**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,
                2006.**





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
      Hemelacha 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: $1,297,000.





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 26, 2007: $1,752,453





Number
      of
      shares outstanding of each of the registrant's classes of common stock as of
      March 28, 2007: Common Stock: 55,947,331





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.


2006
      FORM
      10-KSB ANNUAL REPORT


Table
      of
      Contents





Trademarks/Definitions
                and Note on Forward Looking StatementsPART
                IItem
                1.  Business
            
            5Item
                2.  Properties
            
            10Item
                3.  Legal Proceedings
            
            10Item
                4.  Submission of Matters to a Vote of Security
                Holders
            
            12PART
                IIItem
                5.  Market for the Registrant's Common Equity, Related Stockholder
                Matters and Small Business Issuer Purchases of Equity
                Securities
            
            12Item
                6.  Management's Discussion and Analysis or Plan of
                Operations
            
            13Item
                7.  Financial Statements
            
            19Item
                8.  Changes In and Disagreements With Accountants on Accounting And
                Financial Disclosure
            
            20Item
                8a. Controls and Procedures
            
            21Item
                8b. Other InformationPART
                IIIItem
                9.  Directors, Executive Officers, Promoters, Control Persons;
                Corporate Governance; Compliance with Section 16(a) of the Exchange
                Act
            
            21Item
                10. Executive Compensation
            
            24Item
                11. Security Ownership of Certain Beneficial Owners and Management
                and Related Stockholder Matters
            
            31Item
                12. Certain Relationships and Related Transactions, and Director
                Independence
            
            33Item
                13. Exhibits
            
            35Item
                14.  Principal Accountant Fees and Services
            
            37Signatures
            
            38




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.





3




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.





The
      Company faces risks and uncertainties that could render actual events materially
      different than those described in our forward-looking statements. These are
      described in the Risks and Uncertainties section of the Management ’s Discussion and Analysis.





4


**PART
      I**





**ITEM
      1. BUSINESS**





SecureLogic
      Corp. (the “Company” or “SecureLogic”) specializes in airport security software
      and systems, baggage handling systems, material handling systems and integration
      of warehousing and distribution solutions. The Company develops and markets
      software and systems that manage the security screening operations of baggage
      and people through airports, as well as, systems for materials handling and
      warehouse management. SecureLogic's airport security 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.





Our
      principal executive offices are located at 43 Hamelacha Street, Netanya, Israel,
      and our telephone is (866) 669-6120. Our Web site can be found at
      www.secure-logic.net.





**Company
      History**





The
      company was incorporated on March 26, 1997 as a Nevada Corporation.  Formerly,
      the Company provided software products that served the consumer, small business
      and corporate enterprise markets through
      two wholly-owned operating subsidiaries, then-known as Aladdin Systems, Inc. ("Aladdin Systems") and
      Aladdin Enterprise Solutions, Inc. ("Aladdin Enterprise"). In April 2004, in
      two
      unrelated transactions, we sold our operating subsidiaries. On November 11,
      2004, we then changed our corporate name to "Monterey Bay Tech, Inc."





On
      December 20, 2004, we signed a Letter of Intent to acquire SpaceLogic, Ltd.,
      a
      privately held Israeli corporation ("SpaceLogic") that
      focused on the airport security screening market and airport
      baggage handling market .
      On
      February 17, 2005, we executed a Stock Purchase Agreement with SpaceLogic and
      its stockholders, pursuant to which we agreed to purchase all of the issued
      and
      outstanding capital stock of SpaceLogic from its stockholders (the “SpaceLogic
      Transaction”).





On
      May
      11, 2005, we changed our name to SecureLogic Corp. On May 12, 2005, we completed
      the SpaceLogic Transaction by acquiring all of the issued and outstanding
      capital stock of SpaceLogic, making SpaceLogic a wholly-owned subsidiary, 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 then
      outstanding common
      shares. The acquisition was accounted for as a reverse acquisition and 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. Simultaneously, we also acquired SpaceLogic’s wholly-owned
      SecureLogic, Ltd. subsidiary.





**Current
      Business Focus**





Since
      the
      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. SecureLogic ' **’** s
      systems
      utilize proprietary methodologies to manage and direct passenger and baggage
      security screening systems. Our iScreen security screening software and
      solutions are integrated with screening equipment, passenger data, baggage handling
      and other material handling systems, and information systems at various
      terminals. Our comprehensive baggage screening and passenger screening solutions
      are designed for airports, seaports, border-crossings and other complex transfer
      points. Although the Company has now refocused its business towards being a
      software developer and systems integrator specializing in airport security
      screening systems, we continue to maintain our legacy airport baggage handling
      activities.




5





Our
      business is divided into two
      product lines:




Airport
      Security Screening Systems





Automated
      Baggage Handling and Material Handling Systems





**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.





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.).




6




Among
      the
      innovative features and functionality of all the iScreen products are the
      following:





·
      iScreen products afford airport security
      managers the flexibility to easily and dynamically adjust screening procedures
      according to risk level and in response to operational considerations such
      as
      load level, capacity and workforce ;





· iScreen
      integrates the various screening operations within the checked baggage security
      system with the routing procedures necessary to safely screen and transport
      checked baggage through an airport ’s baggage
      handling operation as well as the screening of passengers and their carry-on
      items ;





·
      iScreen supports the operation of existing
      explosive detection systems, explosive trace detectors and automated
      technologies screening machines as well as baggage handling controls and
      hardware ;





·
      iScreen’s modular programming structure
      ensures rapid and economical deployment. Proprietary algorithms are utilized
      to
      establish a specific routing plan for each checked bag through the
      airport ’ s
      various
      explosive detection systems and manual screening operations ;





·
      iScreen combines proprietary software with
      third party databases and existing operational procedures to provide airport
      management with the advanced easy-to-use tools they need to optimize the
      screening process for each and every bag ;
      and





·
      iScreen provides airport security managers
      with the ability to monitor real-time screening loads, screening equipment
      and
      screener availability for the management and optimization of resources and
      screening capacities, at low and high load intervals.





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 to SpaceLogic to install iScreen Node in a
      major US metropolitan airport for a pilot program. It is expected that the
      system will be fully
      installed for operation in the pilot airport by mid-2007.





**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.




7




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




**Services**





We
      provide a wide range of services to clients, on either a time and materials
      or
      fixed price basis, related to the engineering, design and implementation of
      security screening systems and material handling systems, project management
      of
      security screening and material handling projects, installation, structural
      and
      electro/mechanical services for projects and support services in the form of
      24-hour hot-line, remote support by modem, periodic inspections, preventive
      maintenance and on-site support.





**Product
      Support**





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 systems and its
      interoperability with user’s existing computer systems and software, solving
      problems with software operation and suggesting solutions to computing issues.





**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. Generally, in the future, we intend to
      partner with established airport security vendors and system integrators to
      supply our flagship iScreen-Line software package as well as providing
      integration, adaptation and system configuration services, as
      required.





**Product
      Development**




We
      utilize internal resources as well as contractors for the development of our
      software products. Our future financial performance will depend, in part, on
      the
      successful development of enhanced versions of our existing software products,
      on the development, completion, and introduction of new products and customer
      acceptance of those products. There is no assurance that we will avoid
      difficulties that could delay or prevent the successful development of, or
      marketing of, new products and/or enhancements of existing products. There
      also
      can be no assurance that such products will yield positive results or that
      such
      results can be obtained on a timely basis or without the expenditure of
      substantial funds. For the
      fiscal years ending December 31, 2006 and 2005, we spent approximately $799,000
      and $2,721,000 (including the amortization of intangible assets in the amount
      of
      $1,579,000) in
      research and development costs of our products.




**Competition**




We
      believe that we currently have no direct competitors for
      our
      iScreen product lines and in 2005, the TSA awarded us a single source contract
      to conduct a pilot program of our iScreen Node aviation security software at
      a
      U.S. airport. There can be no assurance that other companies involved in systems
      integration of baggage handling systems will not seek to develop competing
      software products.




8





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.





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, and laws and regulations applicable to businesses generally and
      other
      then 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 form the year of its
      creation, whichever expires first in accordance with the provisions of the
      US
      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
      US
      patent Application No. 10/516,010 for SCREENING SYSTEMS FOR OBJECTS IN TRANSIT
      as well as corresponding pending patent applications in Europe, Canada, Israel
      and PCT (Nos. 03730442.5, 2,487,563, 150251 and PCT/IL03/00488, respectively).
      We are about to file a US divisional application.





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,
      as a result, any such claim could have a material adverse effect upon our
      business, results of operations and financial condition.




