, 2005. In addition, on May 12,
      2005 the Company issued 110,000 newly issued shares of common stock in
      accordance with the loan agreement to those two investors.




On
      May
      12, 2005, the Company also acquired the remaining 15% interest in SecureLogic,
      Ltd., an Israeli corporation (a subsidiary of SpaceLogic), which was not already
      owned by SpaceLogic, in exchange for an additional 3,509,967 newly issued shares
      of the Company’s common shares. The excess of the purchase price over the fair
      value of the net tangible assets acquired, in the amount of $1,579 thousand,
      has
      been allocated to technology asset and was to be amortized over its estimated
      useful life, which was 3-years. Due to the adjustments of the revenues forecast,
      the Company wrote-off in the fourth quarter of 2005, the entire net book value
      of the asset.




F-6




**SECURELOGIC
        CORP.**
 **(FORMERLY:
        MONTEREY BAY TECH. INC.)**
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **(U.S.
        dollars in thousands, except share and per share
        data)**
  **NOTE
      1-**  **GENERAL
      (Cont.)**




As
      a
      result, however, of the settlement of certain litigation described below in
      note
      9C, and upon the approval by the court and the Company’s shareholders, the
      SpaceLogic acquisition that closed in May 2005 will be reversed. Following
      these
      approvals, the Company’s business operations associated with the airport
      security screening and handling markets that were acquired in 2005 will be
      returned to the previous owners and the shares of the Company’s common stock
      issued in that acquisition will be cancelled.




**C.**
            **Going
                Concern**




As
      reflected in the accompanying financial statements, the Company’s operations for
      the year ended December 31, 2007, resulted in a net loss of $1,271 and the
      Company’s balance sheet reflects a net shareholders' deficit of $1,497. The
      Company’s ability to continue operating as a “going concern” is dependent on its
      ability to raise sufficient additional working capital. Management’s plans in
      this regard include raising additional cash from potential shareholders and
      increasing the marketing of its current and new products.





**NOTE
      2 -**  **SIGNIFICANT
      ACCOUNTING POLICIES**





The
      consolidated financial statements have been prepared in accordance with
      generally accepted accounting principles in the United States (“U.S.
      GAAP”).





FINANCIAL
      STATEMENTS IN U.S. DOLLARS





The
      reporting currency of the Company is the U.S. dollar (“dollar").




The
      dollar is the functional currency of the Company and its subsidiary in the
      United States. Transactions and balances originally denominated in dollars
      are
      presented at their original amounts. Non-dollar transactions and balances are
      re-measured into dollars in accordance with the principles set forth in
      Statement of Financial Accounting Standards ("SFAS") No. 52 “Foreign Currency
      Translation” (“SFAS No. 52”). All exchange gains and losses from re-measurement
      of monetary balance sheet items resulting from transactions in non-dollar
      currencies are recorded in the statement of operations as they
      arise.




The
      functional currency of the Israeli Subsidiaries is the New Israeli Shekel
      ("NIS"). Their financial statements are translated into dollars in accordance
      with the principles set forth in SFAS No. 52. The translation of assets and
      liabilities is at year-end exchange rates; results of operations have been
      translated at average exchange rates. The translation adjustments are included
      in accumulated other comprehensive income in shareholders'
      deficiency .





USE
      OF
      ESTIMATES





The
      preparation of financial statements in conformity with generally accepted
      accounting principles requires management to make estimates and assumptions
      that
      affect the amounts reported and disclosure of contingent assets and liabilities
      in the financial statements and accompanying notes. Actual results could differ
      from those estimates.





PRINCIPLES
      OF CONSOLIDATION





The
      consolidated financial statements include the accounts of the Company and its
      majority owned subsidiary (the “Group”). Intercompany transactions and balances
      have been eliminated upon consolidation.





CASH
      AND
      CASH EQUIVALENTS





Cash
      equivalents include unrestricted, short-term, highly liquid investments that
      are
      readily convertible to cash with maturities of three months or less at the
      date
      of acquisition.




F-7


**SECURELOGIC
        CORP.**
 **(FORMERLY:
        MONTEREY BAY TECH. INC.)**
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **(U.S.
        dollars in thousands, except share and per share
        data)**




**NOTE
      2 -**  **SIGNIFICANT
      ACCOUNTING POLICIES (Cont.)**





CONCENTRATION
      OF CREDIT RISKS





Financial
      instruments that potentially subject the Group to concentrations of credit
      risk
      consist principally of cash and cash equivalents and trade
      receivables.





The
      Group
      maintains cash and cash equivalents and investments with major financial
      institutions and limits the amount of credit exposure with any
      institution.





The
      Group
      performs ongoing credit evaluations of its customers and to date, has not
      experienced any unexpected material losses. An allowance for doubtful accounts
      is determined with respect to specific accounts receivable that the management
      evaluates to be uncollectible.





PROPERTY
      AND EQUIPMENT





Equipment
      is stated at cost, net of accumulated depreciation.





Depreciation
      is calculated by the straight-line method over the estimated useful lives of
      the
      assets at the following annual rates:





**years**Motor
                vehicles
            
            
            7Office
                furniture and equipment (including computers)
            
            
            3-17





The
      Company’s long-lived assets are reviewed for impairment in accordance with SFAS
      No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”
whenever events or changes in circumstances indicate that the carrying amount
      of
      an asset may not be recoverable. Recoverability of assets to be held and used
      is
      measured by a comparison of the carrying amount of an asset to the future
      undiscounted cash flows expected to be generated by the asset. If an asset
      is
      determined to be impaired, the impairment to be recognized is measured by the
      amount by which the carrying amount of the asset exceeds its fair value. As
      of
      December 31, 2007, impairment losses of $10 have been identified. ****





DEFERRED
      TAXES





The
      Company and its subsidiary account for income taxes in accordance with Statement
      of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS
      No.109”). This Statement prescribes the use of the liability method whereby
      deferred tax assets and liability account balances 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. The Company and its subsidiary
      provide a valuation allowance, if necessary, to reduce deferred tax assets
      to
      their estimated realizable value.





SEVERANCE
      PAY





The
      liabilities of the Group for severance pay are calculated based on the most
      recent salary of the employees as of the balance sheet date in accordance with
      Israeli Severance Pay Law.




