SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-KSB





ANNUAL
REPORT UNDER SECTION 13 OR 15 (D) OF


THE
SECURITIES EXCHANGE ACT OF 1934





For the
fiscal year ended December 31, 2007


Commission
file number:








MIKROS SYSTEMS
CORPORATION


(Name of
Small Business Issuer in Its Charter)





Delaware
            14-1598200(State
      or other jurisdiction of
            (I.R.S.
      Employerincorporation
      or organization)
            Identification
      No.)





707 Alexander Road, Suite
208, Princeton, New Jersey 08540


(Address
of principal executive offices, Including Zip Code)





609-987-1513


Issuer’s
Telephone Number, including area code:








Securities Registered
Pursuant to Section 12(b) of the Exchange Act:


None





Securities Registered
Pursuant to Section 12(g) of the Exchange Act:


Common
Stock, $.01 par value





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





Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 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. [X] Yes [  ]
No





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





Indicate
by check mark whether the issuer is a shell company (as defined in Rule 12b-2 of
the Exchange Act). [  ]





The
issuer’s revenues for the fiscal year ended December 31, 2007 were
$3,078,492





The
aggregate market value of the voting and non-voting common equity held by non
affiliates of the issuer as of March 24, 2008, based on the last sales price of
the issuer’s common stock on the OTCBB was $14,108,864.





The
number of shares outstanding of the issuer’s $.01 par value common stock as of
March 24, 2008 was 31,766,753.





Transitional
Small Business Disclosure Format


Yes:
[  ] No: [X]




1




TABLE
OF CONTENTS




PART
      IItem
      1.
              Description
      of Business
              3Item
      2.
              Description
      of Property
              11Item
      3.
              Legal
      Proceedings
              11Item
      4.
              Submission
      of Matters to a Vote of Security Holders
              11PART
      IIItem
      5.
              Market
      For Common Equity, Related Stockholder Matters and Small Business Issuer
      Purchases of Equity Securities
              11Item
      6.
              Management’s
      Discussion and Analysis
              12Item
      7.
              Financial
      Statements
              18Item
      8.
              Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
              18Item
      8A(T)
              Controls
      and Procedures
              18Item
      8B.
              Other
      Information
              18PART
      IIIItem
      9.
              Directors,
      Executive Officers, Promoters, Control Persons and Corporate Governance;
      Compliance With Section 16(a) of the Exchange Act
              19Item
      10.
              Executive
      Compensation
              21Item
      11.
              Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
              23Item
      12.
              Certain
      Relationships and Related Transactions, and Director
      Independence
              29Item
      13.
              Exhibits
              29Item
      14.
              Principal
      Accountant Fees and Services
              29









2




PART
I





DISCLOSURE
REGARDING FORWARD-LOOKING STATEMENTS





This
report contains “forward-looking statements” within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended.  All statements other than
statements of historical facts included or incorporated by reference in this
report, including, without limitation, statements regarding our future financial
position, business strategy, budgets, projected revenues, projected costs and
plans and objective of management for future operations, are forward-looking
statements.  In addition, forward-looking statements generally can be
identified by the use of forward-looking terminology such as “may,” “will,”
“expects,” “intends,” “plans,” “projects,” “estimates,” “anticipates,” or
“believes” or the negative thereof or any variation there on or similar
terminology or expressions.





These
forward-looking statements are subject to risks and uncertainties that could
cause actual results to differ materially from results proposed in such
statements.  Although we believe that the expectations reflected in
such forward-looking statements are reasonable, we can give no assurance that
such expectations will prove to have been correct.  Important factors
that could cause actual results to differ materially from our expectations
include, but are not limited to: changes in business conditions, changes in our
sales strategy and product development plans, changes in the marketplace,
continued services of our executive management team, our limited marketing
experience, competition between us and other companies seeking SBIR grants,
competitive pricing pressures, market acceptance of our products under
development, delays in the development of products, and statements of assumption
underlying any of the foregoing, as well as other factors set forth under the
caption “Risk Factors” beginning on page 6 of this report and “Management’s
Discussions and Analysis” below.





All
subsequent written and oral forward-looking statements attributable to us, or
persons acting on our behalf, are expressly qualified in their entirety by the
foregoing.  Except as required by law, we assume no duty to update or
revise our forward-looking statements based on changes in internal estimates or
expectations or otherwise.





ITEM
1.  DESCRIPTION OF BUSINESS.





Mikros
Systems Corporation (“Mikros”, “the Company”, “we” or “us”) is an advanced
technology company specializing in the research and development of electronic
systems technology primarily for military applications.  Classified by
the U.S. Department of Defense (DoD) as a small business, our capabilities
include technology management, electronic systems engineering and integration,
radar systems engineering, combat/command, control, communications, computers
and intelligence (C4I) systems engineering, and communications
engineering.  Our headquarters are located at 707 Alexander Road,
Suite 208, in Princeton, New Jersey.





History of the
Company





Founded
in 1978 in Albany, New York, Mikros was formed to leverage the microprocessor
advancements coming out of the nearby General Electric Research and Development
Center into state-of-the-art digital signal processing applications for the
defense industry.  We specialized in developing technology and
products advancing the state of military RF (radio frequency or wireless) and
underwater data communications.  Through several U.S. Navy Small
Business Innovation Research (SBIR) awards in the early 1990s, we developed and
fielded the AN/USQ-120 Multi-Frequency Link-11 Data Terminal Set still in use
today by the U.S. Navy.




In the
mid 1990s, we began shifting our core business area away from military
communication applications to the rapidly expanding commercial wireless
communications arena.  Our advanced DSP technology base and core
competencies enabled us to develop unique, proprietary technology, high-speed
data broadcasting techniques utilizing the commercial AM and FM radio
spectrum.  In 1998, we sold our military communications business to an
unrelated third party.




Due to
limited capital and a limited commercial market demand for wireless data
broadcasting (one-way communication) applications, we re-entered the military
electronic systems business in 2002 upon expiration of our non-compete
restrictions imposed by the 1998 sale of our military communications
business.  Because of our past successes in the U.S. DoD SBIR program
(11 awards from 1988 through 1996), we began pursuing SBIR awards within our
areas of expertise.




3




Adaptive Diagnostic
Electronic Portable Testset (ADEPT®)




In May
2002, the U.S. Navy’s Dahlgren Division, Naval Surface Warfare Center (“NSWCDD”)
awarded us a $100,000 Phase I SBIR contract to investigate the feasibility of a
Multi-Function Distributed Analysis Tool, or MFDAT.  As envisioned,
the MFDAT was to be a semi-automated, intelligent test tool designed to support
U.S. Navy technical personnel in the maintenance, alignment and diagnosis of
complex electronic systems.  The overall objectives of the MFDAT
program were:




·
            To
      achieve higher readiness through reduced maintenance downtime and better
      system assurance;


·
            To
      increase system reliability by supporting predictive failure analysis and
      proactive remediation; and


·
            To
      promote more effective use of technicians through increased automation,
      distance support and interactive
training.





The
completed Phase I program produced an operational, proof-of-concept, software
demonstration/simulation model of the MFDAT system.




In August
2003, we were awarded a $750,000 Phase II SBIR contract from NSWCDD to continue
our development of the MFDAT system.  The Phase II program produced a
prototype system capable of performing alignment and maintenance procedures on
the Aegis AN/SPY-1A radar system.  This MFDAT prototype system proved
the viability of incorporating the functionality of multiple electronic test
equipment into a single, programmable system.




In
general, the developed MFDAT technology enables common testing processes,
training, and equipment for electronic system support thereby providing a viable
path toward meeting the U.S. Navy’s readiness goals while reducing the
dependency on manpower, manpower training, and discrete test
equipment.  The success of our MFDAT Phase II program prompted the
U.S. Navy to award an additional $250,000 enhancement to the Phase II contract
to accelerate the transitioning, or “commercializing” in SBIR parlance, of the
technology into a product suitable for naval shipboard use.  The
output of this Phase II SBIR program was a fully-functional MFDAT
prototype.




In
September 2004, we received an SBIR Phase III contract from NSWCDD valued at
approximately $2,400,000 to commercialize our MFDAT technology into a
fully-integrated, man-portable test tool qualified for U.S. Navy fleet
use.  This contract secures our SBIR data rights in the MFDAT
technology for a period of five years beyond the last delivery under the
contract.  We have named the resulting product ADEPT® (ADEPT is a
registered trademark of Mikros Systems Corporation), an acronym standing for
Adaptive Diagnostic Electronic Portable Testset.Its initial application is
as a computer-aided alignment and maintenance tool for the AN/SPY-1 radar
system, which is the primary air, and surface radar for the Aegis Combat System
installed on the USS Ticonderoga (CG-47) and USS Arleigh Burke (DDG-51) class
guided missile warships.  Key anticipated benefits of ADEPT
include:




·
            Significant
      reduction in system calibration, alignment, maintenance, and repair
      times;


·
            Improved
      system readiness, availability, and
performance;


·
            More
      effective use of technical manpower through increased automation, distance
      support, and interactive training;


·
            Distance
      support capable enabling “expert” remote (shore-based) system support and
      fleet-wide system analysis;


·
            Reduction
      in the amount of electronic test equipment required for organizational
      level support; and


·
            Modular
      and programmable to overcome current test equipment obsolescence issues
      and to support capability enhancements in future
  systems.





The first
ADEPT production units were manufactured in 2005 and have undergone shipboard
and land-based testing.  On March 2, 2006, we received an amendment to
the SBIR Phase III contract for additional funding in the amount of $2,950,000
from The Department of the Navy for the continuation of the development and
production of our ADEPT maintenance tool for U.S. Navy surface
combatants.  This modification will expand the application of ADEPT to
include all Aegis ship variants for cruisers and destroyers.  This
market is comprised of over 80 ships plus shore-based
facilities.  Future potential markets include foreign navies and other
U.S. Navy ships.  This maintenance and training tool allows U.S. Navy
personnel to engage cutting-edge technology to reduce maintenance time and
enhance skill levels of shipboard personnel.