9





**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.





**Employees**





As
      of
      December 31, 2006, we employed 14 full-time employees in the following
      departments: six in research and development, five in marketing, sales and
      support and three in executive, general and administrative.





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. 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.





**Subsidiaries**





SecureLogic,
      Inc. (100% owned)


SpaceLogic,
      Ltd. (100% owned)


ChainLogic,
      Ltd. (55% owned) Non operational


SecureLogic,
      Ltd. (100% owned)





**ITEM
      2. PROPERTIES**





Our
      offices consist of approximately 4,100 square feet of office space in Netanya,
      Israel. This facility is leased pursuant to a lease expiring in 2008, which
      is
      earlier terminable upon six 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 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)” on July
      10, 2002. 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 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 US paid the sum
      of
      $ 250,000,
      which was paid to SpaceLogic in April 2006 ,
      and
      forgave the $418,000 Vinci Airports US alleged was owed by
      SpaceLogic.




10





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 our 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 21, 2007, Plaintiffs filed
      a motion to disqualify Pepper Hamilton LLP from representing
      Defendants.  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.  All of the motions filed since
      the removal of the case to federal court remain pending.  The Company
      may be obligated to indemnify the officers and directors named as Defendants
      in
      this action for some or all of their respective litigation expenses. The Company
      has already advanced an aggregate of $160,000 in indemnification payments to
      such officers and directors. Whether or not these officers and directors will
      ultimately be entitled to a full or partial indemnification will depend, among
      other things, on the substance and the merit of the claims. At this time we
      are
      unable to state whether an outcome adverse to the Company or to the Defendants
      is either probable or remote, nor are we able to assess the amount or range
      of
      any loss in the event of an unfavorable outcome.





A
      suit
      for $260,000 regarding a project implemented by the Company in 2006 was brought
      against a customer of the Company at the Tel Aviv local court on March 7 2007.
      The suit relates to various claims regarding three bids for supply of automated
      storage systems that were awarded to that customer. The Company is not a party
      to this suit. However, the Company has committed to cover the customer's costs
      in case of legal proceedings related to this project. The Company believes
      that
      the this matter will not have a material adverse effect on the results of
      operations, liquidity, or financial condition, but there can be no assurance
      that the Company will necessarily prevail, due to the inherent uncertainties
      in
      litigation.




11





On
      November 15, 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 $25,000 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. At this stage the Company is unable to determine
      whether this litigation would have a material adverse effect on the
      Company.





**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, 2006, there were 65 stockholders of record. The Company believes
      that it has approximately 500 beneficial stockholders.





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
      present actual transactions.





Common
                StockLow
            
            HighQuarter
                ended:March
                31, 2005
            
            
            0.55
            
            
            1.34June
                30, 2005
            
            
            1.22
            
            
            1.95September
                30, 2005
            
            
            1.25
            
            
            1.80December
                31, 2005
            
            
            0.85
            
            
            1.25March
                31, 2006
            
            
            0.55
            
            
            1.05June
                30, 2006
            
            
            0.46
            
            
            0.90September
                30, 2006
            
            
            0.14
            
            
            0.65December
                31, 2006
            
            
            0.10
            
            
            0.20





The
      Company has never declared, nor has it paid, any cash dividends on its Common
      Stock.




12





**Sales
      of Unregistered Securities**





In
      August
      2006, the Company issued to a consultant, 100,000 shares of the Company's common
      stock, as compensation for services he granted to the company. The issuance
      of
      these shares of common stock was made in reliance upon the exemption from the
      registration requirements of the Securities Act, as set forth in
      Section 4(2) under the Securities Act.





**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.
      We
      recently received an award
      of
      a  $1.6
      million contract to install an automated material handling system in Israel.
      The
      system will be installed by our SpaceLogic subsidiary, and we expect to complete
      the installation by the fourth quarter of 2007. Despite these measures, our
      business is subject to risks beyond our control that can negatively impact
      our
      business, results of operations, and financial condition. Further, we believe
      that our existing cash together with cash generated from operations may only
      be
      sufficient to support our operations until October 2007. For
      these
      and other reasons, our financial statements have been prepared assuming we
      will
      continue as a going concern.





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:**
              
              **2006**
              
              **2005****Revenues**
              
              $
              1,297
              
              $
              807**Costs
                  and expenses:****Cost
                  of revenues**
              
              
              1,075
              
              
              674**Selling
                  and marketing expense**
              
              
              854
              
              
              943**Research
                  and development costs, net**
              
              
              799
              
              
              1,142**Amortization
                  of Intangible Asset**
              
              
              -
              
              
              1,579**General
                  and administrative expenses**
              
              
              1,102
              
              
              965**Acquisition
                  Expenses**
              
              
              -
              
              
              214**Total
                  costs and expenses**
              
              
              3,830
              
              
              5,517**Operating
                  loss**
              
              
              (2,533
              )
              
              (4,710
              )**Financial
                  income (expenses), net**
              
              
              22
              
              
              (20
              )**Other
                  income**
              
              
              568**Loss
                  before taxes on income**
              
              
              (1,943
              )
              
              (4,730
              )**Taxes
                  on income**
              
              
              (20
              )
              
              (20
              )**Net
                  loss**
              
              
              (1,963
              )
              
              (4,750
              )**Basic
                  and diluted net income per share**
              
              
              (0.035
              )
              
              (0.120
              )




13




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:
              
              2006
              
              2005Revenues
              
              
              100
              %
              
              100
              %Costs
                  and expenses:Cost
                  of revenues
              
              
              83
              %
              
              84
              %Selling
                  and marketing expense
              
              
              66
              %
              
              117
              %Research
                  and development costs
              
              
              62
              %
              
              143
              %Amortization
                  of Intangible Asset
              
              
              -
              
              
              196
              %General
                  and administrative expenses
              
              
              85
              %
              
              120
              %Acquisition
                  Expenses
              
              
              -
              
              
              27
              %Total
                  costs and expenses
              
              
              295
              %
              
              684
              %Operating
                  loss
              
              
              (195
              %)
              
              (584
              %)**Financial
                  income (expenses), net**
              
              
              2
              %
              
              (2
              %)**Other
                  income**
              
              
              44
              %
              
              -Loss
                  before taxes on income
              
              
              (150
              %)
              
              (586
              %)Taxes
                  on income
              
              
              (2
              %)
              
              (2
              %)Net
                  loss
              
              
              (151
              %)
              
              (588
              %)




14




**Revenues
      and Cost of Revenues**




Total
      revenues for the year ended December 31, 2006 increased by 61% to $1,297,000
      from $807,000 for the year ended December 31, 2005. The primary reason for
      the
      increase in revenues was the completion of projects during 2006.




Cost
      of
      revenues for the year ended December 31, 2006 increased by 59% to $1,075,000
      from $674,000 for the year ended December 31, 2005. The increase in cost of
      revenues in 2006 was primarily attributable to the increase in revenue.





Gross
      profit increased by 67% for the year ended December 31, 2006 to $222,000 from
      $133,000 for the same period in 2005. The increase in gross profit in 2006
      was
      primarily attributable to the increase in revenue. For the year ended December
      31, 2006, gross profit as a percentage of sales was 17% and for the comparable
      period in 2005 was 16%.




**Operating
      Expenses**




Operating
      expenses consist of (a) research and development expenses, (b) sales and
      marketing expenses, (c) general and administrative expenses and (d) acquisition
      expenses. Operating expenses for the year ended December 31, 2006 decreased
      by 43% to $2,755,000 from $4,843,000 for the similar period in 2005. Operating expenses as a percentage
      of
      revenue decreased from 600% in 2005 to 212% in 2006. The decrease in operating
      expenses was primarily due to the fact that in 2005 we recorded the following
      one-time expenses (i) accrual of additional non-cash severance expense in the
      amount of approximately $300,000 required by Israeli law, which expenses were
      associated with a change in January, 2005, in the method that compensation
      is
      paid to senior management, (ii) acquisition expenses in the amount of $214,000,
      and (iii) amortization of certain intangible assets in connection with our
      May,
      2005 acquisition of SpaceLogic in the amount of $1,579,000.





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




Research
      and Development




Research
      and development expense for the year ended December 31, 2006 decreased by 71%
      to
      $799,000 from $2,721,000 for the year ended December 31, 2005. Research and
      development expense as a percentage of revenue decreased from 337% in 2005
      to
      62% in 2006. The decrease in research and development expenses is mainly due
      to
      implementation of cost cutting plans and to the fact that in 2005 we recorded
      $1,579,000 amortization expenses of certain intangible assets in connection
      with
      our May, 2005 acquisition of SpaceLogic.