F-8


**SECURELOGIC
      CORP.**


**(FORMERLY:
      MONTEREY BAY TECH. INC.)**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**


**(U.S.
      dollars in thousands, except share and per share data)**


**NOTE
      2 -**  **SIGNIFICANT
      ACCOUNTING POLICIES (Cont.)**





The
      Company’s obligation for severance pay is provided by monthly deposits with
      insurance companies (“Severance pay funds”). Severance pay funds presented in
      the balance sheet include profits accumulated to balance sheet date. The amounts
      deposited may only be withdrawn after fulfillment of the obligations pursuant
      to
      Israeli Severance Pay Law or labor agreements. The value of the deposited funds
      is based on the cash surrender value of these funds and includes immaterial
      profits.





Severance
      pay expenses for the years ended December 31, 2007 and 2006 amounted to
      approximately $55 and $116 respectively.





STOCK-BASED
      COMPENSATION




Stock-Based
      Compensation Plans—Effective January 1, 2006, the Company adopted SFAS
      No. 123 (revised 2004), “Share-Based Payment” (SFAS No. 123R)
      requiring that compensation cost relating to share-based payment awards made
      to
      employees and directors be recognized in the financial statements. The principal
      awards issued under Company stock-based compensation plans, which are described
      in Note 1 0,
      “Stock-Based Compensation Plans” include stock options. The cost for such awards
      is measured at the grant date based on the calculated fair value of the award.
      The value of the portion of the award that is ultimately expected to vest is
      recognized as an expense over the requisite service periods (generally the
      vesting period of the equity award) in the Consolidated Statement of Operations.
      The following table summarizes the effects of stock-based compensation resulting
      from the application of SFAS No. 123R (revised 2004) included in Statement
      of
      Operations as follows:




YEAR
                ENDED DECEMBER 31,2007
            
            
            2006Cost
                of revenues
            
            $
            -
            
            $
            18Research
                and development expenses
            
            
            -
            
            
            18Selling
                and marketing expenses
            
            
            -
            
            
            45General
                and administrative expenses
            
            
            163
            
            
            307Total
            
            $
            163
            
            $
            388





F-9





**SECURELOGIC
      CORP.**


**(FORMERLY:
      MONTEREY BAY TECH. INC.)**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**


**(U.S.
      dollars in thousands, except share and per share data)**




**NOTE
      2 -**  **SIGNIFICANT
      ACCOUNTING POLICIES (Cont.)**





REVENUE
      RECOGNITION





The
      Company generated revenues from a long-term contract of installing a material
      handling system in Israel and from the sale of its self - developed software
      relating to Warehouse Management Systems. The Company also generated revenues
      from providing maintenance services and support, from the sale of spare parts
      and from commissions on supplying spare parts.





1.
            Revenue
                from installation automated material handling system





Revenue
      from installation an automated material handling system contract is recognized
      based on Statement of Position 81-1 “Accounting for Performance of
      Construction-Type and Certain Production - Type Contracts” (“SOP 81-1”) whereby
      revenue is recognized according to the percentage - of - completion
      method.





Sales
      and
      anticipated profit under the long-term contract are recorded using the
      cost-to-cost method of accounting, where by percentage of completion is measured
      based on the ratio of costs incurred, to estimated total project costs. This
      percentage approximates the engineering percentage of completion.





Estimated
      gross profit from long-term contracts may change due to changes in estimates
      resulting from differences between actual performance and original forecasts.
      Such changes in estimated gross profit are recorded in results of operations
      when they are reasonably determinable by management, on a cumulative catch-up
      basis.





Amounts
      representing contract change orders, claims or other items are included in
      sales
      only when they can be reliably estimated and realization is probable.





2.
            Revenues
                from sale of software and products





Revenues
      from sale of software are recognized in accordance with Statement of Position
      97-2, “Software Revenue Recognition”, as amended (“SOP 97-2”). SOP 97-2
      generally requires revenue earned on software arrangements involving multiple
      elements to be allocated to each element based on the relative fair value of
      the
      elements The Company has adopted Statement of Position 98-9, “Modification of
      SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions”,
      (“SOP 98-9”). SOP 98-9 requires that revenue be recognized under the “residual
      method” when Vendor Specific Objective Evidence (“VSOE”) of fair value exists
      for all undelivered elements and VSOE does not exist for all of the delivered
      elements. Under the residual method any discount in the arrangement is allocated
      to the delivered elements.


F-10





**SECURELOGIC
      CORP.**


**(FORMERLY:
      MONTEREY BAY TECH. INC.)**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**


**(U.S.
      dollars in thousands, except share and per share data)**




**NOTE
      2 -**  **SIGNIFICANT
      ACCOUNTING POLICIES (Cont.)**





REVENUE
      RECOGNITION (CONT.)





2.
            Revenues
                from sale of software and products
                (cont.)





Revenues
      from sale of software license are recognized when delivery of the product has
      occurred, the fee is fixed or determinable, collectibility is probable, vendor
      specific objective evidence exists to allocate total fees to elements of the arrangement
      and persuasive evidence of an arrangement exists.





The
      Company also generated revenues from products sales which are recognized in
      accordance with Staff Accounting Bulletin No. 104 “Revenue Recognition” when
      delivery has occurred and, where applicable, after installation has occurred,
      there is persuasive evidence of an agreement, the fee is fixed or determinable
      and collection of the related receivable is probable and no further obligations
      exist. In cases where delivery has occurred but the required installation has
      not been performed, the Company does not recognize the revenue until the
      installation is completed.





3.
            Revenues
                from maintenance services and support





Revenues
      from maintenance services and support are recognized on a straight-line basis
      over the term of the maintenance services and support agreement.





4.
            Revenues
                from sale of spare parts





Revenues
      from sale of spare parts are recognized when delivery of the spare parts has
      occurred, the fee is fixed or determinable, collectibility is probable and
      persuasive evidence of an arrangement exists.





5.
            Revenues
                from commissions





Revenue
      from commissions on supplying spare parts is earned when the sale is
      consummated.





6.
            Deferred
                revenue





Deferred
      revenue includes unearned amounts received under maintenance services and
      support contracts.