4




On April
30, 2007, we were awarded a $2,400,000 contract from the Naval Surface Weapons
Center, Port Hueneme Division (“NSWCPHD”) for the continuing development of
ADEPT.  NSWCPHD is the U.S. Navy’s In-Service Engineering Agency
(ISEA) for the AN/SPY-1 Radar System.





This
contract provides for the continuing development of advanced capabilities for
ADEPT, the finalizing of an ADEPT Integrated Logistics Support Plan required for
fleet fielding, and the Low Rate Initial Production (LRIP) of ten (10) ADEPT(V)2
units, which are half the size and weight of the original ADEPT(V)1, while
maintaining the same functionality.   The contract follows
successful testing and evaluation of ADEPT on one AEGIS cruiser along with
testing at the Navy’s AN/SPY-1 Cruiser Modernization Test Facility in
Moorestown, NJ.  It is expected that the ADEPT equipment will
initially be installed on AEGIS cruisers undergoing modernization with
introduction into the destroyers to follow.  The entire U.S. Navy
AEGIS fleet consists of 22 cruisers and 62 destroyers.





Key
partners in the ADEPT program are DRS Laurel Technologies of Johnstown,
Pennsylvania; Lockheed Martin Corporation of Moorestown, New Jersey; and
In-Phase Technologies of Clarksburg, New Jersey.  DRS Laurel
Technologies subcontracted tasking includes the development of ADEPT’s
ruggedized enclosure and unit manufacturing, test, and
qualification.  The current value of the subcontract with DRS Laurel
Technologies is approximately $1,500,000.  As the designer of the
SPY-1 radar, Lockheed Martin Corporation is our subject matter expert partner,
and its subcontract value to date is $200,000.  We have subcontracted
with In-Phase Technologies to assist in the software development for ADEPT’s
virtual instrumentation.  This subcontract is currently valued at
approximately $550,000.




The ADEPT
development for the SPY-1A application is complete and six production units have
been delivered to us by DRS Technologies.  The production units have
passed environmental testing and have undergone functional testing at the SPY-1A
radar training site in Dahlgren, Virginia, aboard the USS SAN JACINTO (CG-56),
and at the Cruiser Modernization (CGM) SPY-1A Test Facility in Moorestown, New
Jersey.  We have developed and environmentally tested a smaller,
light-weight version of the ADEPT.  This unit provides all of the
benefits of ADEPT in an easier to handle enclosure.




Wireless Local Area Network
Systems




We began
work on another independent SBIR subject area in June 2004.  The
Office of Naval Research awarded us a $100,000 SBIR Phase I contract to analyze
the potential for interference between emerging Wireless Local Area Network
systems (WLANs) and DoD radar systems, and to evaluate and quantify the
potential improvements which may be afforded by selected mitigation
techniques.  This Radar Wireless Spectral Efficiency (RWSE) SBIR Phase
I program was completed in January 2005 and concluded that the potential exists
for mutual interference between WLANs and DoD radars, particularly during
land-based, littoral and harbor navigation operation of DoD
radars.  We recommended that further study of the identified mutual
interference mechanisms was warranted, including empirical testing to
characterize the effects of the interference and the potential mitigation
techniques identified during the Phase I program.




In May,
2007, we were awarded SBIR Phase II funding through Space and Naval Warfare
Systems Command (SPAWAR), located in San Diego, California.  This $750,000
effort is a spin off of work performed under the SBIR topic entitled Radar
Wireless Spectral Efficiency (RWSE).  This SBIR Phase II effort, entitled
‘Kill Chain Vulnerability Analysis Tool’, focuses on the interaction between
tactical data links and interferers such as hostile jammers.  We are
working closely with engineers from the Naval Air Warfare Center Weapons
Division (NAWCWD), located in China Lake, California, on this project. 
NAWCWD, a division of Naval Air Systems Command (NAVAIR), is responsible for
‘Arming the Fleet’. The technical objective of this effort is to develop
simulation models that can be used to predict the performance of data links in a
jamming environment.




5




Radar Wireless Spectral
Efficiency




On May 1,
2006, we were awarded an SBIR Phase II contract from SPAWAR as a follow-on to
our SBIR Phase I work performed under the SBIR topic entitled
RWSE.  The total award is valued at approximately $750,000 divided
into a $600,000 base program and a $150,000 option program.  This SBIR
Phase II effort focused on the real world implications of incorporating wireless
networking into the aircraft carrier (CVN platform) environment.  The
overall technical objective is to facilitate the introduction of commercial
wireless communication systems, e.g. Wi-Fi, onto U.S. Navy ships
through:  (1) the identification and testing of potential own-ship
electromagnetic interference (EMI) issues; (2) the development and testing of
viable mitigation technologies to overcome adverse EMI effects; and (3) the
development of a CVN Wi-Fi network planning tool to support networking within a
highly reconfigurable shipboard environment.  This contract was
initially for the CVN platform, but is expected to be eventually applicable to
other U.S. Navy ships.




As part
of this RWSE SBIR Phase II program, our engineers have performed Wi-Fi
propagation surveys aboard the aircraft carrier USS GEORGE WASHINGTON (CVN-73)
and the amphibious assault ship USS BATAAN (LHD-5).  The empirical
results from these surveys were used to refine the Wi-Fi signal propagation
algorithms embedded in the Wireless Network Planning Tool
prototype.  In March 2007, our engineers sailed aboard the U.S. Navy
amphibious assault ship USS KEARSARGE (LHD-3) during its underway exercise in
the Atlantic Ocean near Norfolk, Virginia.  This afforded us the
opportunity to measure the shipboard radio frequency environment during actual
at-sea operating conditions.  This information is critical to
analyzing potential interference to and from commercial wireless networks and to
validate the interference aspect of the Interference-Aware Wireless Network
Planning Tool currently under development.





In May,
2007, we were awarded additional funding on SBIR Topic “A Study of Commercial
Wireless LAN Interference Issues Aboard U.S. Navy Carriers” (CVNs).  The
contract is a follow-on to the SBIR Phase I work we performed under RWSE. The
additional funding of $150,000 was awarded to us from SPAWAR, bringing the total
amount of the SBIR Phase II contract to $750,000.  During the contract
option period, together with our team partner Mobilisa Inc., we plan to continue
development of AIRchitect - EMC, a software package which allows the Navy to
plan and optimize deployment of shipboard WiFi networks.  AIRchitect - EMC
automatically places shipboard Access Points to optimize coverage based on 
user-specified wireless requirements.  It also analyzes potential
interference between network equipment and onboard RF systems such as radars,
and where possible, mitigates interference using smart placement and channel
selection algorithms.  AIRchitect - EMC will be used by the Navy to plan
network deployments on aircraft carriers (CVNs) and other
platforms.




Additional
Contracts





On June
1, 2007, we received a subcontract from Mobilisa, Inc. to assist in the
development of a ”Radio Frequency/Microwave Hazard Assessment Tool
(RHAZ)”.  RHAZ is a hazard analysis software tool designed to enable
medics, range safety officers, and researchers to determine radio frequency
personnel hazards in real time deployment environments.  Valued at
approximately $33,000, the subcontract brings our expertise in radio frequency
(RF) propagation and simulation to the issue of RF safety in deployed
environments.  Working in conjunction with the U.S. Air Force, the
Mobilisa/Mikros team will work to develop a tool to predict the RF hazards
associated with the deployment of RF and Microwave assets.





In
October, 2007,  we were awarded an SBIR Phase I contract through
SPAWAR.  This $100,000 effort  titled “Small Buoy for Energy
Harvesting” will collaborate in the design and development of a miniaturized,
self-powered ocean buoy which can be deployed at sea for extended periods to
support various on-board payload packages, such as network communications
nodes.  This communication package is designed to allow submarines to
communicate with the Battle Group while operating at speed and
depth.




In
October, 2007, we were awarded additional funding for continued development of
the AIRchitect-EMC “interference-aware” wireless network design tool. The
additional funding was awarded to us from SPAWAR.  A modification to
the existing RWSE (Radar Wireless Spectral Efficiency) Phase II SBIR contract
provides an additional $900,000 to support new feature upgrades to the
AIRchitect-EMC software, including full three-dimensional modeling
capabilities.




6




Corporate Growth &
Strategy




Our
strategy for continued growth is three-fold.  First, we expect to
continue expanding our technology base, backlog, and revenue by continuing our
active participation in the DoD SBIR program, bidding on projects that fall
within our areas of expertise – electronic systems engineering and integration,
radar systems engineering, combat/C4I (Command, Control, Communications,
Computers & Intelligence) systems engineering, and communications
engineering.  We believe that we can utilize the intellectual property
developed under our various SBIR awards to develop proprietary products, such as
the ADEPT described above, with broad appeal in both the government and
commercial marketplace. This state-of-the-art test equipment can be used by many
commercial and governmental customers such as the FAA, radio and TV stations,
cell phone stations and airlines.




Second,
we will continue to pursue SBIR projects with the Department of Homeland
Security, the U.S. Navy, and other government agencies.




Third, we
believe that through our marketing of products such as ADEPT® we will develop
key relationships with prime defense system contractors.  Our strategy
is to develop these relationships into longer-term, key subcontractor roles on
future major defense programs awarded to these prime contractors.





Competition





Competition
in the SBIR arena is intense, and we compete against numerous small businesses
for SBIR awards.  In our general business area of electronic defense
systems and products, we also compete against many larger companies which have
greater financial and human resources than we do.We believe that
the primary competitive factors in obtaining SBIR contracts are technical
expertise, prior relevant experience, and cost.  Our history of
completing projects in a timely and efficient manner and the experience of our
management and technical personnel positions us well to compete for future SBIR
grants.