15





Sales
      and Marketing




Sales
        and
        marketing expense for the year ended December 31, 2006 decreased by 9% to
        $854,000 from $943,000 for the year ended December 31, 2005. Sales and marketing
        expense as a percentage of revenue decreased from 117% in 2005 to 66% in
        2006.
        The decrease in sales and marketing expenses during 2006 is mainly due to
        implementation of cost cutting plans.


General
      and Administrative




General
      and administrative expense for the year ended December 31, 2006 increased by
      14%
      to $1,102,000 from $965,000 for the year ended December 31, 2005. General and
      administrative expense as a percentage of revenue decreased from 120% in 2005
      to
      85% in 2005. The increase in general and administrative expenses is attributable
      mainly, to two reasons. First, in August 2006, the Company issued to a
      consultant, 100,000 shares of the Company's common stock, as compensation for
      services he granted to the Company in 2003. Management estimated the fair value
      of the shares based on the market value of the shares at the time of the
      transaction. The Company recorded a general and administrative expense of
      $27,000 for this transaction. Second, non-cash expenses in the amount of
      $307,000 that we recoded as a result of the implementation of FAS123R. This
      increase was partially off-set by the implementation of cost cutting
      plans.




Acquisition
      expenses




There
      were no acquisition expenses for the year ended December 31, 2006. Acquisition
      expenses for the year ended December 31, 2005 were $214,000.




**Operating
      Loss**




Operating
      loss decreased to a loss of $2,533,000 for year ended December 31, 2006 as
      compared to a loss of $4,710,000 for the year ended December 31, 2005, a
      decrease of $2,177,000. This decrease is due to the factors discussed
      above.




**Financial
      income/expenses**




Financial
      income for the year ended December 31, 2006 was $22,000, compared with financial
      expenses of $20,000 for the year ended December 31, 2005. Expenses in 2005
      are
      mainly due to financial expenses recorded due to a secured bridge note, taken
      in
      February 2005, from an affiliated party in the amount of $500,000, which was
      paid in full in May, 2005.




**Provision
      for Income Taxes**




Taxes
      on
      income for the year ended December 31, 2006 and for the year ended 2005 were
      $20,000.




**Net
      Loss and Net Loss Per Share**




Net
      loss
      for the year ended December 31, 2006 was $1,963,000 or $0.035 per share as
      compared to a net loss of $4,750,000 or $0. 12 per share for the year ended
      December 31, 2005, a decrease of $2,787,000. This decrease is due to the factors
      discussed above.




16


**Liquidity
          and Capital Resources**
  As
          of
          December 31, 2006, total current assets were $1,391,000 and total current
          liabilities were $1,414,000. At December 31, 2006, we had a working capital
          deficiency of $23,000 and an accumulated deficit of $7,553,000. At December
          31,
          2006, the Company had a cash balance of $926,000.


Net
      cash
      used in operating activities during the year ended December 31, 2006 was
      $2,399,000 as compared to net cash used in operating activities of $3,204,000
      in
      the comparable period in 2005. The major effect on  operating
      cash flows for the period relatively to the prior period was a net
      loss  of
      $1,963,000 relative to a net loss of $4,750,000 partly offset by depreciation
      and amortization of $1,618,000 in 2005.





Net
      cash
      used in investment activities was $14,000 for the year ended December 31, 2006
      as compared to net cash provided by investment activities of $4,519,000 for
      the
      comparable period in 2005. The primary reason for the decrease in net cash
      provided by investment activities was the receipt of cash from a subsidiary
      in
      connection with the reverse acquisition on May 2005.





Net
      cash
      provided by financing activities for the year ended December 31, 2006 was zero
      as compared to $1,995,000 for the comparable period in 2005. The increase was
      a
      result of the issuance of common stock to investors who invested $2,000,000
      into
      the Company in May 2005.





The
      Company believes that its existing cash together with cash generated from
      operations should be sufficient to support its operations for until October
      2007; 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 during 2007. Further, we expect the announcement of our recent award
      of
      a $1.6 million contract to install an automated material handling system in
      Israel to provide some working capital during 2007. The system will be installed
      in Israel by our SpaceLogic subsidiary, and we expect to complete the
      installation by the fourth quarter of 2007. However,
      there can be no assurance that, based upon our calendar year 2006 historical
      results or the above-described activities, that we will not require significant
      amounts of additional capital in the foreseeable future 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. 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 may potentially
      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. For
      these
      and other reasons, our financial statements have been prepared assuming we
      will
      continue as a going concern.


17


**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 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 to the portrayal of 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.
      However, 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, 2006 contain further discussions
      on our critical accounting policies and estimates.




18





We
      have
      no off-balance sheet arrangements.





RISKS
      AND
      UNCERTAINTIES





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





·
            Adoption
                by airports of our iScreen product line;





·
            Failure
                to successfully complete TSA and other government pilot projects
                and
                approval processes;
                and





·
            Potential
                product obsolescence of our legacy
                products





The
      preceding statements under “ Management ’ s
      Discussion and Analysis of Financial Condition and Results of
      Operations ” which
      are not historical facts are forward-looking statements. These forward-looking
      statements involve risks and uncertainties that could render them materially
      different, including, but not limited to, the risk that new products and product
      upgrades may not be available on a timely basis, the risk that such products
      and
      upgrades may not achieve market acceptance, the risk that competitors will
      develop similar products and reach the market first, and the risk that we would
      not be able to fund our working
      capital needs from cash flow .




**ITEM
                7. FINANCIAL STATEMENTS**





**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-5-6****Notes
                to Financial Statements**
            
            
            **F-7-27**





19
  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, 2006 and 2005, 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, 2006.
      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, 2006, 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 2. 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
                1, 2007


F-1





**SECURELOGIC
      CORP.**


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


**CONSOLIDATED
      BALANCE SHEET**


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




**December
                31,****Note**
            
            **2006**CURRENT
                ASSETS:Cash
                and cash equivalents
            
            
            3
            
            $
            926Short-term
                bank deposits
            
            
            4
            
            
            170Trade
                receivables
            
            
            
            
            
            200Work
                in process
            
            
            
            
            
            6Other
                accounts receivable
            
            
            5
            
            
            891,391LONG-TERM
                DEPOSITS:Long
                term bank deposit
            
            
            
            
            
            128Long-term
                deposit
            
            
            
            
            
            18Severance
                pay funds
            
            
            2
            
            
            196342PROPERTY
                AND EQUIPMENT, NET
            
            
            6
            
            
            136$
            1,869CURRENT
                LIABILITIES:Trade
                payables
            
            
            
            
            $
            239Other
                accounts payable
            
            
            7
            
            
            396Deferred
                revenues
            
            
            
            
            
            50Deferred
                tax liability
            
            
            
            
            
            7291,414LONG-TERM
                LIABILITIES:Long-term
                loans
            
            
            8
            
            
            3Accrued
                severance pay
            
            
            2
            
            
            766769GUARANTEES,
                CHARGES, CONTINGENCIES AND COMMITMENTS
            
            
            10SHAREHOLDERS'
                DEFICIENCYShare
                capital
            
            
            11Common
                stock of $ 0.001 par value -Authorized:
                100,000 shares;issued
                and outstanding: 55,947,331 shares
            
            
            
            
            
            56additional
                paid-in capital
            
            
            
            
            
            7,203Accumulated
                other comprehensive income:Foreign
                currency translation adjustments
            
            
            
            
            
            (20
            )Accumulated
                deficit
            
            
            
            
            
            (7,553
            )(314
            )$
            1,869





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**
            
            
            **2006**
            
            
            **2005**Revenues
            
            
            
            
            $
            1,297
            
            $
            807Cost
                of revenues
            
            
            
            
            
            1,075
            
            
            674Gross
                profit
            
            
            
            
            
            222
            
            
            133Research
                and development costs, net
            
            
            12A
            
            
            799
            
            
            2,721Selling
                and marketing expenses
            
            
            
            
            
            854
            
            
            943General
                and administrative expenses
            
            
            
            
            
            1,102
            
            
            965Acquisition
                expenses
            
            
            
            
            
            -
            
            
            2142,755
            
            
            4,843Operating
                loss
            
            
            
            
            
            (2,533
            )
            
            (4,710
            )Financial
                income (expenses), net
            
            
            
            
            
            22
            
            
            (20
            )Other
                income
            
            
            12B
            
            
            568
            
            
            -Loss
                before taxes on income
            
            
            
            
            
            (1,943
            )
            
            (4,730
            )Taxes
                on income
            
            
            9
            
            
            (20
            )
            