PROVISION
      FOR WARRANTIES





The
      Company estimates the costs that may be incurred under its basic warranty and
      records a liability in the amount of such costs at the time revenue is
      recognized. The specific terms and conditions of those warranties vary depending
      upon the product sold and the work preformed. Factors that affect the Company’s
      warranty liability include the anticipated work, weighted average cost of
      employees, engineering estimates and anticipated rates of warranty claims.
      The
      Company’s management periodically assesses the adequacy of its recorded warranty
      liability based on the past experience of management and adjusts the amount
      as
      necessary.




F-11





**SECURELOGIC
      CORP.**


**(FORMERLY:
      MONTEREY BAY TECH. INC.)**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**


**(U.S.
      dollars in thousands, except share and per share data)**




**NOTE
      2** -  **SIGNIFICANT
      ACCOUNTING POLICIES (Cont.)**





PROVISION
      FOR WARRANTIES (CONT.)





Changes
      in the Company’s provision for warranty during the year are as
      follows:





Balance,
                at January 1, 2007
            
            $
            65Warranties
                issued during the year
            
            
            3Warranties
                expired or settled during the year
            
            
            (44
            )Balance,
                at December 31, 2007
            
            $
            24





RESEARCH
      AND DEVELOPMENT COSTS





Research
      and development costs, net of participations, are charged to the statement
      of
      operations as incurred. SFAS No. 86 “Accounting for the Costs of Computer
      Software to be Sold, Leased or Otherwise Marketed,” requires capitalization of
      certain software development costs subsequent to the establishment of
      technological feasibility. Based on the product development process,
      technological feasibility is established upon completion of a working model.
      Costs, incurred by the Company between completion of the working models and
      the
      point at which the products are ready for general release, have been
      insignificant. Therefore, research and development costs have been charged
      to
      the statement of operations, as incurred.





PARTICIPATION
      IN RESEARCH AND DEVELOPMENT COSTS





Participation
      of the BIRD Foundation in funding approved research and development projects
      is
      recognized at the time the Company is entitled to such participation, on the
      basis of the costs incurred. Such participation is included as a deduction
      of
      research and development costs.





FAIR
      VALUE OF FINANCIAL INSTRUMENTS





The
      carrying amount reported in the balance sheet for cash and cash equivalents,
      short-term bank deposits, trade receivables, other accounts receivable,
      long-term deposits, long-term note receivables, long-term loans, trade payables
      and other accounts payable approximates their fair value.





BASIC
      AND
      DILUTED NET LOSS PER SHARE





Basic
      and
      diluted net loss per share are presented in conformity with SFAS No. 128
      "Earnings per Share" for all years presented. Basic and diluted net loss per
      share have been computed using the weighted-average number of ordinary shares
      outstanding during the year.





Outstanding
      share options and shares issued and reserved for outstanding share options
      have
      been excluded from the calculation of basic and diluted net loss per share
      to
      the extent such securities are anti-dilutive




F-12


**SECURELOGIC
        CORP.**
 **(FORMERLY:
        MONTEREY BAY TECH. INC.)**
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **(U.S.
        dollars in thousands, except share and per share data)**


**NOTE
      2**  **-**  **SIGNIFICANT
      ACCOUNTING POLICIES (Cont.)**





RECENT
      ACCOUNTING PRONOUNCEMENTS





1.
            In
                September 2006, the FASB issued**SFAS
                No. 157, “Fair Value Measurements”**(SFAS No. 157). The purpose of SFAS No. 157 is to define fair value,
                establish a framework for measuring fair value, and enhance disclosures
                about fair value measurements. The measurement and disclosure requirements
                are effective for the Company beginning in the first quarter of fiscal
                year 2008. The Company does not believe that the adoption of SFAS
                No. 157
                will have a significant impact on its consolidated financial
                statement.





2.
            InFebruary
                2007, the FASB issued**SFAS
                No. 159, “The Fair Value Option for Financial Assets and Financial
                Liabilities”**(SFAS No. 159). SFAS No. 159 permits companies to choose to
                measure certain financial instruments and certain other items at
                fair
                value. The standard requires that unrealized gains and losses on
                items for
                which the fair value option has been elected be reported in earnings.
                SFAS
                No. 159 is effective for the Company beginning in the first quarter
                of fiscal year 2008, although earlier adoption is permitted.The
                Company does not believe that the adoption of SFAS No. 159 will have
                a
                significant impact on its consolidated financial
                statement.




3.
            In
                June 2007, the FASB ratified Emerging Issues Task Force
                (EITF)**Issue
                No. 07-3, “Accounting for Nonrefundable Advance Payments for Goods or
                Services to Be Used in Future Research and Development
                Activities”**(EITF 07-3). EITF 07-3 requires non-refundable advance payments for
                goods
                and services to be used in future research and development activities
                to
                be recorded as an asset and the payments to be expensed when the
                research
                and development activities are performed. EITF 07-3 applies prospectively
                for new contractual arrangements entered into beginning in the first
                quarter of fiscal year 2008. We currently recognize these non-refundable
                advanced payments as an expense upon payment. The adoption of EITF
                07-3 is
                not expected to have a significant impact on the Company's consolidated
                financial statements.





**4.**
            In
                December 2007, the FASB issued**SFAS No. 141(R)
                “Business Combinations”**(“SFAS 141(R)”)
                and**SFAS No. 160,
                “Non-controlling Interests in Consolidated Financial Statement”
                (“SFAS 160”)**.
                SFAS 141(R) requires the acquiring entity in a business combination
                to record all assets acquired and liabilities assumed at their respective
                acquisition-date fair values and changes other practices under
                FAS 141, some of which could have a material impact on how we account
                for business combinations. SFAS 141(R) also requires additional
                disclosure of information surrounding a business combination, such
                that
                users of the entity’s financial statements can fully understand the nature
                and financial impact of the business combination. SFAS 160 requires
                entities to report non-controlling (minority) interests in subsidiaries
                as
                equity in the consolidated financial statements. The Company is required
                to adopt SFAS 141(R) and SFAS 160 simultaneously in its fiscal
                year beginning November 1, 2009. The provisions of SFAS 141(R)
                will only impact the Company if it is a party to a business combination
                after the pronouncement has been adopted. Currently, the Company
                does not
                believe that the adoption of SFAS No. 141R and SFAS No. 160 will
                have a
                significant impact on its consolidated financial
                statement.