Intellectual
Property





We have
two patents covering digital signal processing technology and our base scheme of
implementing Link-11.  We have also developed and continue to develop
intellectual property (technology and data) under our SBIR contracts. Under the
ADEPT® development program, we are in process of filing a patent covering its
key technology with the U.S. Patent and Trademark Office. Our request for a
trademark for the product name “ADEPT” has been approved by the U.S. Patent and
Trademark Office, and ADEPT® is now a registered trademark of ours.





Under
SBIR data rights, we are protected from unauthorized use of SBIR-developed
technology and data for a period of five years after acceptance of all items to
be delivered under a particular SBIR contract or any follow-on
contract.





Customer Concentration;
Dependence on Federal Government





Substantially
all of our revenue is derived from SBIR contracts for the federal
government.  Although our operations are not subject to any particular
government approval or regulations, we are dependent upon funding being made
available to the Department of Defense in amounts sufficient to cover the SBIR
grants that we compete for.





Research and
Development





We are a
specialized research and development company focused on the development of
electronic systems technology primarily for military
applications.  All of our research and development costs in 2006 and
2007 were for the benefit of our customers, agencies of the federal
government.  The customer-sponsored research and development projects
are performed under contracts and are accounted for as contract costs as the
work is performed.  In future periods, we may engage in
company-sponsored research and development projects which would be expensed as
incurred.




7





Employees





As of
December 31, 2007, we had eight  full-time employees working at our
Fort Washington, Pennsylvania Research  & Development Center and
two part-time employees.  None of the employees belong to a labor
union.  We believe relations with our employees are
satisfactory.   We also use the services of subcontractors and/or
consultants as necessary to aid in software and hardware development and for the
manufacture of products.





RISK
FACTORS





An
investment in our common stock involves a high degree of risk.  You
should carefully consider the following risk factors in addition to other
information in this Annual Report on Form 10-KSB before purchasing our common
stock. The risks and uncertainties described below are those that we currently
deem to be material and that we believe are specific to our company and our
industry.  In addition to these risks, our business may be subject to
risks currently unknown to us.  If any of these or other risks
actually occurs, our business may be adversely affected, the trading price of
our common stock may decline and you may lose all or part of your
investment.





We have a history of operating
losses.  Although we had net income of $165,811 for the year
ended December 31, 2007 and a working capital surplus of $407,262, we still had
an accumulated deficit of $11,367,894 at December 31, 2007.





We may experience substantial
variability in ourquarterly operating
results.  Our revenue, gross profit, operating income and net
income may vary substantially from quarter to quarter due to a number of
factors. Many factors, some of which are not within our control, may contribute
to fluctuations in operating results. These factors include the
following:





·
            market
      acceptance of our new products;


·
            budgetary
      constraints of our customers;


·
            new
      product and service introductions by our competitors or
  us;


·
            our
      employment patterns;


·
            market
      factors affecting the availability or costs of qualified technical
      personnel;


·
            timing
      and customer acceptance of our new product and service
      offerings;


·
            length
      of sales cycle; and


·
            industry
      and general economic conditions.





Our success depends on the services
of our senior management and our ability to hire and retain additional skilled
personnel.  The future
success of our company depends on the personal efforts and abilities of the
members of our senior management team to provide strategic direction, develop
business, manage operations and maintain a cohesive and stable environment.
Specifically, we are dependent upon Thomas J. Meaney, President and Chief
Executive Officer, Walter T. Bristow, Vice President of Engineering, and Henry
Silcock, Senior Software Engineer.  We do not have employment
agreements with any key personnel. Furthermore, our performance also depends on
our ability to attract and retain management and qualified professional and
technical operating staff. Competition for these skilled personnel is intense.
The loss of services of any key executive, or inability to continue to attract
and retain qualified technical staff, could have a material adverse effect on
our business, results of operations and financial condition. We do not maintain
any key employee insurance on any of our executives.





The market for our products is
subject to rapid technological change.  The market for our
products and planned products is characterized by rapid changes in technology,
including the potential introduction of new types of wireless communications and
digital signal processor technologies which could have a material adverse impact
on our business.  Our future success will depend in part on our
ability to continually enhance our current technology and to develop or acquire
new ideas that address the needs of the defense industry and other potential
users.  There can be no assurance that we will be successful in
developing new products or procedures that respond to technological changes.
There can be no assurance that research and development by competitors will not
render our technology obsolete or uncompetitive.  In addition, in a
technology-based industry, there can be no assurance that a claim of patent or
other infringement will not be made against us.  While we are not
aware of any such claims, no infringement studies have been conducted on our
behalf.




8





Our industry is highly
competitive.High technology applications such as those being
developed by us often require large investments of both money and
talent.  Many large entities with greater financial, technical and
human resources than us are currently investing heavily in products and services
that compete directly with our services and underlying products. There is no
assurance that our offerings can be successfully marketed against such
competition.  In addition, being first in the market with new high
technology is a critical factor in a company’s success in the market. There is
no assurance that we will be able to introduce new offerings to the market
before any of our competitors.  As the markets in which we compete
mature and new and existing companies compete for customers, price competition
is likely to intensify, and such price competition could adversely affect our
results of operations.





We may issue additional shares of our
capital stock that could dilute the value of your shares.  Our
outstanding securities include shares of convertible preferred stock and
options.  During the respective terms of the options, and while the
preferred stock is outstanding, the holders thereof are given an opportunity to
profit from a rise in the market price of our common stock, causing a dilution
of the interests of existing stockholders.  Thus, the terms on which
we may obtain additional financing during that period may be adversely
affected.  The holders of preferred stock and options may exercise
their respective rights to acquire our common stock at a time when we could be
seeking to raise additional capital through sales of securities on terms more
favorable than those being offered by us to new investors.  In the
event that such holders exercise their rights to acquire shares of our common
stock at such time, the net tangible book value per share of our common stock
will be subject to dilution.





Future sales of our securities by
existing stockholders could adversely affect the market price of our common
stock.  Future sales of shares by existing stockholders under
Rule 144 of the Securities Act of 1933 or through the exercise of outstanding
options or otherwise could have a negative impact on the market price of our
common stock.  We are unable to estimate the number of shares that may
be sold under Rule 144 because such sales depend on the market price for our
common stock, the personal circumstances of the sellers and a variety of other
factors.  Any sale of substantial amounts of our common stock in the
open market may adversely affect the market price of our common stock and may
adversely affect our ability to obtain future financing in the capital
markets.





Penny Stock
Rules.Our common stock currently trades on the OTC Bulletin
Board. Since our common stock continues to trade below $5.00 per share, our
common stock is considered a “penny stock” and is subject to SEC rules and
regulations which impose limitations upon the manner in which our shares can be
publicly traded. These regulations require the delivery, prior to any
transaction involving a penny stock, of a disclosure schedule explaining the
penny stock market and the associated risks.  Under these regulations,
certain brokers who recommend such securities to persons other than established
customers or certain accredited investors must make a special written
suitability determination regarding such a purchaser and receive such
purchaser’s written agreement to a transaction prior to sale.  These
regulations may have the effect of limiting the trading activity of our common
stock and reducing the liquidity of an investment in our common
stock.





We rely on third-party contractors
for certain engineering services that may be difficult to
replace.  We currently provide a portion of our engineering
services through third-party contractors such as DRS Laurel
Technologies.  These services may not continue to be available on
commercially reasonable terms, if at all.  Services that are not
immediately replaceable would need to be internally developed, which could
strain existing engineering personnel and require us to spend substantial time
and resources to retain additional personnel or third-party
contractors.  The loss or inability to maintain any of these
engineering service providers could result in delays in the development of our
products and services until equivalent services, if available, are identified,
developed, and integrated, which could harm our business.





We have limited operating history in
providing commercial wireless applications. Historically, we developed
and sold technology and products for military applications, primarily to the
U.S. Navy.  We may in the future develop commercial wireless products
and applications that would perform different functions than our historic
products, and would be targeted at an entirely different customer
base.  Because we have not previously operated as a provider of
commercial wireless products, we have no basis to evaluate our ability to
develop, market and sell such products.  Our ability to commercialize
any products or services and generate operating profits and positive operating
cash flow will depend principally upon our ability to:





·
            develop
      and manufacture commercially attractive
  products;


·
            attract
      and retain an adequate number of
customers;


·
            enter
      new markets and compete successfully in
them;


·
            manage
      operating expenses;


·
            raise
      any necessary capital; and


·
            attract
      and retain qualified personnel.





9





We have never paid dividends on our
common stock and we do not anticipate paying dividends in the foreseeable
future.We have never paid cash dividends on our common
stock.  Any payment of cash dividends in the future will depend upon
our earnings (if any), financial condition and capital requirements. We do not
anticipate paying dividends in the foreseeable future. In addition, we have
executed certain loan agreements, which prohibit the payment of a dividend on
our common stock as long as such agreements are in
place.  Accordingly, any potential investor who anticipates the need
for current dividends from its investment should not purchase any of our
securities.





Our common stock is thinly traded and
the price of our common stock may experience price
volatility.  Our common stock currently is traded
over-the-counter on the OTC Bulletin Board.  There can be no assurance
that an active market for our shares will develop or, if developed, will be
sustained.  Absent a public trading market, an investor may be unable
to liquidate its investment.  We believe that factors such as the
announcements of the availability of new services and new contracts by us or our
competitors, quarterly fluctuations in our financial results and general
conditions in the communications industry could cause the price of our common
stock to fluctuate substantially. If stockholders seek to sell their shares in a
thinly traded stock, it may be difficult to obtain the price
desired.  In addition, stock markets have experienced extreme price
volatility in recent years.  This volatility has had a substantial
effect on the market prices of securities issued by many companies for reasons
unrelated to the operating performance of the specific companies.