            (20
            )Net
                loss
            
            
            
            
            $
            (1,963
            )
            $
            (4,750
            )Basic
                and diluted net loss per share
            
            
            
            
            
            (0.035
            )
            
            (0.120
            )Weighted
                average number of common shares used in computing basic and diluted
                net
                loss per share
            
            
            
            
            
            55,880,664
            
            
            39,481,693




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 LOS**
 **(U.S.
        dollars in thousands, except share data)**
 
 **Number
                  of common shares $0.001 par value**
              
              **Share
                  capital**
              
              **Additional
                  paid-in capital**
              
              **Deferred
                  Stock-based compensation**
              
              **Accumulated
                  other comprehensive income**
              
              **Accumulated
                  deficit**
              
              **Comprehensive
                  loss**
              
              **Total
                  shareholders' Equity (deficiency)**Balance
                  as of December 1, 2006
              
              
              55,847,331
              
              $
              56
              
              $
              6,
                  797
              
              $
              (9
              )
              $
              16
              
              $
              (5,590
              )
              
              
              
              $
              1,270Shares
                    issued to consultants, valued $27,000
              
              
              100,000
              
              
              -
              
              
              27
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              27Amortization
                    of deferred stock-based compensation
              
              
              -
              
              
              -
              
              
              -
              
              
              9
              
              
              -
              
              
              -
              
              
              -
              
              
              9Stock
                  based compensation
              
              
              -
              
              
              -
              
              
              379
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              379Foreign
                    currency translation adjustments
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (36
              )
              
              -
              
              
              (36
              )
              
              (36
              )Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (1,963
              )
              
              (1,963
              )
              
              (1,963
              )Comprehensive
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              $
              (1,999
              )
              
              -Balance
                  as of December 31, 2006
              
              
              55,947,331
              
              $
              56
              
              $
              7,
                  203
              
              $
              -
              
              $
              (20
              )
              $
              (7,553
              )
              
              
              
              $
              (314
              )
 
 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****2006**
              
              **2005**Cash
                  flows from operating activities:Net
                  loss
              
              $
              (1,963
              )
              $
              (4,750
              )Depreciation
                  and amortization
              
              
              458
              
              
              1,618Accrued
                  severance pay, net
              
              
              83
              
              
              337Loss
                  from sale of equipment
              
              
              3
              
              
              4Impairment
                  of long-lived assets
              
              
              45
              
              
              6Decrease
                  (increase) in trade receivables
              
              
              (114
              )
              
              56Decrease
                  (increase) in other accountsreceivable
                  and prepaid expenses
              
              
              78
              
              
              (56
              )Decrease
                  (increase) in work in process
              
              
              (6
              )
              
              35Decrease
                  (increase) in long term receivables
              
              
              3
              
              
              (20
              )Decrease
                  (increase) in trade payables
              
              
              (413
              )
              
              385Decrease
                  in other payables
              
              
              (618
              )
              
              (814
              )Increase
                  indeferred
                  revenues
              
              
              50
              
              
              -Decrease
                  in long term loan payable
              
              
              (5
              )
              
              (5
              )Net
                  cash used in operating activities
              
              
              (2,399
              )
              
              (3,204
              )Cash
                  flows from investing activities:Purchase
                  of property and equipment
              
              
              (5
              )
              
              (45
              )Acquisition
                  of a subsidiary in connection with reverse acquisition (Appendix
                  A)
              
              
              -
              
              
              1,738Repayment
                  of notes receivables
              
              
              130
              
              
              2,741Proceeds
                  from sales of equipment
              
              
              7
              
              
              7Short-term
                  bank deposits, net
              
              
              (25
              )
              
              78Long-term
                  bank deposits, net
              
              
              (121
              )
              
              -Net
                  cash (used in) provided by investing activities
              
              
              (14
              )
              
              4,519Cash
                  flows from financing activities:Repayment
                  of short-term credit
              
              
              -
              
              
              (5
              )Issuance
                  of common stock
              
              
              -
              
              
              2,000Net
                  cash provided by financing activities
              
              
              -
              
              
              1,995Effect
                  of exchange rate changes on cash balance
              
              
              12
              
              
              (1
              )Net
                  change in cash and cash equivalents
              
              
              (2,401
              )
              
              3,309Cash
                  and cash equivalents at the beginningof
                  the period
              
              
              3,327
              
              
              18Cash
                  and cash equivalents at the endof
                  the period
              
              $
              926
              
              $
              3,327NON-CASH
                  ACTIVITIESAcquisition
                  of intangible asset in connection withreverse
                  acquisition
              
              $
              -
              
              $
              1,579
  F-5
  **SECURELOGIC
        CORP.**
 **(FORMERLY:
        MONTEREY BAY TECH, INC.)**
 STATEMENTS
        OF CASH FLOWS (CONT.)
 **(U.S.
        dollars in thousands)**
 
 **For
                  the year ended**
                **December,
                  31****2006**
              
              **2005**Appendix
                  AAcquisition
                  of a subsidiary in connection with reverse acquisition, net of
                  cash
                  acquiredWorking
                  capital- excluding cash
              
              
              -
              
              $
              (1,342
              )Long
                  term notes receivable
              
              
              -
              
              
              (130
              )Issuance
                  of shares in connection with reverse acquisition
              
              
              -
              
              
              3,210$
              -
              
              $
              1,738
  The
        accompanying notes are an integral part of the consolidated financial
        statements.
  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**
 
 **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-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
        1**  **--**  **GENERAL
        (Cont.)**
 
 **C.**
              **Going
                  Concern**
  As
        reflected in the accompanying financial statements, the Company’s operations for
        the year ended December 31, 2006, resulted in a net loss of $1,963 and the
        Company’s balance sheet reflects a net shareholders' deficit of $314. 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-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.)**
 
 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, 2006, impairment losses of $56 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.
 
 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, 2006 and 2005 amounted to
        approximately $116 and $144 respectively.
  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.)**
 
 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 12, “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. 123(revised 2004)
        included in Statement of Operations as follows:
  YEAR
                    ENDED DECEMBER 31,2006
                
                2005Cost
                    of revenues
                
                $
                18
                
                $
                -Research
                    and development expenses
                
                
                18
                
                
                -Selling
                    and marketing expenses
                
                
                45
                
                
                -General
                    and administrative expenses
                
                
                307
                
                
                5Total
                
                $
                388
                
                $
                5
  Prior
        to
        January 1, 2006, the Company accounted for share-based compensation cost
        using
        the intrinsic value method in accordance with Accounting Principles Board
        No. 25, “Accounting for Stock Issued to Employees” (APB No. 25), and
        related interpretations. The Company also followed disclosure requirements
        of
        SFAS No. 123, “Accounting for Stock-Based Compensation”, as amended by SFAS
        No. 148, “Accounting for Stock-Based Compensation-Transition and
        Disclosure”. Under APB No. 25 there was no material compensation cost
        recognized in the Consolidated Statement of Operations for stock option
        awards.
  The
        Company adopted SFAS No. 123R using the modified prospective method and,
        accordingly, the Consolidated Statement of Operations for prior years has
        not
        been restated to reflect the fair value method of recognizing compensation
        cost
        relating to stock options. Share-based compensation cost relating to stock
        options recognized in 2006 is based on the value of the portion of the award
        that is ultimately expected to vest. SFAS No. 123R requires forfeitures to
        be estimated at the time of grant in order to estimate the portion of the
        award
        that will ultimately vest. The estimate is based on the Company historical
        rates
        of forfeiture.
  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.)**
 
 STOCK-BASED
        COMPENSATION **(Cont.)**
  Compensation
        cost related to stock options is recognized in operating results (included
        in
        cost of revenues, research and development, selling and marketing, general
        and
        administrative expenses) under SFAS No. 123R in 2006 was $388,000.
        Compensation cost related to stock options recognized in the Consolidated
        Statement of Operations in 2006 includes (1) compensation cost for stock
        option awards granted prior to, but not yet vested as of December 31, 2005,
        based on the grant-date fair value estimated in accordance with the pro forma
        provisions of SFAS No. 123 and (2) compensation cost for stock option
        awards granted subsequent to December 31, 2005, based on the grant-date
        fair value estimated in accordance with the provisions of SFAS
        No. 123R.
  The
        following table illustrates the effect on net income and earnings per share
        as
        if we had applied the fair value recognition provisions of SFAS No. 123 in
        the
        years prior to the adoption of FAS No. 123R.
 