F-13


**SECURELOGIC
        CORP.**
 **(FORMERLY:
        MONTEREY BAY TECH. INC.)**
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **(U.S.
        dollars in thousands, except share and per share
        data)**




**NOTE
      3**  **-**  **CASH
      AND CASH EQUIVALENTS**





**December
                31,****2007**Cash
            
            $
            74Deposits
                in USD
            
            
            80$
            154




**NOTE
      4**  **-**  **SHORT-TERM
      BANK DEPOSITS**





**Annual
                Interest rate**
              **as
                of****December
                31,**
            
            **December
                31,****2007**
            
            **2007**%Deposits
                in NIS (1)
            
            
            3.3
            
            $
            159Deposits
                in USD (2)
            
            
            3.9-4.0
            
            
            101$
            260





(1)
            The
                deposits include a balance in the amount of $87 that serves as collateral
                for a bank guarantee issued to secure a bid submittal, a balance
                of $11
                serves as collateral for bank guarantees issued to secure rental
                fees (see
                Note 9a) and a balance of $42 serves as collateral for bank guarantees
                issued to secure advances received from
                customers.


(2)
            The
                deposits include a balance of $27 serves as collateral for bank guarantees
                issued to secure advances received from customers and a balance of
                $74
                serves as collateral against credit
                line.




**NOTE
      5**  **-**  **PROPERTY
      AND EQUIPMENT, NET**




A.
            COMPOSITION




**December
                31,****2007**CostMotor
                vehicles
            
            $
            153Office
                furniture and equipment
            
            
            381534Accumulated
                depreciation
            
            
            394Equipment,
                net
            
            $
            140






B.
            Depreciation
                expense for the years ended December 31, 2007 and 2006 amounted to
                $44 and
                $39 respectively. In addition, the Company recognized in 2007 and
                in 2006
                an impairment loss of $44 and $6,
                respectively.




F-14


**SECURELOGIC
        CORP.**
 **(FORMERLY:
        MONTEREY BAY TECH. INC.)**
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **(U.S.
        dollars in thousands, except share and per share data)**


**NOTE
      6 -**  **OTHER
      ACCOUNTS PAYABLE**





**December
                31,****2007**Payroll
                and related expenses
            
            $
            77Provision
                for employees vacation leave
            
            
            165Government
                authorities
            
            
            85Provision
                for warranty
            
            
            24Accrued
                Expenses
            
            
            139$
            490





**NOTE
      7**  **-**  **LONG-TERM
      LOANS**




a.
            COMPOSITION:




**Annual
                interest rate****as
                of****December
                31,**
            
            **Years
                of**
            
            **December
                31,****2007**
            
            **maturity**
            
            **2007**From
                bank
            
            
            5.85
            %
            
            2007-2010
            
            $
            22From
                Leasing Company
            
            
            -
            
            
            2007-2008
            
            
            325Less
                - current maturities
            
            
            
            
            
            
            
            
            (11
            )$
            14





The
      maturities of these loans after December 31, 2007 are as follows:





2008-
                current maturities
            
            
            112009
            
            
            82010
            
            
            6$
            25





b.
            With
                respect to collateral, see Note 9b.





**NOTE
      8**  **-TAXES
      ON INCOME**





a.
            APPLICABLE
                TAX LAWS:





The
      provisions of the Income Tax (Inflationary Adjustments) Law, 1985 apply to
      the
      Israeli subsidiaries of the Company. According to the law, the results for
      tax
      purposes are measured based on the changes in the Israeli CPI.





b.
            TAX
                LOSSES CARRYFORWARD:





As
      of
      December 31, 2007, the Company’s Israeli subsidiaries have tax losses of
      approximately $3,057 that may be carried forward for an indefinite
      period.




F-15


**SECURELOGIC
        CORP.**
 **(FORMERLY:
        MONTEREY BAY TECH. INC.)**
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **(U.S.
        dollars in thousands, except share and per share data)**


**NOTE
      8**  **-
      TAXES ON INCOME (Cont.)**





c.
            FINAL
                TAX ASSESSMENTS:





The
      Company's and its U.S. subsidiary tax filings are open to examination by the
      Internal Revenue Service and California Franchise Tax Board for 3 and 4 years,
      respectively SpaceLogic
      has tax assessments, which are considered final through 2000. Other subsidiaries
      have no final tax assessments since inception.




d.
            DEFERRED
                TAXES:




Deferred
      income taxes reflect the net tax effect of temporary differences between the
      carrying amounts of assets and liabilities for financial reporting purposes
      and
      the amounts used for income tax purposes. The
      deferred taxes computed at the enacted tax rate that is expected to be in effect
      at the time the differences are expected to reverse. Significant
      components of the Group’s deferred tax assets are as follows:





DEFERRED
      TAX ASSETS:




**December
                31,****2007**Short-term
                deferred tax assets-net:Provision
                for employees vacation leave
            
            $
            165Valuation
                allowance
            
            
            (165
            )$
            -Long-term
                deferred tax assets-net:Accrued
                severance pay and others
            
            $
            652Carryforward
                tax losses of the company
            
            
            993Carryforward
                tax losses of the subsidiaries
            
            
            3,0574,702Valuation
                allowance
            
            
            (4,702
            )$
            -





The
      Company adopted the provisions of FASB interpretation No. 48 (“FIN 48”),
      Accounting for Uncertainty in Income Taxes, an Interpretation of SFAS 109 on
      January 1,2007. There was no impact as result of this adoption




e.
            INCOME
                TAX EXPENSES




Income
      tax expense consists of:





**For
                the year ended**
              **December,
                31****2007**
            
            **2006**Current
                non-U.S.
            
            $
            26
            
            $
            20




F-16





**SECURELOGIC
      CORP.**


**(FORMERLY:
      MONTEREY BAY TECH. INC.)**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**


**(U.S.
      dollars in thousands, except share and per share data)**


**NOTE
      8**  **-
      TAXES ON INCOME (Cont.)**




e.
            INCOME
                TAX EXPENSES (Cont.)