Our share ownership is highly
concentrated.  Our directors, officers and principal
stockholders, and certain of their affiliates, beneficially own approximately
31.9% of our common stock and will continue to have significant influence over
the outcome of all matters submitted to the stockholders for approval, including
the election of our directors.  In addition, such influence by
management could have the effect of discouraging others from attempting to take
control of us, thereby increasing the likelihood that the market price of our
common stock will not reflect a premium for control.





We have adopted certain anti-takeover
provisions.  We are authorized to issue 4,040,000 shares of
preferred stock, which may be issued by our board of directors on such terms,
and with such rights, preferences and designations as the board may determine.
Issuance of such preferred stock, depending upon the rights, preferences and
designations thereof, may have the effect of delaying, deterring or preventing a
change in control of our company.  The 2,052,433 shares of issued and
outstanding preferred stock have certain rights and preferences, including
dividend and liquidation preferences, which also may have the effect of
delaying, deterring or preventing a change in control of us.  In
addition, certain “anti-takeover” provisions of the Delaware General Corporation
Law (the “DGCL”), among other things, restrict the ability of stockholders to
effect a merger or business combination or obtain control of the Company, and
may be considered disadvantageous by a stockholder.





Corporate governance requirements are
likely to increase our costs and make it more difficult to attract and retain
qualified directors.   We are subject to  the
Sarbanes-Oxley Act of 2002, as well as rules adopted pursuant to that
legislation by the SEC.  We expect that these and other new laws,
rules and regulations will continue to increase our legal and financial
compliance costs and place a significant burden on management.  We
also expect that new regulatory requirements will make it more difficult and
more expensive for us to obtain director and officer liability
insurance.  We may be required to accept reduced coverage or incur
significantly higher premium costs to obtain coverage.  These new
requirements are also likely to make it more difficult for us to attract and
retain qualified individuals to serve as members of our board of directors or
committees of the board, particularly the audit committee.   In
addition, starting with our fiscal year ended December 31, 2007, we became
subject to the requirements of Section 404 of the Sarbanes-Oxley Act which
requires us to make annual assessments of our internal control over financial
reporting and starting with our fiscal year ending December 31, 2008 file an
attestation of this assessment by our independent registered public accountants,
unless extended by the SEC as currently proposed.  To date, we have
taken limited actions with respect to compliance with the auditor attestation
requirement under Section 404.  We may need to hire additional
personnel and/or engage outside consulting firms to assist in our efforts to
comply with Section 404.  Any failure to improve our internal
accounting controls or other problems with our control systems could result in
delays or inaccuracies in reporting financial information or non-compliance with
SEC reporting and other regulatory requirements, any of which could adversely
affect our business and stock price.




10





ITEM
2.  DESCRIPTION OF PROPERTY.





Our
principal executive offices are located at 707 Alexander Road, Building 2, Suite
208, Princeton, New Jersey 08540-6331.  Our engineering research,
design and development facility is located at 220 Commerce Drive, Suite 300,
Fort Washington, Pennsylvania 19034, where we lease approximately 2,513 square
feet of general office space under a lease agreement that terminates in November
2010.  We also maintain a marketing office at Three Crystal Park, 2231
Crystal Drive, Suite 1005, Arlington, Virginia.   We believe that
our office space is adequate to support our current and anticipated operations
over the next 12 months.





ITEM
3.  LEGAL PROCEEDINGS.





None.





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





None.





PART
II





ITEM
5.  MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
SMALL


BUSINESS
ISSUER PURCHASES OF EQUITY SECURITIES.





Our
common stock is quoted on the OTC Bulletin Board under the trading symbol
“MKRS.OB”. The following table sets forth the range of high and low bid prices
of our common stock for the periods indicated as reported by the OTC Bulletin
Board.  The quoted prices represent only prices between dealers on
each trading day as submitted from time to time by certain of the securities
dealers wishing to trade in our common stock, do not reflect retail mark-ups,
mark-downs or commissions, and may differ substantially from prices in actual
transactions.





BidHigh
            
            
            Low2007First
      Quarter
            
            $
            0.5000
            
            
            $
            0.3400Second
      Quarter
            
            
            0.9200
            
            
            
            0.3700Third
      Quarter
            
            
            0.9300
            
            
            
            0.4600Fourth
      Quarter
            
            
            0.6170
            
            
            
            0.4320





2006First
      Quarter
            
            $
            0.2900
            
            
            $
            0.1750Second
      Quarter
            
            
            0.2800
            
            
            
            0.2100Third
      Quarter
            
            
            0.2600
            
            
            
            0.2100Fourth
      Quarter
            
            
            0.4750
            
            
            
            0.2100





The last
price of our common stock as reported on the OTC Bulletin Board as of March 24,
2008 was $0.60 per share.





Dividends





We have
never paid cash dividends on our common stock.   Any payment of
cash dividends in the future will depend upon our earnings (if any), financial
condition, and capital requirements.  Our secured loan agreement with
Sun National Bank prohibits us from paying any dividends on our common
stock.  Certain provisions of our convertible preferred stock also
prohibit us from declaring or paying dividends on our common stock. The declaration and
payment of dividends on our common stock is subject to the discretion of our
board of directors and to certain contractual restrictions and limitations
imposed under the DGCL.  We do not anticipate paying dividends in the
foreseeable future.





As of
March 24, 2008, we had 306 holders of record of our common stock.




11





ITEM
6.  MANAGEMENT’S DISCUSSION AND ANALYSIS





This
Management’s Discussion and Analysis and other parts of this Annual Report on
Form 10-KSB contain forward-looking statements that involve risks and
uncertainties.  All forward-looking statements included in this Annual
Report on Form 10-KSB are based on information available to us on the date
hereof, and except as required by law, we assume no obligation to update any
such forward-looking statements.  Our actual results may differ
materially from those anticipated in these forward-looking statements as a
result of a number of factors, including those set forth under the caption “Risk
Factors” beginning on page 6 of this report and elsewhere herein.  The
following should be read in conjunction with our annual financial statements
contained elsewhere in this report.





Overview





Our
primary business focus is to pursue Small Business Innovation Research (SBIR)
programs from the U.S. Department of Defense, Department of Homeland Security,
and other governmental authorities, and to expand this government funded
research and development into products, services, and business areas of the
Company.  Since 2002, we have been awarded a number of Phase I, II,
and III SBIR contracts.




Revenues
from our government contracts represented 100% of our revenues for the years
ended  December 31, 2007 and 2006.  We believe that we can
utilize the intellectual property developed under our various SBIR awards to
develop proprietary products for both the government and commercial
marketplace.




Contracts




In 2007,
we were awarded a number of SBIR contracts related to our ADEPT, WLAN and RWSE
programs.  These included:





·
            a
      $2,400,000 contract from the Naval Surface Weapons Center, Port Hueneme
      Division for the continuing development of
ADEPT


·
            a  $750,000
      SBIR Phase II for the further development of RWSE
  program


·
            a
      $150,000 SBIR topic related to our RWSE
program


·
            a
      $33,000 subcontract from Mobilisa to assist in the development of a radio
      frequency microwave hazard assessment
tool


·
            a
      $100,000 SBIR Phase I contract regarding design and development of
      miniaturized self-powered ocean buoy to support various onboard payload
      packages


·
            a
      $900,000 Phase II SBIR to support new feature upgrades to the
      AIRchitect-EMC software.





We are
currently in the process of seeking additional SBIR awards related to the
further development of our existing programs.





Key
Performance Indicator




As
substantially all of our revenue is derived from SBIR contracts with the federal
government, our key performance indicator is the dollar volume of contracts
awarded to us. Increases in the number and value of contracts awarded will
generally result in increased revenues in future periods and assuming relatively
stable variable costs associated with our fulfilling such contracts, increased
profits in future periods.  The timing of such awards is uncertain as
we sell to federal government agencies where the process of obtaining such
awards can be lengthy and at times uncertain.




Competition
in the SBIR arena is intense, and we compete against numerous small businesses
for SBIR awards.  We believe that the primary competitive factors in
obtaining SBIR contracts are technical expertise, prior relevant experience, and
cost. Our history of completing projects in a timely and efficient manner as
well as the experience of our management and technical personnel position us
well to compete for future SBIR grants.




12





Outlook





Our
strategy for continued growth is three-fold.  First, we expect to
continue expanding our technology base, backlog and revenue by continuing our
active participation in the DoD SBIR program and bidding on projects that fall
within our areas of expertise.  These areas include electronic systems
engineering and integration, radar systems engineering, combat/C4I (Command,
Control, Communications, Computers & Intelligence) systems engineering, and
communications engineering.  We believe that we can utilize the
intellectual property developed under our various SBIR awards to develop
proprietary products, such as the ADEPT described above, with broad appeal in
both the government and commercial marketplace.  This state-of-the-art
test equipment can be used by many commercial and governmental customers such as
the FAA, radio and television stations, cell phone stations, and
airlines.  Second, we will continue to pursue SBIR projects with the
Department of Homeland Security, the U.S. Navy, and other government
agencies.  Third, we believe that through our marketing of products
such as ADEPT we will develop key relationships with prime defense system
contractors.  Our strategy is to develop these relationships into
longer-term, key subcontractor roles on future major defense programs awarded to
these prime contractors.





In 2008,
our primary strategic focus will be to continue to: (i) establish ourselves as a
premium provider of research and development and product development
services to the defense industry; and (ii) grow our business, generate profits
and increase our cash reserves through obtaining additional SBIR contracts and
positioning the company to obtain future SBIR contracts.  From an
operational prospective, we expect to focus substantial resources on generating
sales of our ADEPT product.  We intend to capitalize on the Navy
modernization program which could result in two or three ADEPT units being
placed on each destroyer and cruiser in the U.S.Navy, with the potential to
install multiple units on additional U.S. Navy ships and
submarines.




Over the
longer term, we expect to further develop technology based on existing and
additional SBIR contracts and to develop these technologies into products for
wide deployment to Department of Defense customers and contractors as well as
developing potential commercial applications. As an example, we recently
entered into a memorandum of understanding with a global provider of
telecommunications equipment and related services pursuant to which we will
assist the global provider in marketing its products to the DoD.