 **For
                  the year ended December 31,****2005**Net
                  loss, as reported
              
              $
              (4,750
              )Stock-based
                  compensation determinedUnder
                  APB 25
              
              
              5Total
                  stock-based compensationexpense
                  determined under fair valuemethod
                  for all awards
              
              
              (427
              )Pro
                  forma net loss
              
              $
              (5,172
              )Basic
                  and diluted net loss per share, as reported
              
              
              (0.120
              )Basic
                  and diluted net loss per share, pro forma
              
              
              (0.131
              )
  Under
        SFAS 123, the fair market value of each option grant is estimated on the
        date of
        grant using the “Black-Scholes option pricing” method with the following
        weighted-average assumptions:(1) expected life of 3 years (2005 - 3); (2)
        dividend yield of 0% (3) expected volatility of 95% (2005 - 116%) and (4)
        risk-free interest rate of 5.10% (2005 - 3.99%).
  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.)**
 
 REVENUE
        RECOGNITION
 
 The
        Company generated revenues from a long-term contract of construction of the
        baggage handling system in Ben Gurion Airport (“BGA 2000”) 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 BGA 2000 Baggage Handling System
                  (“BHS”)
 
 Revenue
        from the BGA 2000 BHS long-term construction 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-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.)**
 
 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-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
        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, 2006
              
              $
              121Warranties
                  issued during the year
              
              
              32Warranties
                  expired or settled during the year
              
              
              (88
              )Balance,
                  at December 31, 2006
              
              $
              65
 
 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. The total number of shares
        excluded from the calculations of diluted net loss per share were 13,636
        and
        6,532,903 for the years ended December 31, 2006 and 2005
        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
        2**  **--**  **SIGNIFICANT
        ACCOUNTING POLICIES (Cont.)**
 
 RECENT
        ACCOUNTING PRONOUNCEMENTS
 
 1.
              FASB
                  Interpretation No. 48, “Accounting for Uncertainty in Income Taxes -
                  an Interpretation of FASB Statement No. 109” - In June 2006, the FASB
                  issued FASB Interpretation No. 48 (“FIN-48”), “Accounting for
                  Uncertainty in Income Taxes - an Interpretation of FASB Statement
                  No. 109.” The interpretation clarifies the accounting for uncertainty
                  in income taxes recognized in an entity's financial statements
                  in
                  accordance with SFAS No. 109, “Accounting for Income Taxes.”
                  Specifically, FIN-48 prescribes a recognition threshold and a measurement
                  attribute for the financial statement recognition and measurement
                  of a tax
                  position taken or expected to be
                  taken.
  The
        provisions of FIN-48 are effective for financial statements for fiscal years
        beginning after December 15, 2006. Accordingly, the Company is to adopt FIN-48
        on January 1, 2007. The adoption of FIN-48 is not expected to have a material
        effect on the Company’s financial position or results of operations.
 
 2.
              SFAS
                  No. 157, “Fair Value Measurements” - In September 2006, the FASB
                  issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"), which
                  defines
                  fair value, establishes a framework for measuring fair value and
                  expands
                  disclosures about fair value measurements. SFAS 157 applies whenever
                  other
                  accounting standards require or permit assets or liabilities to
                  be
                  measured at fair value. Accordingly, it does not expand the use
                  of fair
                  value in any new circumstances. Fair value under SFAS 157 is defined
                  as
                  the price that would be received to sell an asset or paid to transfer
                  a
                  liability in an orderly transaction between market participants
                  at the
                  measurement date. This Standard clarifies the principle that fair
                  value
                  should be based on the assumptions market participants would use
                  when
                  pricing an asset or liability. In support of this principle, SFAS
                  157
                  establishes a fair value hierarchy that prioritizes the information
                  used
                  to develop those assumptions. The fair value hierarchy gives the
                  highest
                  priority to quoted prices in active markets and the lowest priority
                  to
                  unobservable data, for example, a reporting entity's own data.
                  Under SFAS
                  157, fair value measurements would be separately disclosed by level
                  within
                  the fair value hierarchy. SFAS 157 is effective for fiscal years
                  beginning
                  after November 15, 2007. Accordingly, the Company is to adopt SFAS
                  157 on
                  January 1, 2008. The adoption of SFAS 157 is not expected to have
                  a
                  material effect on the Company’s financial position or results of
                  operations.
 
 3.
              In
                  February 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 is currently
                  evaluating the impact that SFAS No. 159 will have on its financial
                  statements.
  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
        3**  **-**  **CASH
        AND CASH EQUIVALENTS**
 
 **December
                  31,****2006**Cash
              
              $
              200Deposits
                  in USD
              
              
              718Deposits
                  in NIS
              
              
              8$
              926
 
 **NOTE
        4**  **-**  **SHORT-TERM
        BANK DEPOSITS**
 
 **Annual
                  Interest rate**
                **as
                  of****December
                  31,**
              
              **December
                  31,****2006**
              
              **2006****%**Deposits
                  in NIS (1)
              
              
              4.3
              
              $
              36Deposits
                  in USD (2)
              
              
              4.4
              
              
              134$
              170
 
 (1)
            The
                deposits include a balance in the amount of $36 that serves as collateral
                for a bank guarantee issued in favor of a related
                company.  (2)
            The
                deposits include a balance of $44 serves as collateral for bank guarantees
                issued to secure advances received from customers and a balance of
                $19
                serves as collateral for bank guarantees issued to secure rental
                fees (see
                Note 10a). 
 **NOTE
        5 -**  **OTHER
        ACCOUNTS RECEIVABLE**
 
 **December
                  31,****2006**Related
                  companies (1)
              
              $
              5Grant
                  receivable from the Bird Foundation (2)
              
              
              26Government
                  authorities
              
              
              3Other
                  receivables
              
              
              55$
              89
 
 (1)  Non-interest
        bearing.
 (2)  See
        Note
        10.
  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
        6**  **-**  **PROPERTY
        AND EQUIPMENT, NET**
 
 A.
              COMPOSITION
  **December
                  31,****2006**CostMotor
                  vehicles
              
              $
              125Office
                  furniture and equipment
              
              
              336461Accumulated
                  depreciation
              
              
              325Equipment,
                  net
              
              $
              136
 
 B.
              Depreciation
                  expense for the years ended December 31, 2006 and 2005 amounted
                  to $44 and
                  $39 respectively. In addition, the Company recognized in 2006 and
                  in 2005
                  an impairment loss of $44 and $6,
                  respectively.
 
 **NOTE
        7-**  **OTHER
        ACCOUNTS PAYABLE**
 
 **December
                  31,****2006**Payroll
                  and related expenses
              
              $
              36Provision
                  for employees vacation leave
              
              
              182Government
                  authorities
              
              
              82Provision
                  for warranty
              
              
              65Other
                  payables
              
              
              31$
              396
 
 **NOTE
        8**  **-**  **LONG-TERM
        LOANS**
 
 a.
            COMPOSITION: 
 **Annual
                  interest rate****as
                  of****December
                  31,**
              
              **Years
                  of**
              
              **December
                  31,****2006**
              
              **maturity**
              
              **2005**From
                  leasing companies
              
              
              8.3
              %
              
              2006-2009
              
              $
              8Less
                  - current maturities
              
              
              
              
              
              
              
              
              (5
              )$
              3
 
 The
        maturities of these loans after December 31, 2006 are as
        follows:
 2007-
                  current maturities
              
              
              52008
              
              
              12009
              
              
              1$
              7
 
 b.
              With
                  respect to collateral, see Note
                  10b.
  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**  **-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, 2006, the Company has tax losses of approximately $4,250 that
        may
        be carried forward for an indefinite period.
 
 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:
  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**  **-TAXES
        ON INCOME (Cont.)**
 d.
                  DEFERRED
                          TAXES:
                          (Cont.)
 
 DEFERRED
        TAX ASSETS:
 
 **December
                  31,****2006**Short-term
                  deferred tax assets-net:Provision
                  for employees vacation leave
              
              $
              183Valuation
                  allowance
              
              
              (183
              )$
              -Long-term
                  deferred tax assets-net:Accrued
                  severance pay and others
              
              $
              143Carryforward
                  tax losses of the company
              
              
              290Carryforward
                  tax losses of the subsidiary
              
              
              3,9604,820Valuation
                  allowance
              
              
              (4,820
              )$
              -
 e.
                    INCOME
                              TAX
                              EXPENSES
 Income
        tax expense consists of:
  **For
                  the year ended**
                **December,
                  31****2006**
              
              **2005**Current
                  U.S.
              
              $
              -
              
              $
              1,487Current
                  non-U.S.
              
              
              20
              
              
              17$
              20
              
              $
              1,504Deferred
                  U.S.
              