In
      2005
      the Israeli Knesset approved a law for the amendment of the Income Tax
      Ordinance, according to which the regular corporate tax rate is to be reduced
      gradually and annually from 34% to 29% for the 2007 tax year ending at 25%
      for
      the 2010 tax year.





**NOTE
      9 -**  **GUARANTEES,
      CHARGES, AND CONTINGENCIES AND COMMITTMENTS**





a.
            GUARANTEES:





The
      Company has provided bank guarantees at the amount of $77 in order to secure
      advances received from customers $22 to secure rental fees, and $87 to secure
      a
      bid submittal.





b.
            CHARGES:





As
      collateral for loans granted by a leasing company and a bank, a fixed charge
      has
      been placed on motor vehicles.





For
      deposits serving as collateral for bank guarantees, see Note 4.





c.
            CONTINGENCIES:





On
      November 14, 2006, Michael Gardner, a stockholder holding approximately 7.9%
      of
      the Company's common stock, filed a complaint in the Supreme Court of New York
      for the County of New York against defendants, which include certain officers
      and directors of the Company, Gary Koren, Shalom Dolev, Cathal L. Flynn, Iftach
      Yeffet, Tony Gross and Michael Klein (the “Defendants”) and SecureLogic, as a
      nominal defendant. The complaint purports to be a shareholder derivative action,
      alleging the Defendants breached their fiduciary duties as directors and
      officers, committed waste, and were unjustly enriched. On January 22, 2007,
      the
      Plaintiff moved for a temporary restraining order to prevent the Defendants
      and
      the Company’s Board of Directors from taking action to delist the Company’s
      common stock from the Over-the-Counter Bulletin Board. The court granted the
      Plaintiff’s request for a temporary restraining order on January 22, 2007,
      temporarily preventing the delisting of the Company’s common stock from trading
      on the Over-the-Counter Bulletin Board. On January 26, 2007, the Defendants
      removed the action to the United States District Court for the Southern District
      of New York. On February 22, 2007, Defendants filed a motion to dissolve the
      temporary restraining order.  On March 6, 2007, an amended complaint was
      filed naming four additional shareholders as Plaintiffs, asserting additional
      claims for breach of fiduciary duty and seeking the appointment of a receiver
      for the Company.  On March 20, 2007, Plaintiffs filed a response to the
      motion to dissolve the temporary restraining order, along with a cross motion
      seeking to make the temporary restraining order permanent and asking the court
      to appoint a receiver for the Company. On March 23, 2007, Defendants filed
      a motion to dismiss the amended complaint, asserting that the court lacks
      personal jurisdiction over Defendants and that Plaintiffs have failed to
      establish why a demand on the Board of the Company would be futile, which
      is a prerequisite to maintaining a derivative action.  The parties
      submitted their briefings on the pending motions in early September 2007.
      To-date the Court has not ruled on the pending motions.





The
      parties have reached a settlement that, if approved by the Court, will resolve
      all claims in this action. The settlement has been submitted for approval,
      and a
      hearing of the parties’ application to approve the Settlement is scheduled for
      May 1, 2008.




F-17





**SECURELOGIC
      CORP.**


**(FORMERLY:
      MONTEREY BAY TECH. INC.)**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**


**(U.S.
      dollars in thousands, except share and per share data)**





**NOTE
      9 -**  **GUARANTEES,
      CHARGES, AND CONTINGENCIES AND COMMITMENTS (Cont.)**




c.
            CONTINGENCIES:
                (Cont.)





In
      November 2006, Plaintiffs Treeline Investment Partners and David Jaroslawicz
      filed a complaint (the “Complaint”) in the Supreme Court of New York for New
      York County against Gary Koren and and Killy Koren (collectively, “Defendants”)
      regarding two transactions for the purchase of shares of the Company. On March
      7, 2007, Defendants removed this action to the District Court and on March
      14,
      2007, Defendants moved to dismiss the Complaint for lack of personal
      jurisdiction, insufficiency of service of process, failure to state a claim
      for
      fraud upon which relief can be granted, and for failure to plead fraud with
      particularity. While the Company is not a party to this litigation, the Company
      may be obligated to indemnify Mr. Koren for some or all of his litigation
      expenses. The Company has already advanced $101 indemnification payment to
      Mr.
      Koren. Whether or not Mr. Koren will ultimately be entitled to a full or partial
      indemnification will depend, among other things, on the substance and the merit
      of the claims. This litigation will be settled as part of the settlement
      agreement described herewith.





Pursuant
      to the Settlement Agreement, the parties intend to reverse a May 2005
      acquisition (“2005 Acquisition”) whereby the Company acquired the outstanding
      capital stock and business of SpaceLogic Ltd. and its subsidiary SecureLogic
      Ltd. from the Defendants in exchange for shares (“Shares”) of the Company’s
      common stock. On the Effective Date (as defined in the Settlement Agreement),
      (i) the individual Defendants will surrender their respective Shares to the
      Company for cancellation with Mr. Koren transferring 1,200,000 of his Shares
      to
      Treeline Investment Partners, L.P. and Mr. Jaroslowicz, and (ii) the Company
      will transfer to a new entity beneficially owned by Messrs. Koren, Dolev,
      Yeffet, Gross and Klein (“Newco”), all of the business and assets of the Company
      other than (a) $250 in cash, (b) accounts in existence prior to the 2005
      Acquisition, (c) corporate and tax records, and (d) 75% of the proceeds from
      the
      Company’s directors and officers insurance policy after payment of certain legal
      fees and expenses by the Company, Newco, and/or the Defendants in connection
      with the lawsuits. Newco will assume all liabilities and obligations of the
      Company except certain liabilities and obligations of the Plaintiffs, other
      shareholders, and tax and Securities and Exchange Commission filings not to
      exceed $5 in the aggregate. The Settlement Agreement also includes mutual
      general releases and non-disparagement provisions.




In
      addition, Newco will grant the Company or a designated subsidiary four
      non-exclusive licenses for individual iScreen Systems. Pursuant to these
      licenses, the Company will not market the iScreen Systems except through Newco
      or its designee. Each license will give the Company or its designated subsidiary
      the right to receive the first $200 in proceeds from the sale of the licensed
      iScreen System and an equal portion in any amount in excess of $200.