Critical
Accounting Policies And Estimates





The
discussion and analysis of our financial condition and results of operations are
based upon our financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of
America.  The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities.  On  an on-going basis, we evaluate our
estimates, including those related to bad debts, investments, recoverability of
long-lived assets, income taxes, restructuring charges, and contingencies and
litigation.  We base our estimates on historical experience and on
various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.  The accounting estimates and assumptions
discussed in this section are those that we consider to be the most critical to
an understanding of our financial statements because they inherently involve
significant judgments and uncertainties.





Revenue
Recognition





We are
engaged in contracts with the Federal Government to help fund the costs of
certain research and development activities as the Company attempts to develop
certain technology to be utilized by the US Department of
Defense.  The contracts are cost plus fixed fee contracts and we
recognize revenue under the contracts as it incurs reimbursable
costs.  Each bill has a component for the reimbursable direct costs
and a portion of overhead and fixed fees.  The overhead and fixed fees
are being billed to the government at the rate permitted by the Defense Contract
Audit Agency.




13





Certain
arrangements are different from production-type contracts and qualify as
research and development by meeting all of the following
conditions:





-
            Activities
      performed in connection with the contractual arrangement qualify as
      research and development as defined by FASB Statement No.
  2-
            The
      contractor retains a right to the data and results of the research and
      development activities-
            The
      contractual arrangement obligates the contractor to perform only on a
      best-efforts basis to achieve the agreed-upon objectives of the research
      and development activity, rather than to deliver a product or service
      meeting defined performance or other (such as design)
      specifications-
            At
      the inception of the contract, the contractor and the customer enter into
      the arrangement with the expectation that costs will be incurred in excess
      of amounts to be funded. This condition will be met if contractual or
      other documentation specifically evidences acknowledgment of this
      expectation by both the contractor and the customer. Implicit in this
      condition is the existence of significant uncertainty at the date the
      contractor enters into the arrangement regarding the likelihood of
      successfully securing follow-on contracts related to the research and
      development activity-
            The
      research and development arrangement is not combined with other contracts
      or segmented in accordance with paragraphs 35  through 42 of SOP
      81-1-
            The
      federal government is the sole or principal expected ultimate customer
      (including foreign military sales) for the research and development
      activity or products directly resulting from the R&D activity subject
      to the arrangements





Similarly,
when third party contractors are utilized in relation to these contracts, we
review their performance and upon our determination that the costs are
reimbursable under the contract, we record revenue for such costs in the period
incurred.





Stock
Options





We
havea fixed stock
option plan which is described in Note 5 of our financial statements to provide
for the grant of stock  options to eligible employees and
directors.





Prior to
January 1, 2006, our stock option plans were accounted for under the recognition
and measurement provisions of APB Opinion No. 25 (Opinion 25), “Accounting for
Stock Issued to Employees,” and related Interpretations, as permitted by FASB
Statement No. 123, “Accounting for Stock Based Compensation.” No stock-based
employee compensation cost was recognized in the Company’s statements of income
through December 31, 2005, as all options granted under the plan had an exercise
price equal to the market value of the underlying common stock on the date of
the grant.  Statement No. 123(R) replaces Statement No. 123,
supersedes APB Opinion No. 25 and requires compensation costs related to
share-based payment transactions to be recognized in the financial statements
over the period that an employee provides service in exchange for the
award.  Effective January 1, 2006, we adopted the fair value
recognition provisions of FASB Statement No. 123(R), “Share Based Payment,”
using the modified-prospective transition method.  Under that
transition method, compensation cost recognized after January 1, 2006 includes:
(a) compensation cost for all share-based payments granted prior to, but not yet
vested, as of January 1, 2006 based on the grant-date fair value calculated in
accordance with the provision of Statement No. 123(R), and (b) compensation cost
for all share-based payments granted subsequent to December 31, 2005, based on
the grant-date fair value calculated in accordance with the provision of
Statement 123(R).  We had no unvested stock options at December 31,
2005, therefore, the adoption of Statement 123(R) relates only to share-based
payments granted after January 1, 2006.  We granted no stock options
in 2006.





On
October 3, 2007, we issued stock options to each member of the board of
directors, plus key employees and consultants under the Company’s 2007 Stock
Incentive Plan.  Directors were granted a total of 125,000 shares,
which vest over a three-year period.  Key employees were granted a
total of 305,000 shares and these options vest over a five-year
period.  The options are exercisable at $.55 per share, the last sales
price of the Company’s common stock as reported on the OTCBB on the date of
grant.  The options have a term of 10 years and vest in equal annual
installments over a three or five year period, commencing on the date of
grant.




14





In
accordance with the recognition provisions of  SFAS No. 123(R), we
recognized stock-based compensation expense of $7,692 in the accompanying
financial statements for the year ended December 31, 2007.  There was
no income tax benefit recorded related to this stock-based compensation
expense.





No
options were exercised for the years ended December 31, 2007 and 2006, and
accordingly, there were no income tax benefits recorded relating to the exercise
of stock options.





Recently
Issued Accounting Standards





In July
2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes – an interpretation of FASB Statement No. 109” (FIN 48), which
clarifies the accounting for uncertainty in tax positions.  This
Interpretation requires that companies recognize in their financial statements
the impact of a tax position, if that position is more likely than not of being
sustained on audit, based on the technical merits of the
position.  The provisions of FIN 48 were effective for fiscal years
beginning after December 15, 2006, with the cumulative effect of the change in
accounting principle recorded as an adjustment to opening retained
earnings.  Adoption of this pronouncement did not impact the Company’s
financial position.




In
September 2006, the FASB issued Statement No. 157, Fair Value Measurements,
which defines fair value, establishes a framework for measuring fair value under
GAAP, and expands disclosures about fair value measurements.  FASB
Statement No. 157 applies to other accounting pronouncements that require or
permit fair value measurements.  The new guidance is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and for interim periods within those fiscal years.  The Company
is  currently evaluating the potential impact, if any, of the adoption
of FASB Statement No. 157 on its financial statements.




In
February 2007, the FASB Issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – Including an amendment of FASB
Statement No. 115”.  SFAS No. 159 permits entities to choose to
measure many financial instruments and certain other items at fair
value.  Unrealized gains and losses on items for which the fair value
option has been elected will be recognized in earnings at each subsequent
reporting date.  SFAS No. 159 is effective for the Company January 1,
2008.  The Company is evaluating the impact, if any, that the adoption
of SFAS No. 159 will have on its financial statements.




In May
2007, the FASB issued FASB Staff Position (“FSP”) FIN 48-1 “Definition of
Settlement in FASB Interpretation No. 48” (FSP FIN 48-1). FSP FIN 48-1 provides
guidance on how to determine whether a tax position is effectively settled for
the purpose of recognizing previously unrecognized tax benefits. FSP FIN 48-1 is
effective retroactively to January 1, 2007. The implementation of this standard
did not impact the Company’s financial position or results of
operations.




In
December 2007, the FASB issued proposed FASB Staff Position (FSP) 157-b,
“Effective Date of FASB Statement No. 157,” that would permit a one-year
deferral in applying the measurement provisions of Statement No. 157 to
non-financial assets and non-financial liabilities (non-financial items) that
are not recognized or disclosed at fair value in an entity’s financial
statements on a recurring basis (at least annually). Therefore, if the change in
fair value of a non-financial item is not required to be recognized or disclosed
in the financial statements on an annual basis or more frequently, the effective
date of application of Statement 157 to that item is deferred until fiscal years
beginning after November 15, 2008 and interim periods within those fiscal
years. This deferral does not apply, however, to an entity that applies
Statement 157 in interim or annual financial statements before proposed FSP
157-b is finalized. The Company is currently evaluating the impact, if any, that
the adoption of FSP 157-b will have on the Company’s operating income or net
earnings.





FASB
statement No. 141 (R) “Business Combinations” was issued in December of 2007.
This Statement establishes principles and requirements for how the acquirer of a
business recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree. The Statement also provides guidance for recognizing and measuring the
goodwill acquired in the business combination and determines what information to
disclose to enable users of the financial statements to evaluate the nature and
financial effects of the business combination. The guidance will become
effective as of the beginning of a company’s fiscal year beginning after
December 15, 2008. This new pronouncement will not impact the Company’s
accounting for business combinations completed until January 1,
2009.




15





In
December 2007, the FASB issued statement No. 160 “Noncontrolling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51”, issued in
December of 2007. This Statement establishes accounting and reporting standards
for the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. The guidance will become effective as of the beginning of a
company’s fiscal year beginning after December 15, 2008. The Company does not
expect  FASB No. 160 to have material impact on its financial
statements.





In
December 2007,  Staff Accounting Bulletin No. 110 (SAB 110)
amends and replaces Question 6 of Section D.2 of Topic 14,“Share-Based Payment,” of
the Staff Accounting Bulletin series. Question 6 of Section D.2 of Topic 14
expresses the views of the staff regarding the use of the “simplified” method in
developing an estimate of expected term of “plain vanilla” share options and
allows usage of the “simplified” method for share option grants prior to
December 31, 2007. SAB 110 allows public companies which do not have
historically sufficient experience to provide a reasonable estimate to continue
use of the “simplified” method for estimating the expected term of “plain
vanilla” share option grants after December 31, 2007.  SAB 110 is
effective January 1, 2008. The
Company does not expect SAB 110 to have a material impact on its financial
statements.





Results
of Operations





Years ended December 31,
2007 and 2006





Total
contract revenues in 2007 were $3,078,492 compared to $2,274,868 in 2006, an
increase of 35%.  Contract revenues in both years were derived
entirely from SBIR contracts.  The increase was due to the addition of
six material new contracts in 2007.  Based on current backlog and
outstanding bids, we expect revenue to increase in future periods.