              $
              -
              
              $
              (1,484
              )$
              20
              
              $
              20
  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
      9**  **-TAXES
      ON INCOME (Cont.)**





e. INCOME
        TAX EXPENSES





On July
      25,
      2005 an amendment to the Israeli Tax Law was approved by the Israeli Parliament,
      which reduces the tax rates imposed on Israeli companies to 31% for 2006. This
      amendment states that the corporate tax rate will be further reduced in
      subsequent tax years as follows: in 2007 29%, in 2008 27%, in 2009 26% and
      thereafter 25%. This change does not have a material effect on the Company's
      financial statements.




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





a.
            GUARANTEES:





The
      Company has provided bank guarantees at the amount of $172 in order to secure
      advances received from customers and $19 to secure rental fees.





The
      Company has also deposited an amount of $33 as collateral for a bank guarantee
      issued in favor of a related company.





b.
            CHARGES:





As
      collateral for a loan granted by a leasing company, 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 Defandants 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 21, 2007, Plaintiffs filed
      a motion to disqualify Pepper Hamilton LLP from representing
      Defendants.  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
      Company may be obligated to indemnify the officers and directors named as
      Defendants in this action for some or all of their respective litigation
      expenses. The Company has already advanced an aggregate of $160,000 in
      indemnification payments to such officers and directors.Whether
      or not these officers and directors will ultimately be entitled to a full or
      partial indemnification will depend, among other things, on the substance and
      the merit of the claims.All of the motions filed since the removal
      of the case to federal court remain pending.  At this time the Company
      is unable to state whether an outcome adverse to the Company or to the
      Defendants is either probable or remote, nor is the Company able to assess
      the
      amount or range of any loss in the event of an unfavorable
      outcome.


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





c.
            CONTINGENCIES(Cont.)




On
      November 15, 2006, 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 (Company’s CEO) and and Killy Koren (collectively,
“Defendants”) regarding two transactions for the purchase of shares of the
      Company performed in 2005.  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 $25,000 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. The Company believes that the this matter will not have a material
      adverse effect on the results of operations, liquidity, or financial
      condition.




A
      suit
      for $260 regarding a project implemented by the Company in 2006 was brought
      against a customer of the Company at the Tel Aviv District court on March 7
      2007. The suit has to do with various claims regarding 3 bids for supply of
      automated storage systems that were awarded to that customer. The Company is
      not
      a party to this suit however, the Company has committed to cover the customer's
      costs in case of legal proceedings to do with this project. The Company believes
      that the this matter will not have a material adverse effect on the results
      of
      operations,


liquidity,
      or financial condition, but there can be no assurance that the Company will
      necessarily prevail, due to the inherent uncertainties in
      litigation.





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,
      2006 as follows:





2007
            
            
            712008
            
            
            612009
            
            
            5137





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, 2006 aggregate to
      approximately $50 per annum. As for collateral, see above.




Rent
      expenses for the years ended December 31, 2006 and 2005 amounted to $50 per
      each
      year.





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 2006 and 2005 amounted to $91 and $184,
      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, 2006 the Company's' contingent
      obligation to BIRD in respect of the aforementioned participation amounted
      to $
      402.





**NOTE
      11-**  **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 1,142,247 remain
      available for granting at December 31, 2006. 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-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
      11-**  **SHAREHOLDERS'
      DEFICIENCY (Cont.)**





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




During
      the year ended December 31, 2006 and during the year ended December 31, 2005,
      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 1,684,750 remained
      available for granting at December 31, 2005. 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 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, 2006 and
      2005 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, 2004
            
            
            1,142,247
            
            
            1,857,753
            
            $
            0.74New
                Plan
            
            
            3,000,000Granted
            
            
            (1,265,250
            )
            
            1,265,250
            
            $
            1.31
            
            $
            0.82Exercised
            
            
            
            
            
            (241,000
            )
            
            0.42Outstanding
                December 31, 2005
            
            
            2,876,997
            
            
            2,882,003
            
            $
            0.97Granted
            
            
            (250,000
            )
            
            250,000
            
            $
            0.78
            
            $
            0.61Forfeited
            
            
            200,000
            
            
            (200,000
            )
            $
            1.23Outstanding
                December 31, 2006
            
            
            2,826,997
            
            
            2,932,003
            
            $
            0.94






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
      11-**  **SHAREHOLDERS'
      DEFICIENCY (Cont.)**





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




The
      following table summarizes information about options outstanding and exercisable
      as of December 31, 2006:




**OPTIONS
                OUTSTANDING**
            
            **OPTIONS
                EXERCISABLE****RANGE
                OF**
              **EXERCISE
                PRICE**
              **$**
            
            **NUMBER
                OUTSTANDING AT**
              **DECEMBER
                31, 2006**
            
            **WEIGHTED-AVERAGE
                REMAINING CONTRACTUAL LIFE**
            
            **WEIGHTED-AVERAGE
                EXERCISE PRICE**
            
            **NUMBER
                OUTSTANDING AT**
              **DECEMBER
                31, 2006**
            
            **WEIGHTED-AVERAGE
                EXERCISE PRICE**0.23
                - 0.44
            
            
            175,000
            
            
            4.79
            
            $
            0.36
            
            
            175,000
            
            $
            0.360.60
                - 0.75
            
            
            1,390,054
            
            
            3.96
            
            $
            0.63
            
            
            1,390,054
            
            $
            0.631.07
                - 1.54
            
            
            1,240,799
            
            
            5.75
            
            $
            1.31
            
            
            960,799
            
            $
            1.261.74
                - 4.00
            
            
            126,150
            
            
            1.39
            
            $
            2.37
            
            
            126,150
            
            $
            2.672,932,003
            
            
            
            
            
            
            
            
            2,652,003




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





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




**For
                the year ended**
              **December,
                31****2006**
            
            **2005**Research
                and development costs, netResearch
                and development costs
            
            $
            890
            
            $
            1,326Amortization
                of Intangible Asset
            
            
            -
            
            
            1,579Participation
                from BIRD
            
            
            (91
            )
            
            (184
            )$
            799
            
            $
            2,721








B. Other
      income





The
      $568
      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.




**NOTE
      13**  **-**  **INFORMATION
      ON OPERATING SEGMENTS**





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





·
            Baggage
                Handling Systems- the Company was involved in the construction of
                the
                automatic -baggage-handling system for Ben-Gurion Airport. 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 - development, planning, implementation and marketing
                of
                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-24


**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
          13:-** **INFORMATION
          ON OPERATING SEGMENTS ( CONT.)**





c.  Financial
      data relating to reportable operating segments:








**Year
                ended December 31, 2006****Baggage
                Handling 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


F-25


**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
          13:-** **INFORMATION
          ON OPERATING SEGMENTS ( CONT.)**





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




**Year
                ended December 31, 2005****Baggage
                Handling Systems**
            
            **WMS
                and Software**
            
            **Maintenance**
              **services
                and support**
            
            **Adjustments**
            
            **Totals**Revenues
                from external customers
            
            
            423
            
            
            199
            
            
            185
            
            
            
            
            
            807Segment
                profit (loss)
            
            
            (3,262
            )
            
            (334
            )
            
            25
            
            
            (1,179
            )(1)
            
            (4,750
            )Depreciation
                expense
            
            
            19
            
            
            10
            
            
            5
            
            
            5
            
            
            39Investments
                in long-lived assets
            
            
            30
            
            
            5
            
            
            5
            
            
            5
            
            
            45**December
                31, 2005**Segment
                assets
            
            
            3,489
            
            
            150
            
            
            125
            
            
            -
            (2)
            
            4,239




(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,****2006**
            
            **2005**Customer
                A
            
            
            13
            %
            
            35
            %Customer
                B
            
            
            56
            %
            
            -





F-26


**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
          14:-** **TRANSACTIONS
          AND BALANCES WITH RELATED PARTIES**




**For
                the year ended**
              **December,
                31****2006**
            
            **2005**A.Expenses:Salary
                and related expenses to the Company's CEO
            
            
            186
            
            
            283Consulting
                and management fees to a related company
            
            
            -
            
            
            130Participation
                in general expenses in the ordinary course of business
            
            
            (23
            )
            
            (28
            )385
            
            
            385





**For
                the year ended**
              **December,
                31****2006**B.Balances
                with related parties:Other
                accounts receivable
            
            
            5Long-term
                receivable and loan
            
            
            -Participation
                in general expenses in the ordinary course of business
            
            
            2934




C.  For
      deposits serving as collateral for a bank guarantee issued in favor of a related
      company - See Note 4(1).