Further,
      Newco will be required to deliver to the Company a promissory note (the “Note”)
      in the principal amount of $100 payable on or before June 30, 2008. The Note
      will be non-negotiable, bear no interest, and be secured personally by Mr.
      Koren.




The
      settlement of these actions will become effective no later than five business
      days following the later of the final approval by the court of the Settlement
      Agreement and the effective date of the approval of the Settlement Agreement
      by
      the holders of at least a majority of the Company’s common stock. Upon the
      Effective Date, the Defendants will resign as officers and directors of the
      Company, terminate their employment contracts, and waive any options or rights
      to compensation.




The
      Plaintiffs have advised the Defendants that they intend to spin-out the
      outstanding shares of the subsidiary designated by the Company as the licensee
      to the iScreen licenses. The spin-out will require court approval to render
      the
      issuance of the subsidiary shares exempt from registration under the Securities
      Act of 1933, as amended. The Plaintiffs have agreed to bear all of the cost
      and
      expenses related to the spin-out prior to the Effective Date.




F-18




**SECURELOGIC
        CORP.**
 **(FORMERLY:
        MONTEREY BAY TECH. INC.)**
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **(U.S.
        dollars in thousands, except share and per share data)**


**NOTE
      9 -** **GUARANTEES,
      CHARGES, AND CONTINGENCIES AND COMMITMENTS (Cont.)**





d.
            COMMITMENTS





The
      future minimum lease commitments of the Company under various non-cancelable
      operating lease agreements in respect of motor vehicles are as of December
      31,
      2007 as follows:





2008
            
            
            712009
            
            
            122010
            
            
            588





The
      Company is committed to pay rent for a building until December 2008. Future
      rental fees on account of the lease as of December 31, 2007 aggregate to
      approximately $50 per annum. As for collateral, see above.




Rent
      expenses for the years ended December 31, 2007 and 2006 amounted to $46 and
      $50,
      respectively.





In
      June
      2004, an Agreement was signed between the Company and the Bird Foundation
      (“BIRD”) for BIRD’s participation in the Company’s expected research and
      development budget of approximately $1,072 up to a participation amount of
      $534.
      This research and development was to be performed within 18 months from the
      approval date. In March 2006, the Company received an approval from BIRD to
      extend the project's time framework by an additional six months. The
      participation recorded in 2007 and 2006 amounted to $0 and $91,
      respectively.





Pursuant
      to the agreement, the Company is required to pay royalties at the rate of 5%
      of
      sales of product developed with funds provided by the BIRD Foundation, up to
      an
      amount equal to 100%-150% of BIRD Foundation’s research and development grants
      (dollar-linked) related to such projects. The obligation to pay these royalties
      is contingent on actual sales of the products and in the absence of such sales
      no payment is required. As of December 31, 2007 the Company's' contingent
      obligation to BIRD in respect of the aforementioned participation amounted
      to $
      402.





**NOTE
      10 -**  **SHAREHOLDERS'
      DEFICIENCY**





**EMPLOYEE,
      DIRECTORS, AND CONSULTANT OPTION PLANS**




In
      1999,
      the Company adopted a stock option plan (“1999 Stock Option Plan”), which allows
      for the issuance of incentive stock options and non-qualified stock options
      to
      purchase shares of the Company's common stock. The option plan has authorized
      3,000,000 shares of which 1,292,447 remain available for granting at December
      31, 2007. Under the option plan, incentive stock options may be granted to
      employees, directors, and officers of the Company and non-qualified stock
      options may be granted to consultants, employees, directors, and officers of
      the
      Company. Options granted under the option plan are for periods not to exceed
      ten
      years, and must be issued at prices not less than 100% of the fair market value
      of the stock on the date of grant. Options granted to shareholders who own
      greater than 10% of the outstanding stock are for periods not to exceed five
      years and must be issued at prices not less than 110% of the fair market value
      of the stock on the date of grant. Options granted under the option plan
      generally vest within 4 years.




F-19




**SECURELOGIC
        CORP.**
 **(FORMERLY:
        MONTEREY BAY TECH. INC.)**
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **(U.S.
        dollars in thousands, except share and per share
        data)**





**NOTE
      10-**  **SHAREHOLDERS'
      DEFICIENCY (Cont.)**





**EMPLOYEE,
      DIRECTORS, AND CONSULTANT OPTION PLANS (Cont.)**




During
      the year ended December 31, 2007 and during the year ended December 31, 2006,
      the Company did not grant options under the 1999 Stock Option Plan.





In
      2005,
      the Company adopted a new stock option plan (“2005 Stock Option/Stock Issuance
      Plan”), the option plan authorized 3,000,000 shares of which 1,934,750 remained
      available for granting at December 31, 2007. Under the option plan: incentive
      stock options may be granted to employees, directors, and officers of the
      Company and non-qualified stock options may be granted to consultants,
      employees, directors, and officers of the Company. Options granted under the
      option plan are for periods not to exceed ten years, and must be issued at
      prices not less than 100% of the fair market value of the stock on the date
      of
      grant. Options granted to shareholders who own greater than 10% of the
      outstanding stock are for periods not to exceed five years and must be issued
      at
      prices not less than 110% of the fair market value of the stock on the date
      of
      grant. Options granted under the option plan generally vest within 4 years.
      During the year ended December 31, 2007, the Company did not grant options
      under
      the 2005 Stock Option Plan. During 2006, the Company granted under this plan,
      250,000 options at an average exercise price of $0.78.