Cost of
sales consist of direct contract costs such as labor, material, subcontracts,
travel, and other direct costs.  Cost of sales increased from
$1,361,255 in 2006 to $1,828,184 in 2007, an increase
of  approximately 34%.  This increase was due to our
increased contract revenue in 2007 and was consistent, on a percentage basis,
with our increase in revenues.





The
substantial majority of our engineering costs consist of (i) salary, wages and
related fringe benefits paid to engineering employees, (ii) rent-related costs,
and (iii) consulting fees paid to engineering consultants.  As the
nature of these costs benefit the entire organization and all research and
development efforts, and their benefit cannot be identified with a specific
project or contract, these engineering costs are classified as part
of  “Engineering Overhead” and included in operating
expenses.  Engineering expenses were $436,104 in 2007 compared to
$324,357 in 2006, an increase of $111,747 or 34% .  The increase in
engineering costs for the year ended December 31, 2007 was due to the hiring of
additional engineering personnel, additional fringe benefits expenses,
appointment of an outside information technology firm and a new program
management consultant, and incentive compensation.  The increase was
consistent, on a percentage basis, with increases in revenue and cost of
sales.





General
and administrative expenses consist primarily of salary, consulting fees paid to
bid and proposal consultants and related costs, professional fees, business
insurance, corporate taxes, register and public related costs, travel, and
unallowable expenses (representing those expenses for which the government will
not reimburse us).  General and administrative expenses were $651,155
in 2007 compared to $429,391 in 2006, an increase of $221,764 or
51%.  The increase was due to higher costs related to bid and proposal
salaries, bid and proposal consulting fees, professional fees associated with
our status as a public company, and the retention of a  financial
consultant to assist in complying with our obligations under Section 404 of The
Sarbanes-Oxley Act to evaluate the effectiveness of our internal controls over
financial reporting.





The
provision for federal income taxes was $2,781 in 2007 compared to $30,350 for
2006, representing an effective tax rate of 1.7%, and 19%,
respectively.  During 2007 approximately $79,000 reduction in tax
expense was recorded as a result of a reduction in valuation allowance against a
deferred tax asset derived from net operating loss carryovers, which was
partially offset by permanent items.




16





We
generated net income of $165,811 in 2007 as compared to $129,800 in 2006, an
increase of $36,011 or 28%.   The increase in net income was due
primarily to the additional profits generated from the additional Air Force RHAZ
Phase I contract form Mobilisa, SBIR Phase III and RWSE Phase II contracts in
2007 which was offset by proportionately larger increases in general and
administrative expenses.





Liquidity and Capital
Resources





Since our
inception, we have financed our operations through debt, private and public
offerings of equity securities and cash generated by operations.





In 2007,
net cash provided from operations was $185,873 compared to $127,753 in
2006.  The increase was primarily the result of increased contract
revenues and an increase in accounts payable.  We had working capital
of $407,262 as of December 31, 2007 as compared to working capital of $263,353
at December 31, 2006.  The $143,909 increase was due primarily to
increases in cash of $175,000, accounts receivable of $102,000, and the
provision for deferred taxes of $22,500, all of which were partially offset by
an increase of $115,000 in accounts payable.





On
November 16, 2006, we entered into a $50,000 revolving line of credit with Sun
National Bank (the “Lender”) evidenced by a Promissory Note made by us in favor
of the Lender.  The revolving line of credit will be available to us
for two years.  On November 14, 2008, advances will no longer be
available under the revolving line of credit.  At that time, the then
outstanding principal balance will be converted into a five-year term loan with
payments based on a five-year amortization schedule.  The term loan
will be payable in 60 equal monthly installments and be due in full on November
14, 2013. During the first five months of the revolving line of credit, any
outstanding principal balance will bear interest at 5.99% per
annum.  Thereafter, any outstanding principal balance will bear
interest equal to the Sun National Bank Prime Rate.  The loan is
secured by substantially all of our assets pursuant to a Commercial Security
Agreement (the “Security Agreement”) made by us in favor of the Lender and is
guaranteed by Thomas J. Meaney, our President and Chief Financial Officer. There
were no outstanding amounts under this line of credit at December 31, 2007 and
2006.





We
believe our available cash resources and expected cash flows from operations
will be sufficient to fund operations for the next twelve months.  We
do not expect to incur any material capital expenditures during the next twelve
months.





In order
to pursue strategic opportunities, obtain additional SBIR contracts,
or  acquire strategic assets or businesses, we may need to obtain
additional financing or seek strategic alliances or other partnership agreements
with other entities.   In order to raise any such financing, we
anticipate considering the sale of additional debt or equity securities under
appropriate market conditions.  There can be no assurance, assuming we
successfully raise additional funds or enter into business alliances, that we
will achieve profitability or positive cash flow. If we are unable to obtain
additional adequate financing or enter into such business alliances, management
will be required to sharply curtail our operations.





Off-Balance Sheet
Arrangements





As of
December 31, 2007, we did not have any relationships with unconsolidated
entities or financial partners, such as entities often referred to as structured
finance or special purpose entities, established for the purpose of facilitating
off-balance sheet arrangements or other contractually narrow or limited
purposes.  As such, we are not materially exposed to any financing,
liquidity, market or credit risk that could arise if we had engaged in such
relationships.





Contractual
Obligations





We lease
our engineering office in Fort Washington, Pennsylvania pursuant to a five-year
lease which continues through November 30, 2010.  Our current monthly
lease payment is $5,469.85, and is subject to an annual increase.





Our
obligation under the non cancellable operating leases is as follow:





2008
            
            $
            66,2022009
            
            $
            67,9292010
            
            $
            63,755TOTAL
            
            $
            197,886




17





ITEM
7.  FINANCIAL STATEMENTS.





The
financial statements required to be filed pursuant to this Item 7 are appended
to this report beginning on page 32  located immediately after
the signature page.





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





None.





ITEM
8A(T). CONTROLS AND PROCEDURES





Disclosure Controls and
Procedures.





An
evaluation of the effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of
1934) was carried out by us under the supervision and with the participation of
our president, who serves as our principal executive officer and principal
financial officer.  Based upon that evaluation, our president
concluded that as of December 31, 2007, our disclosure controls and procedures
were effective to ensure (i) that information we are required to disclose in
reports that we file or submit under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms and (ii) that such information is accumulated and
communicated to management, including our president, in order to allow timely
decisions regarding required disclosure.





Management’s Report on
Internal Control over Financial Reporting.





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rule 13a-15(f) of the Securities
Exchange Act of 1934.  Our internal control system was designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial reporting and the preparation of financial
statements for external purposes, in accordance with generally accepted
accounting principals.  Because of its inherent limitations, internal
control over financial reporting may not prevent or detect
misstatements.  Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.





Our
management, including our president, conducted an evaluation of the
effectiveness of internal control over financial reporting using the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway
Commission in Internal Control – Integrated Framework.  Based on its
evaluation, our management concluded that our internal control over financial
reporting was effective as of December 31, 2007.





This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by our
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit us to provide only management’s report in
this annual report.





Changes in Internal Control
Over Financial Reporting.





There
have not been any changes in our internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act )
that occurred during the fiscal quarter ended December 31, 2007 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.





ITEM
8B.  OTHER INFORMATION





None.




18




PART
III





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





The
current members of our Board of Directors and executive officers of our Company
are as follows:





Name
            Age
            Positions
      with the CompanyPaul
      G. Casner
            70
            DirectorThomas
      C. Lynch
            65
            DirectorThomas
      J. Meaney
            73
            President,
      Chief Financial Officer and DirectorWayne
      E. Meyer
            81
            Chairman
      of the Board of DirectorsTom
      L. Schaffnit
            61
            DirectorWalter
      T. Bristow
            50
            Vice
      President of EngineeringPatricia
      A. Kapp
            41
            Secretary
      and Treasurer





The
principal occupation and business experience, for at least the past five years,
of each current director and executive officer is as follows:





Paul G. Casner, Jr. has been a
director of the Company since May 2002.From 1999 to March 2005,
Mr. Casner served as Executive Vice President and Chief Operating Officer of DRS
Technologies, Inc.  From 1994 to 1998, Mr. Casner served as President
of the Electronic Systems Group of DRS Technologies. Before joining DRS
Technologies, Mr. Casner was the Chairman and Chief Executive Officer of
Technology Applications and Service Company.  Mr. Casner has
over  40  years of Defense Industry experience, including
several senior positions in Business Management, Technical Management, Strategic
Planning and Business Development. He is a member of the Naval Reserve
Association and is a Commodore of the Navy League of the United States, in
addition to other professional affiliations. Mr. Casner is also a director of
ACE-COMM Corporation.





Thomas C. Lynch has been a
Director of the Company since February 1997. Mr. Lynch is currently Managing
Director of The Musser Group and an active Consultant for The Staubach Company.
 Mr. Lynch served as Senior Vice President of Safeguard Scientifics, Inc.
from 1998 to August 2000 and he was Executive Vice President and later became
President and Chief Operating Officer of CompuCom Systems, Inc, a Safeguard
subsidiary.  Mr. Lynch, a retired Navy Admiral, serves as a Director on the
following boards:  InfoLogix, Mikros Systems, Epitome Systems, Telkonet,
Armed Forces Benefit Association, Catholic Leadership Institute, National Center
for the American Revolution at Valley Forge and USO World Board of
Governors.  He has served as President of Valley Forge Historical Society
and Chairman of the Cradle of Liberty Council, Boy Scouts of America. He
currently serves as a Chairman of the US Naval Academy Athletic &
Scholarship Foundation.