F-27


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





Effective
      July 15, 2005, the Board of Directors of the Company approved the engagement
      of
      Brightman Almagor & Co., a member firm of Deloitte Touche Tohmatsu as its
      new independent auditors for the fiscal year ended December 31, 2005. The
      Company did not consult with Brightman Almagor & Co., a member firm of
      Deloitte Touche Tohmatsu on any
      matters prior to their retention regarding the application of accounting
      principles to a specific completed or contemplated transaction, or the type
      of
      audit opinion that might be rendered on the Company’s financial
      statements. The
      Audit Committee recommended that the Company change its independent auditors
      and
      approve the engagement of Brightman Almagor & Co .





Stonefield
      Josephson audited the Company’s financial statements for fiscal year ended
      December 31, 2004. Stonefield Josephson’s report on our financial statements for
      the year ended December 31, 2004 did not contain an adverse opinion or a
      disclaimer of opinion nor was it qualified or modified as to uncertainty, audit
      scope or accounting principle. Since January 31, 2005, the date that Stonefield
      Josephson was engaged as the Company’s independent auditors, which was the
      subject of the Company’s Current Report on
      Form
      8-K filed **** on
      February 4, 2005 and through July 15, 2005, the date of cessation of Stonefield
      Josephson as the Company’s independent auditor, there were no disagreements with
      Stonefield Josephson on any matter of accounting principles or practices,
      financial statement disclosure, or auditing scope or procedure, which
      disagreements if not resolved to the satisfaction of Stonefield Josephson would
      have caused them to make reference thereto in their report on the financial
      statements for such years.





**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,
      as
      amended (the “Exchange Act”), 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 has
      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.




20




**ITEM
      8B. OTHER INFORMATION**





None





**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
            
            58
            
            Chairman
                of the Board, Chief Executive Officer, and PresidentShalom
                Dolev
            
            50
            
            Director,
                Vice President for Security SystemsTomer
                Nahum
            
            35
            
            Chief
                Financial OfficerCathal
                Flynn (1)
            
            68
            
            DirectorSean
                Deson (1)(2)(3)
            
            43
            
            DirectorPaul
                Goodman (2)
            
            45
            
            DirectorMichael
                Klein
            
            54
            
            DirectorIftach
                Yeffet
            
            49
            
            Director





(1)
      Member of the Compensation Committee


(2)
      Member of the Audit Committee


(3)
      Sean
      Deson, a member of our audit committee, serves as the audit committee’s
      financial expert as that term is defined in Section 407 of the Sarbanes-Oxley
      Act.





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 BSc. in Industrial and Management Engineering from
      the
      Technion, the Israel Institute of Technology.




21




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 BSc. degree in Electronics Engineering from the Tel Aviv
      University.





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 US 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 (“FAA”) .
      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.





TOMER
      NAHUM - Mr. Nahum joined the Company in March 2005
      as
      its Chief Financial Officer .
      Prior
      to SecureLogic, he served as Corporate Controller in Nova Measuring Instrument
      LTD. Prior to Nova, he served as finance manager of mergers and acquisitions
      in
      Intel Israel. He began his career as an accountant at the accounting
      firm of
      KPMG .
      Mr.
      Nahum holds a BA in Economics and Accounting from Jerusalem University, an
      MBA in
      finance and accounting from Tel-Aviv University, and is a Certified Public
      Accountant in Israel.





SEAN
      DESON - Sean Deson has been a director since May 2005 and, since
      January 2000, has been the Managing Partner of Deson Ventures, LLC, and Managing
      Director of Deson & Co., Inc. both finance and investment firms principally
      focused on high technology companies. Additionally, since November 2002, Mr.
      Deson has been the Managing Member of Treeline Management, LLC, also a finance
      and investment firm principally focused on high technology companies. From
      1990
      to 2000, Mr. Deson was employed by Donaldson, Lufkin & Jenrette as an
      Investment Banker. His last position was as Senior Vice President of the
      Internet Investment Banking Group. Mr. Deson has been a director of other
      publicly traded companies, including Technology
      Flavors and Fragrances, Inc., where
      he serves
      on its audit committee , e-Centives, Inc ,
      and ActiveWorlds Corp .
      Mr.
      Deson earned his BS in Computer Technology and his MBA in Finance, both with
      Distinction from the University of Michigan, Ann Arbor.




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 Juris Doctor degree, Mr. Goodman holds a BA and MA degree in
      Computer Science. He was a former member of the Computer Science faculty of
      Queens College, is the author of five books on microcomputer
      programming.




22




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.





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, 2005 all Section 16(a) filing
      requirements applicable to the Company ’s officers, directors and greater than ten percent shareholders were complied
      with.





Family
      Relationships





There
      are
      no family relationships between or among the directors, executive officers
      or
      persons nominated or charged by the Company to become directors or executive
      officers.





Involvement
      in Legal Proceedings





To
      the
      best of the Company ’s knowledge, during the past five years, none of the following occurred with
      respect to a present or former director or executive officer of the Company:
      (1)
      any bankruptcy petition filed by or against any business of which such person
      was a general partner or executive officer either at the time of the bankruptcy
      or within two years prior to that time; (2) any conviction in a criminal
      proceeding or being subject to a pending criminal proceeding (excluding traffic
      violations and other minor offenses); (3) being subject to any order, judgment
      or decree, not subsequently reversed, suspended or vacated, of any court of
      any
      competent jurisdiction, permanently or temporarily enjoining, barring,
      suspending or otherwise limiting his involvement in any type of business,
      securities or banking activities; and (4) being found by a court of competent
      jurisdiction (in a civil action), the SEC or the Commodities Futures Trading
      Commission to have violated a federal or state securities or commodities law,
      and the judgment has not been reversed, suspended or vacated.






23




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. The Board of Directors has
      determined that Mr. Deson qualifies as “audit committee financial expert”
as that term is defined under the rules of the Securities and Exchange
      Commission, or SEC.





**ITEM
      10. EXECUTIVE COMPENSATION**





COMPENSATION
      SUMMARY ****





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
      Executives”) 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 CEO
            
            
            2006
            
            $
            170,100
            
            $
            14,169
            
            $
            36,114
            
            $
            220,383SHALOM
                DOLEV
              Vice
                President for Security Systems
            
            
            2006
            
            $
            115,925
            
            $
            0
            
            
            24,000
            
            $
            139,925






24




(1)
      The
      columns for “Bonus”, “Stock Awards”, “Option Awards”, Non-Equity Incentive Plan
      Compensation”, and “All other 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 successor 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.





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 successor 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.






25





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 his 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 that he be regarded as 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





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 resume 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.




26




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 resume 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, Alladin 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 1,142,247 remain available for granting at December 31, 2006.
      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, 2006 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.





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 1,684,750 remained
      available for granting at December 31, 2006. 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 2006, the Company granted options to purchase a total of 250,000 shares
      of the Company’s common stock. 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.






27




**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 s as of December 31, 2006. 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
            
            
            —
            
            
            —
            
            
            —
            
            
            —




**Director
      Compensation**





The
      following Director Compensation table sets forth information concerning
      compensation for services rendered by directors of the Company for fiscal year
      2006.





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
            
            $
            75,250
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            6,268
            
            $
            15,000
                (2
            )
            $
            96,518IFTACH
                YEFFET
            
            $
            76,500
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            6,372
            
            $
            15,000
                (2
            )
            $
            97,872SEAN
                DESON
            
            $
            0
            
            $
            0
            
            $
            15,000
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            15,000CATHAL
                (“IRISH”) FLYNN
            
            $
            0
            
            $
            0
            
            $
            15,000
            
            $
            0
            
            $
            0
            
            $
            54,000
            
            $
            69,000(3
            )PAUL
                GOODMAN DESON
            
            $
            0
            
            $
            0
            
            $
            15,000
            
            $
            0
            
            $
            0
            
            $
            62,000
            
            $
            77,000(4
            )






28





(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, and continuing
      education, pursuant to the employment agreements described below.




(3)
      Admiral Cathal Flynn has provided consulting services to the Company. The fees
      paid to Admiral Flynn were $42,000 for 2006. He was also paid $12,000 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 $62,000 for 2006.




In
      2006,
      our non-employee Directors, Cathal Flynn, Sean Deson and Paul Goodman, each
      received options to purchase up to 50,000 shares of Common Stock, respectively,
      with exercise prices of $0.60 per share. The options were granted as
      compensation for service as members of the Board of Directors and were
      immediately vested. The Company does not provide fees or retainers to its
      Directors for service on the Board or Board committees.





In
      addition, the Company has employment agreements with two directors who are
      also
      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 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.