A
      summary
      of the status of the Company's stock option plans as of December 31, 2007 and
      2006 and changes during the years then ended are as follows:





**OPTIONS
                AND SHARES AVAILABLE FOR GRANT**
            
            **OUTSTANDING
                OPTIONS (*)**
            
            **WEIGHTED-AVERAGE
                EXERCISE PRICE PER SHARE**
            
            **WEIGHTED-AVERAGE
                FAIR VALUE OF OPTION**Outstanding
                December 31, 2005
            
            
            2,876,997
            
            
            2,075,136
            
            $
            1.15Granted
            
            
            (250,000
            )
            
            250,000
            
            $
            0.78
            
            $
            0.61Forfeited
            
            
            200,000
            
            
            (200,000
            )
            $
            1.23Outstanding
                December 31, 2006
            
            
            2,826,997
            
            
            2,125,136
            
            $
            1.10Forfeited
            
            
            400,200
            
            
            (400,200
            )
            $
            1.11Outstanding
                December 31, 2007
            
            
            3,227,197
            
            
            1,724,936
            
            $
            1.09




(*)
            Restated





F-20





**SECURELOGIC
        CORP.**
 **(FORMERLY:
        MONTEREY BAY TECH. INC.)**
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **(U.S.
        dollars in thousands, except share and per share data)**


**NOTE
      10-**  **SHAREHOLDERS'
      DEFICIENCY (Cont.)**





**EMPLOYEE,
      DIRECTORS, AND CONSULTANT OPTION PLANS (Cont.)**




The
      following table summarizes information about options outstanding and exercisable
      as of December 31, 200 7 :





**OPTIONS
                OUTSTANDING**
            
            **OPTIONS
                EXERCISABLE****RANGE
                OF**
              **EXERCISE
                PRICE**
              **$**
            
            **NUMBER
                OUTSTANDING AT**
              **DECEMBER
                31, 2007**
            
            **WEIGHTED-AVERAGE
                REMAINING CONTRACTUAL LIFE**
            
            **WEIGHTED-AVERAGE
                EXERCISE PRICE**
            
            **NUMBER
                OUTSTANDING AT**
              **DECEMBER
                31, 2007**
            
            **WEIGHTED-AVERAGE
                EXERCISE PRICE**0.23
                - 0.44
            
            
            266,000
            
            
            1.17
            
            $
            0.34
            
            
            266,000
            
            $
            0.340.60
                - 0.75
            
            
            403,186
            
            
            2.62
            
            $
            0.61
            
            
            403,186
            
            $
            0.611.07
                - 1.54
            
            
            997,650
            
            
            2.96
            
            $
            1.34
            
            
            747,650
            
            $
            1.371.74
                - 4.00
            
            
            58,100
            
            
            1.96
            
            $
            3.70
            
            
            58,100
            
            $
            3.701,724,936
            
            
            
            
            
            
            
            
            1,474,936




**NOTE
      11-**  **SUPPLEMENTARY
      INFORMATION TO THE STATEMENTS OF OPERATIONS**





**A.** Research
      and development costs, net




**For
                the year ended**
              **December,
                31****2007**
            
            **2006**Research
                and development costs, netResearch
                and development costs
            
            $
            375
            
            $
            890Cancellation
                of accrual for BIRD (participation from BIRD)
            
            
            26
            
            
            (91
            )$
            401
            
            $
            799





B. Other
      income (expenses)





The
      expenses of $4 in 2007 represent a loss from sale of equipment.





The
      $568
      income recorded in 2006 was a result of a settlement paid to the Company by
      Vinci Airports US, Inc. ("Vinci"), which settled the law suit filed against
      Vinci by the Company's SpaceLogic, Ltd. subsidiary. The $568 amount represents
      a
      settlement payment in the amount of $250 (less legal fees and expenses in the
      amount of $100 which were deducted directly from the settlement amount) plus
      a
      waiver by Vinci of its claim for the repayment of a $418 loan previously made
      in
      connection with a joint venture between the parties.




F-21


**SECURELOGIC
        CORP.**
 **(FORMERLY:
        MONTEREY BAY TECH. INC.)**
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **(U.S.
        dollars in thousands, except share and per share
        data)**





**NOTE
      12**  **-**  **INFORMATION
      ON OPERATING SEGMENTS**





a.
            The
                Group operates in the three following reportable operating
                segments:





·
            Baggage
                Handling and Security Systems - the United States Transportation
                Security
                Administration (“TSA”) a division of the Department of Homeland Security,
                awarded a Single Source Contract to the Company to install iScreen
                Node in
                a major US metropolitan airport for a pilot program. In addition,
                the
                Company sold spare parts relating to the system constructed and also
                received commissions in respect of the aforementioned
                sales.





·
            WMS
                and Software - the Company has installed an automated material handling
                system in Israel. In addition, the Company develops, plans, implements
                and
                markets software for warehouses and distribution
                centers.





·
            Maintenance
                services and support.





b.
            Measurement
                of revenues and segment profits and
                losses:




The
      measurement of revenues, profits or losses and assets of the reportable
      operating segments is based on the same accounting principles applied in these
      financial statements.





Segment
      profits (losses) reflect the income from operations of the segment and do not
      include net financial income or expense and income tax expenses (tax benefit)
      since those items are not included in the measurement of segment profit or
      loss.




F-22





**SECURELOGIC
        CORP.**
 **(FORMERLY:
        MONTEREY BAY TECH. INC.)**
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **(U.S.
        dollars in thousands, except share and per share
        data)**





**NOTE
                12:-**
            **INFORMATION
                ON OPERATING SEGMENTS (
                CONT.)**





c.
            Financial
                data relating to reportable operating
                segments:




**Year
                    ended December 31, 2007****Baggage
                    Handling and Security Systems**
                
                
                **WMS
                    and Software**
                
                
                **Maintenance**
                  **services
                    and support**
                
                
                **Adjustments**
                
                
                **Totals**Revenues
                    from external customers
                
                
                320
                
                
                2,054
                
                
                371
                
                
                
                
                
                2,745Segment
                    profit (loss)
                
                
                (139
                )
                
                304
                
                
                188
                
                
                (1,587
                )(1)
                
                (1,234
                )Depreciation
                    expense
                
                
                21
                
                
                10
                
                
                8
                
                
                5
                
                
                44Investments
                    in long-lived assets
                
                
                -
                
                
                2
                
                
                9
                
                
                
                
                
                11


**December
                  31, 2007**Segment
                  assets
              
              
              846
              
              
              213
              
              
              57
              
              
              -
              (2)
              
              1,116





(1)
            Unallocated
                expenses


(2)
            Unallocated
                assets




F-23




**SECURELOGIC
        CORP.**
 **(FORMERLY:
        MONTEREY BAY TECH. INC.)**
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **(U.S.
        dollars in thousands, except share and per share data)**


**NOTE
                12:-**
            **INFORMATION
                ON OPERATING SEGMENTS (
                CONT.)**





c.
            Financial
                data relating to reportable operating segments:
                (cont.)