Thomas J. Meaney has been a
Director of the Company since July 1986 and was Chairman of the Board from June
1997 to February 1999. He was appointed President in June 1986 and continued to
serve until February 1997.  On September  30, 1998, he was
reappointed President of the Company.  From February 1983 to June
1986, Mr. Meaney was Senior Vice President and Director of Robotic Vision
Systems Incorporated (“RVSI”), a manufacturer of robotic vision
systems.  Mr. Meaney served as a Director of RVSI until 1991 when he
resigned from the post.  Prior to 1983 and for more than five years,
he was Vice President - Business Development, International of Norden Systems
and President - Norden Systems Canada, both divisions of United Technologies
Corporation and developers of computer and electronic products and
systems.  He presently owns his own defense consulting company with
offices in Arlington, Virginia and Chadds Ford, Pennsylvania.  Mr.
Meaney is also a director of Ocean Power Technologies, Inc., a public company
listed on Nasdaq.




19





Wayne E. Meyer has been a
Director of the Company since April 1988, Chairman of the Board 1990 to 1997,
and re-elected as Chairman in February 1999. From 1986 to present, he has been
the Founder and President of the W.E. Meyer Corporation, based in Arlington,
Virginia. The company engages in consulting and advice to industry, government
and academic institutions in matters of systems engineering, project management,
strategic planning and military and electronic designs.  He enlisted
in the U.S. Navy as an Apprentice Seaman in 1943 and retired in 1985 in the rank
of Rear Admiral.  As a national authority on Ballistic Missile
Defense, he serves on numerous boards, groups and panels.





Tom L. Schaffnit has been a
Director of the Company since June 2000.  Since March 1999, he has
been President of Schaffnit Consulting, Inc., a technology-related management
consulting company specializing in wireless data communications and automotive
telematics.  He was President of CUE Data Corporation from February
1997 to March 1999, responsible for creating and implementing new datacasting
services on a nationwide FM subcarrier paging network.  Previously, he
served as a Senior Manager with Deloitte & Touche Consulting Group, and as
Director with Nordicity Group (since acquired by PricewaterhouseCoopers). Mr.
Schaffnit remains actively involved in the evolution of wireless technology, and
is co-author of the book “The Comprehensive Guide to Wireless
Technologies”.





Walter T. Bristow has been
Vice President of Engineering since August 2007.  Prior to that, he
served as our Director of Engineering since October 2003.  Prior to
Mikros, Mr. Bristow served as the Director of Network Engineering for Clariti
Telecommunications International, responsible for wireless network development
and implementation, software engineering, corporate telecommunication, and
information technology.   Prior to Clariti, Mr. Bristow spent 13 years
with Magnavox/General Atronics Corporation, a manufacturer of military
communications equipment, where he worked in hardware engineering, integration,
and design for state-of-the-art military radio communications
equipment.





Patricia A. Kapp has been
Corporate Secretary of the Company since April 1996.  In September
1998, Ms. Kapp was also named Treasurer.  Ms. Kapp has served in various
capacities with the Company since 1987.





Section 16(a) Beneficial
Ownership Reporting Compliance





Section
16(a) of the Exchange Act requires our directors, officers and stockholders who
beneficially own more than 10% of any class of our equity securities registered
pursuant to Section 12 of the Exchange Act to file initial reports of ownership
and reports of changes in ownership with respect to our equity securities with
the SEC.  All reporting persons are required by SEC regulation to
furnish us with copies of all reports that such reporting persons file with the
SEC pursuant to Section 16(a).  Based solely on our review of the
copies of such forms received by us and upon written representations of such
reporting persons, we believe that all reporting persons are in compliance with
all Section 16(a) filing requirements applicable to such reporting persons,
except that Thomas Lynch failed to timely file a Form 4 reporting options
granted in October 2007.





Audit
Committee





In March
2004, the board of directors formed an Audit Committee. The members of the Audit
Committee are Tom L. Schaffnit (Chair), Thomas C. Lynch, Wayne E. Meyer, and
Paul G. Casner, Jr.  The Audit Committee oversees and monitors
management’s and the independent outside auditors’ participation in the
accounting and financial reporting processes and the audits of the financial
statements of the Company. The Audit Committee has the responsibility to
appoint, compensate, retain and oversee the work of the outside independent
auditors and to consult with the independent auditors and the appropriate
officers of the Company on matters relating to outside auditor independence,
corporate financial reporting, accounting procedures and policies, adequacy of
financial accounting and operating controls, and the scope of audits. The Audit
Committee is governed by an Audit Committee Charter, which was adopted on March
10, 2004 and amended on March 17, 2008.




20





Since our
inception, we have had a limited number of employees and generated limited
revenues, most of which have been from a single customer.  In light of
the foregoing, and the need to conserve our financial resources to execute our
business plan, our Board of Directors concluded that the benefits of retaining
an individual who qualifies as an “audit committee financial expert,” would be
outweighed by the costs of retaining such a person.  As a result, no
member of our Board of Directors qualifies as an “audit committee financial
expert.”





Code of
Ethics





We have
adopted a written code of ethics that applies to our directors, officers and
employees, including our principal executive officer, principal financial
officer, principal accounting officer or controller, or persons performing
similar functions.   Our Code of Business Conduct and Ethics is
also available on our website, www.mikros.us, or without charge upon written
request directed to Patricia A. Kapp, Secretary, Mikros Systems Corporation, 707
Alexander Road, Building Two, Suite 208, Princeton, New Jersey
08540.





ITEM
10.  EXECUTIVE COMPENSATION





The
following table provides certain summary information concerning compensation
earned by the executive officers named below (“named executive officers”) during
the fiscal years ended December 31, 2007 and 2006.





SUMMARY
COMPENSATION TABLE


Name
      andPrincipal
      Position
            
            Year
            
            
            Salary
              ($)
            
            
            Option
              Awards
              ($)(1)
            
            
            Total
              ($)Thomas
      J. Meaney
            
            
            2007
            
            
            
            120,300
            
            
            
            544.00
            
            
            
            120,844President,Chief
      Executive Officer and Chief Financial Officer
            
            
            2006
            
            
            
            103,666
            
            
            
            --
            
            
            
            --Walter
      T. Bristow
            
            
            2007
            
            
            
            129,778
            
            
            
            815.00
            
            
            
            130,593Vice  President
      of Engineering
            
            
            2006
            
            
            
            109,723
            
            
            
            --
            
            
            
            --


(1) The
assumptions used in calculating the value of the option awards and the amount
recognized for financial statement reporting purposes in 2007 is located in Note
5 of our financial statements.





OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR−END TABLE





The
following table sets forth information regarding unexercised stock options for
each named executive officer outstanding as of December 31, 2007:





Name
            Number
      of
              securities
      underlying
              unexercised
      options
              (#)unexercisable
            Option
              exercise
              price
              ($)
            Option
              expiration
              dateThomas
      J. Meaney
            25,000
      (1)
            0.55
            10/3/17Walter
      T. Bristow
            50,000
      (2)
            0.55
            10/3/17





(1) The stock
options were granted on October 3, 2007 and vest in equal  annual
installments over a three year period commencing on the date of
grant.


(2) The stock
options were granted on October 3, 2007 and vest in equal annual installment
over a five year period commencing on the date of grant.


21




Narrative
Disclosure to Summary Compensation and Outstanding Equity Awards
Tables




On October 3, 2007, we
issued options to Mr. Meaney and Mr. Bristow under the 2007 Stock Incentive Plan
to purchase 25,000 and 50,000 shares of common stock, respectively, at an
exercise price of $0.55 per share,the
last sales price of our common stock as reported on the OTCBB on the date of
grant.  Mr. Meaney’s options vest in three equal annual installments
and terminate ten years from the date of grant.   Mr. Bristow’s
options vest in five equal annual installments and terminate ten years from the
date of grant.  For a more complete description of the terms and
conditions of these options, including a description of the change in control
provisions, please see “2007
Stock Incentive Plan” in Item 11 below.





On
December 19, 2007 we revised our arrangement with Mr. Meaney, who apportions his
professional time between the Company and his consulting firm which provides
services to various defense contractors.  In recent years, he has
devoted approximately 50% of his professional time to the Company.  In
light of the resignation of our Executive Vice President on September 1, 2007,
the growth of the Company in 2007, and the importance of Mr. Meaney to
both  our operations and continued growth, Mr. Meaney has been
required to and is expected to continue to devote substantial additional time
and attention to the Company.  In recognition of the forgoing,
effective January 1, 2008, we expect Mr. Meaney to devote approximately 75% of
his professional time to the Company which will result in his annual
compensation increasing from approximately $105,000 to approximately
$160,000.





COMPENSATION
OF DIRECTORS





The
following table sets forth the compensation for 2007 for those persons who
served as members of our Board of Directors during 2007:





Name(1)
            Option
      Awards (2)
              ($)
            Total
              ($)Wayne
      E. Meyer
            544.00
      (3)
            544.00Paul
      G. Casner
            544.00
      (3)
            544.00Thomas
      C. Lynch
            544.00
      (3)
            544.00Tom
      L. Schaffnit
            544.00
      (4)
            544.00





(1)
            Thomas
      J. Meaney is not listed in the above table because all compensation
      received for serving on our board of directors is included in the Summary
      Compensation Table above.


(2)
            The
      assumptions used in calculating the value of the option awards and the
      amount recognized for financial statement reporting purposes in 2007 is
      located in Note 2 of our consolidated financial
  statements.


(3)
            As
      of December, 31, 2007, Messrs. Meyer, Casner and Lynch each owned an
      option to purchase 25,000 shares of our common stock at an exercise price
      of $0.55 per share.


(4)
            As
      of December 31, 2007, Mr. Schaffnit owned options to purchase 361,818 and
      25,000 shares of common stock at exercise prices of $0.1658 and $0.55 per
      share, respectively.





22




Narrative Disclosure To
Director Compensation Table




We do not
pay cash compensation to any of our directors.  Each member of our
board of directors receives reimbursement of expenses incurred in connection
with his or her services as a member of our board or board committees.
On October 3, 2007, we issued options to each member of our board of directors
under the 2007 Stock Incentive Plan to purchase 25,000 shares of common
stock  at an exercise price of $0.55 per share, the last sales price
of our common stock as reported on the OTCBB on the date of
grant.  The options vest in three equal annual installments and
terminate ten years from the date of grant.  For a more complete
description of the terms and conditions of these options, including a
description of the change in control provisions, please see “2007 Stock Incentive Plan”in
Item 11 below.