29




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






30





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 resume
      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. Koren such additional options.
      At
      the end of the period of reduced compensation, Mr. Yeffet’s base compensation
      will resume 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.





For
      certain payments made to Messrs. Flynn and Goodman for services rendered to
      the
      Company, please see “Certain Relationships and Related Transactions, and
      Director Independence”.




**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, 2007.




31





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
            %Sean
                Deson (5)
            
            
            1,992,926
            
            
            3.6
            %Cathal
                Flynn (6)
            
            
            250,000
            
            
            *Paul
                Goodman (7)
            
            
            290,000
            
            
            *Michael
                Klein (8)
            
            
            7,486,490
            
            
            13.4
            %All
                directors and executive officers
              as
                a group (8 persons)
            
            
            34,420,937
            
            
            61.5
            %OTHER
                5% STOCKHOLDERSTony
                Gross (10)
            
            
            3,676,906
            
            
            6.6
            %All
                directors, executive officers and 5% stockholders as a group (10
                persons)
            
            
            41,231,549
            
            
            73.7
            %




*
      Less
      than 1%




(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
      at March 31, 2007.




(3)
      Includes 127,000 shares of Common Stock subject to options that were exercisable
      at March 31, 2007.




(4)
      Includes 94,500 shares of Common Stock subject to options that were exercisable
      at March 31, 2007.




(5)
      Includes 100,000 shares of Common Stock subject to options that were exercisable
      at March 31, 2007. Additionally , Mr.
      Deson may
      be
      deemed the beneficial
      owner of 1,162,926
      shares of
      Common Stock ,
      which
      includes 550,963 shares subject to an option to acquire such shares directly
      from the Company held by Treeline Management, LLC, of which he is the Managing
      Member. Mr. Deson disclaims beneficial ownership of the shares except to the
      extent of his pecuniary interest therein.




(6)
      Includes 250,000 shares of Common Stock subject to options that were exercisable
      at March 31, 2007.




(7)
      Includes 250,000 shares of Common Stock subject to options that were exercisable
      at March 31, 2007.




(8)
      Includes 94,500 shares of Common Stock subject to options that were exercisable
      at March 31, 2007.




(9)
      Includes 550,963 shares of Common Stock subject to warrants that were
      exercisable at March 31, 2007.




(10)
      Includes 47,250 shares of Common Stock subject to options that were exercisable
      at March 31, 2007.




32


**Equity
      Compensation Plan Information as of December 31, 2006**




The
      following table sets forth information as of the end of the Company’s 2006
      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)
            
            
            2,932,003
            
            $
            0.94
            
            
            2,826,997Equity
                compensation plans not approved by security holders(2)
            
            
            —
            
            
            —
            
            
            —Total
            
            
            2,932,003
            
            $
            0.94
            
            
            2,826,997







(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 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 1,142,247 remain available
      for granting at December 31, 2006. ****





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 1,684,750 remained available for granting at December 31,
      2006.





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




**Related
      Party Transactions**




In
      June,
      2003, the Company ’s SpaceLogic, Ltd. subsidiary agreed to guarantee a bank loan issued to Paradigma,
      Ltd., a privately held Israeli company which develops software for the long
      term
      healthcare industry. Paradigma, Ltd. is a related entity since its principal
      beneficial stockholders are Gary Koren, Tony Gross and Iftach Yeffet. In
      connection with such guarantee, SpaceLogic posted security in the form of a
      certificate of deposit in the amount of $66,000. At the time that such
      transaction was entered into, SpaceLogic, Ltd. was privately owned by Gary
      Koren, Tony Gross and Iftach Yeffet. On an annual basis, the guarantee must
      either be renewed or the collateral forfeited. In June, 2005, SpaceLogic renewed
      the guarantee in favor of the related entity. In June 2006, SpaceLogic renewed
      the guarantee in a reduced amount of $33,000 in favor of the related
      entity.




33




In
      January, 2001, the Company ’s SpaceLogic, Ltd. subsidiary entered into a six month convertible loan agreement
      with Paradigma, Ltd., a privately held Israeli company which develops software
      for the long term healthcare industry, pursuant to which SpaceLogic lent to
      Paradigma the sum of $150,000, at an interest rate of 8%. At the time that
      such
      transaction was entered into, SpaceLogic, Ltd. was privately owned by Gary
      Koren, Tony Gross and Iftach Yeffet. Paradigma failed to repay the loan and,
      in
      2001, the loan was extended until December 31, 2005. Due to the related
      party ’s deteriorated financial position, in 2003, SpaceLogic recorded a provision for
      the impairment of the loan and a write-off was recorded in other expenses in
      the
      statement of operations. The related entity failed to pay the loan on December
      31, 2005 and is currently in default. As of the
      date
      of this report ,
      the
      outstanding debt, with interest, is approximately $227,000.




In
      2004,
      the Company ’s SpaceLogic, Ltd. subsidiary entered into an agreement with Paradigma, Ltd.,
      a
      privately held Israeli company to share certain expenses related to shared
      office space located in Netanya, Israel. At the time that such transaction
      was
      entered into, SpaceLogic, Ltd. was privately owned by Gary Koren, Tony Gross
      and
      Iftach Yeffet. The current amount owed by the related party to the Company
      is
      $6,000.




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 $62,000 and $37,000 for 2006 and 2005, respectively.




Admiral
      Cathal Flynn, a director of the Company, has provided consulting services to
      the
      Company. The fees paid to Admiral Flynn were $42,000 and $68,000 for 2006 and
      2005, respectively.




In
      December, 2005, the Company entered into a Consulting Agreement with Baytree
      Capital Associates, LLC. Sean Deson, a 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 Small Business Issuers (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 Sean Deson and Paul Goodman
      are 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 they serve, except that (i) Mr. Deson is not
      considered independent for purposes of Audit Committee standards as a result
      of
      payments made to BayTree Capital Associates, LLC, of which Mr. Deson is a
      Managing Director, for consulting services during 2006 and (ii) 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. See “Related Party Transactions”
above. The Board of Directors has determined that none of Gary Koren, Shalom
      Dolev, Michael Klein, Iftach Yeffet, or Cathal Flynn are considered independent
      under AMEX rules.




34




**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.***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.***




35




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 193432.2
            
            Certification
                of 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 to English to be subsequently
                filed





36


**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 Kost Forer Gabbay & Kasierer
      for the fiscal years ended December 31, 2006 and 2005:





2006
            
            2005Grant
                Thornton LLPAuditFees
            
            $
            0
            
            $
            7,500Audit-Related
                Fees
            
            
            0
            
            
            0Tax
                Fees
            
            $
            25,000
            
            $
            12,500All
                Other Fees
            
            
            0
            
            
            0Total
                fees from Grant Thornton LLP
            
            $
            25,000
            
            $
            20,000Brightman
                Almagor & Co., a member firm of Deloitte Touche
                TohmatsuAudit
                fees
            
            $
            32,000
            
            $
            44,000Audit-Related
                Fees
            
            
            0
            
            
            0Tax
                Fees
            
            
            0
            
            
            0All
                Other Fees
            
            
            0
            
            
            0Total
                fees from Brightman Almagor & Co.
            
            $
            32,000
            
            $
            44,000Kost
                Forer Gabbay & Kasierer,
              a
                Member of Ernest & Young GlobalAuditFees
            
            
            0
            
            
            0Audit-Related
                Fees
            
            
            0
            
            $
            10,000Tax
                Fees
            
            
            0
            
            
            0All
                Other Fees
            
            
            0
            
            
            0Total
                fees from Ernest & Young, LLP
            
            
            0
            
            $
            10,000





*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
      2006 and 2005, 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.




37




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 Koren





(Gary
      Koren, Chief Executive Officer, President and Director)






By
      /s/
      Tomer Nahum


(Tomer
      Nahum, 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/
            
            Chief
                Executive Officer, President and Director
            
            April
                12, 2007(Gary
                Koren)/s/
            
            Director
            
            April
                12, 2007(Shalom
                Dolev)/s/
            
            Director
            
            April
                12, 2007(Sean
                Deson)/s
            
            Director
            
            April
                12, 2007(Cathal
                Flynn)/s/
            
            Director
            
            April
                12, 2007(Iftach
                Yeffet)/s/
            
            Director
            
            April
                12, 2007(Michael
                Klein)/s/
            
            Director
            
            April
                12, 2007(Paul
                Goodman)





38





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 193432.2
            
            Certification
                of 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 April 14, 2005.***
                Management or Director contract or arrangement.(1)
                Translation from to English to be subsequently
                filed


39