**Year
                ended December 31, 2006****Baggage
                Handling and Security Systems**
            
            
            **WMS
                and Software**
            
            
            **Maintenance**
              **services
                and support**
            
            
            **Adjustments**
            
            
            **Totals**Revenues
                from external customers
            
            
            244
            
            
            834
            
            
            219
            
            
            
            
            
            1,297Segment
                profit (loss)
            
            
            (1,271
            )
            
            (200
            )
            
            40
            
            
            (1,102
            )(1)
            
            (2,533
            )Depreciation
                expense
            
            
            20
            
            
            10
            
            
            8
            
            
            5
            
            
            43Investments
                in long-lived assets
            
            
            5
            
            
            
            
            
            
            
            
            
            
            
            5




**December
                31, 2006**Segment
                assets
            
            
            1,655
            
            
            150
            
            
            80
            
            
            -
            (2)
            
            1,885







(1)
            Unallocated
                expenses


(2)
            Unallocated
                assets





d.
            Revenues
                from major customers that exceed 10% of total revenues in the reported
                years:




**Year
                ended December 31,****2007**
            
            **2006**Customer
                A
            
            
            67
            %
            
            -Customer
                B
            
            
            11
            %
            
            -Customer
                C
            
            
            -
            
            
            56
            %Customer
                D
            
            
            4
            %
            
            13
            %




F-24




**NOTE
                13:-**
            **TRANSACTIONS
                AND BALANCES WITH RELATED
                PARTIES**




**For
                the year ended**
              **December,
                31****2007**
            
            **2006**A.Expenses:Salary
                and related expenses to the Company's CEO
            
            
            144
            
            
            186Participation
                in general expenses in the ordinary course of business
            
            
            (6
            )
            
            (23
            )138
            
            
            163





**For
                the year ended**
              **December,
                31****2007**B.Balances
                with related parties:Other
                accounts receivable
            
            
            1




F-25


SIGNATURES





Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, the Registrant has duly caused this report to be signed on its behalf
      by
      the undersigned, thereunto duly authorized.




SECURELOGIC
                CORP.
                (Registrant)By
            /s/
              Gary
              KorenGary
                Koren, Chief Executive Officer,
              President
                and Director




By
            /s/
              Michal MosesMichal Moses, Chief Accounting Officer,
              Chief Financial Officer,
                Secretary




Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed below by the following persons on behalf of the registrant and in the
      capacities and on the dates indicated below.





Signature
            
            Title
            
            Date/s/
              (Gary
                Koren)
            
            Chief
                Executive Officer, President and Director
            
            April
                10, 2008/s/
              (Shalom
                Dolev)
            
            Director
            
            April
                10, 2008/s/
              
              (Josh
                Hurewitz)
            
            Director
            
            April
                10, 2008/s/
              
              (Cathal
                Flynn)
            
            Director
            
            April
                10, 2008/s/
              
              (Iftach
                Yeffet)
            
            Director
            
            April
                10, 2008/s/
              
              (Michael
                Klein)
            
            Director
            
            April
                10, 2008/s/
              
              (Paul
                Goodman)
            
            Director
            
            April
                10, 2008





32





EXHIBIT
      INDEX





Exhibit
            
            Contents3.1
            
            Articles
                of Incorporation of the Registrant.*3.2
            
            Certificate
                of Amendment to the Articles of Incorporation of the
                Registrant.*3.3
            
            By-Laws
                of Registrant.*4.1
            
            Sample
                Stock Certificate of the Registrant.*10.1
            
            1999
                Stock Option Plan (Incorporated by reference to Exhibit 4.1 to the
                Registrant’s Registration Statement on Form S-8 (Commission File Number
                333-46712) filed with the SEC on September 27,
                2000).***10.2
            
            2005
                Equity Compensation Plan (incorporated by reference to the Company’s
                definitive proxy statement filed with the SEC on April 5,
                2005).***10.3
            
            Executive
                Employment Agreement between Monterey Bay Tech, Inc. and Gary Koren
                dated
                May 10, 2005.***10.4
            
            Executive
                Employment Agreement between Monterey Bay Tech, Inc. and Shalom Dolev
                dated May 10, 2005.***10.5
            
            Employment
                Agreement between SpaceLogic Ltd. and Michael Klein dated February
                17,
                2005.***10.6
            
            Employment
                Agreement between SpaceLogic Ltd. and Iftach Yeffet dated April 20,
                2005.***(1)10.7
            
            Services
                Agreement between SpaceLogic Ltd. and Shalom Dolev dated May 10,
                2005.***10.8
            
            Letter
                Agreement between SpaceLogic Ltd. and Shalom Dolev effective December
                1,
                2005.***10.9
            
            Letter
                Agreement between SpaceLogic Ltd. and Gary Koren effective December
                1,
                2005.***10.10
            
            Letter
                Agreement between SpaceLogic Ltd. and Iftach Yeffet effective December
                1,
                2005.***10.11
            
            Letter
                Agreement between SpaceLogic Ltd. and Michael Klein effective December
                1,
                2005.***10.12
            
            Form
                of Option Agreement.***14
            
            Code
                of Ethics.**21.1
            
            Subsidiaries
                of Registrant23.1
            
            Consent
                of Brightman Almagor & Co31.1
            
            Certification
                of Chief Executive Officer, as required by Rule 13a-14(a) of the
                Securities Exchange Act of 193431.2
            
            Certification
                of Chief Financial Officer, as required by Rule 13a-14(a) of the
                Securities Exchange Act of 193432.1
            
            Certification
                of Chief Executive Officer and Chief Financial Officer, as required
                by
                Rule 13a-14(b) of the Securities Exchange Act of
                1934




*
              Incorporated
                  into this Report by reference to the Registrant’s RegistrationStatement
                  on Form 10 dated November 15, 1999.
  33
 **
                Incorporated
                    into this Report by reference to Exhibit 99 to the Registrant’s Annual
                    Report onForm-10KSB filed April 14, 2005.
  ***
                Management
                    or Director contract or
                    arrangement.
  (1)
                  Translation
                      from Hebrew to English to be subsequently
                      filed


34