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





Common
Stock





The
following table sets forth certain information, as of March 24, 2008 with
respect to holdings of our common stock by (i) each person known by us to be the
beneficial owner of more than 5% of the total number of shares of common stock
outstanding as of such date, (ii) each of our directors and executive officers,
and (iii) all directors and executive officers as a group.  Except as
otherwise indicated, the address of each person is 707 Alexander Road, Suite
208, Princeton, New Jersey 08540.




Name
      of

              Beneficial
              Owner
            Amount
      and
              Nature  of
      Beneficial
              Ownership
      (1)
            Percent
              of
              Class5%
      Beneficial Owners:Princeton
      Valuation Consultants, L.L.C.
            2,920,050(2)
            8.9%5
      Vaughn Drive Princeton, New Jersey 08540Directors
      and Executive Officers:Walter
      T. Bristow
            13,000(3)
            *220
      Commerce Drive, Suite 300Fort
      Washington, Pennsylvania 19034Paul
      G. Casner
            382,400(4)
            1.2%Patricia
      A. Kapp
            163,000(3)
            *Thomas
      C. Lynch
            382,400(4)
            1.2%Thomas
      J. Meaney
            5,527,842(5)
            16.5%Wayne
      E. Meyer
            3,071,650(6)
            9.7%Tom
      L. Schaffnit
            1,103,277(7)
            3.4%All
      Current Directors and Officers
            10,643,569
            31.2%as
      a Group (seven persons)




*Less than
1%





23


(1)
            The
      beneficial owners and amount of securities beneficially owned have been
      determined in accordance with Rule 13d-3 under the Exchange Act and, in
      accordance therewith, includes all shares of our common stock that may be
      acquired by such beneficial owners within 60 days of March 24, 2008 upon
      the exercise or conversion of any options, warrants or other convertible
      securities.  This table has been prepared based on 31,766,753
      shares of common stock outstanding on March 24, 2008.  Except as
      otherwise indicated, all shares are beneficially owned and the sole
      investment and voting power is held by the persons
  named.


(2)
            Includes
      202,500 shares issuable upon conversion of Convertible Preferred Stock and
      695,883 shares issuable upon conversion of Series B Convertible Preferred
      Stock.


(3)
            Does
      not include 50,000 shares issuable upon exercise of options that are
      subject to vesting.


(4)
            Does
      not include 25,000 shares issuable upon exercise of options subject to
      vesting


(5)
            Includes
      50,000 shares issuable upon conversion of Convertible Preferred Stock and
      1,949,775 shares issuable upon conversion of Series B Convertible
      Preferred Stock.  Does not include 25,000 shares issuable upon
      exercise of options that are subject to
vesting.


(6)
            Includes
      30,000 shares issuable upon conversion of Series B Convertible Preferred
      Stock.  Does not include 25,000 shares issuable upon exercise of
      options subject to vesting.


(7)
            Includes
      361,818 shares issuable upon the exercise of options.  Does not
      include 25,000 shares issuable upon exercise of options subject to
      vesting.








Convertible Preferred
Stock





The
following table sets forth certain information, as of March 24, 2008, with
respect to holdings of our Convertible Preferred Stock by (i) each person known
by us to be the beneficial owner of more than 5% of the total number of shares
of our Convertible Preferred Stock outstanding as of such date, (ii) each of our
directors and executive officers, and (iii) all directors and executive officers
as a group.  Except as otherwise indicated, the address of each person
is 707 Alexander Road, Suite 208, Princeton, New Jersey 08540.





Name

              of
      Beneficial
              Owner
            Amount
      and

              Nature
      ofBeneficial
              Ownership
      (1)
            Percent
              Of
              Class5%
      Beneficial Owners:Princeton
      Valuation Consultants L.L.C.
            202,500
            79.4%5
      Vaughn Drive Princeton, New Jersey 08540Directors
      and Executive Officers:Walter
      T. Bristow
            --
            --220
      Commerce Drive, Suite 300Fort
      Washington, Pennsylvania 19034Paul
      G. Casner
            --
            --Patricia
      A. Kapp
            --
            --Thomas
      C. Lynch
            --
            --Thomas
      J. Meaney
            50,000
            19.6%Wayne
      E. Meyer
            --
            --Tom
      L. Schaffnit
            --
            --All
      Current Directors and Officers
            50,000
            19.6%as
      a Group (seven persons)




(1)Except as
otherwise indicated, all shares are beneficially owned and the sole investment
and voting power is held by the persons named.
  24





Series B Convertible
Preferred Stock





The
following table sets forth certain information, as of March 24, 2008, with
respect to holdings of our Series B Convertible Preferred Stock by (i) each
person known by us to be the beneficial owner of more than 5% of the total
number of shares of our Series B Convertible Preferred Stock outstanding as of
such date, (ii) each of our directors and  executive officers, and
(iii) all directors and executive officers as a group.  Except as
otherwise indicated, the address of each person is 707 Alexander Road, Suite
208, Princeton, New Jersey 08540.





Name
      of
              Beneficial
              Owner
            Amount
      and
              Nature
      of Beneficial
              Ownership(1)
            Percent
              of
              Class5%
      Beneficial Owners:The
      Mercantile & General Reinsurance
            91,342
            8.3%Company,
      PLC Moorfields HouseMoorfields
      London EC2Y 9ALPrinceton
      Valuation Consultants, L.L.C.
            231,961
            21.0%5
      Vaughn DrivePrinceton,
      New Jersey 08540Directors
      and Executive Officers:Walter
      T. Bristow
            --
            --220
      Commerce Drive, Suite 300Fort
      Washington, Pennsylvania 19034Paul
      G. Casner
            --
            --Thomas
      C. Lynch
            --
            --Patricia
      A. Kapp
            --
            --Thomas
      J. Meaney
            649,925
            59.0%Wayne
      E. Meyer
            10,000
            *Tom
      L. Schaffnit
            --
            --All
      Current Directors and Officers
            659,925
            59.0%as
      a Group (seven persons)




* Less
than 1%




(1) Except as otherwise
indicated, all shares are beneficially owned and the sole investment and
voting power is held by the persons named.
  25





Redeemable Series C
Preferred Stock





The
following table sets forth certain information, as of March 24, 2008, with
respect to holdings of our Redeemable Series C Preferred Stock by (i) each
person known by us to be the beneficial owner of more than 5% of the total
number of shares of our Redeemable Series C Preferred Stock outstanding as of
such date, (ii) each of our directors and executive officers, and (iii) all
directors and executive officers as a group.  Except as otherwise
indicated, the address of each person is 707 Alexander Road, Suite 208,
Princeton, New Jersey 08540.




Name
      of
              Beneficial
              Owner
            Amount
      and
              Nature
      of Beneficial
              Ownership
      (1)
            Percent
              of
              ClassDirectors
      and Executive Officers:Walter
      T. Bristow
            --
            --220
      Commerce Drive, Suite 300Fort
      Washington, Pennsylvania 19034Paul
      G. Casner
            --
            --Patricia
      A. Kapp
            --
            --Thomas
      C. Lynch
            --
            --Thomas
      J. Meaney
            5,000
            100.0%Wayne
      E. Meyer
            --
            --Tom
      L. Schaffnit
            --
            --All
      Current Directors and Officers
            5,000
            100.0%as
      a Group (seven persons)




* 
Less than 1%




(1)
Except as otherwise indicated, all shares are beneficially owned and the sole
investment and voting power is held by the persons named.




26





Series D Preferred
Stock





The
following table sets forth certain information, as of March 24, 2008, with
respect to holdings of our Series D Preferred Stock by (i) each person known by
us to be the beneficial owner of more than 5% of the total number of shares of
our Series D Preferred Stock outstanding as of such date, (ii) each of our
directors and  executive officers, and (iii) all directors and
executive officers as a group.  Except as otherwise indicated, the
address of each person is 707 Alexander Road, Suite 208, Princeton, New Jersey
08540.




Name
              of
      Beneficial
              Owner
            Amount
      and
              Nature
      of Beneficial
              Ownership(1)
            Percent
              Of
              Class5%
      Beneficial Owners:Princeton
      Valuation Consultants, L.L.C.
              5
      Vaughn Drive
              Princeton,
      New Jersey 08540
            138,000
            20.0%Frederick
      C. Tecce
              c/o
      Mikros Systems Corporation 707 Alexander Road, Bldg 2, Suite 208
      Princeton, New Jersey 08540
            138,000
            20.0%JoAnne
      E. Burns
              c/o
      Mikros Systems Corporation 707 Alexander Road, Bldg 2, Suite 208
      Princeton, New Jersey 08540
            69,000
            10.0%George
      W. Taylor
              c/o
      Mikros Systems Corporation 707 Alexander Road, Bldg 2, Suite 208
      Princeton, New Jersey 08540
            69,000
            10.0%


Directors
      and Executive Officers:Walter
      T. Bristow
              220
      Commerce Drive, Suite 300
              Fort
      Washington, Pennsylvania 19034
            --
            --Paul
      G. Casner
            --
            --Patricia
      A. Kapp
            --
            --Thomas
      C. Lynch
            --
            --Thomas
      J. Meaney
            138,000
            20.0%Wayne
      E. Meyer
            138,000
            20.0%Tom
      L. Schaffnit
            --
            --All
      Current Directors and Officers as a Group (seven persons)
            276,000
            40.0%





(1) Except as
otherwise indicated, all shares are beneficially owned and the sole investment
and voting power is held by the persons named.




27




EQUITY
COMPENSATION PLAN INFORMATION





The
following is certain information about our equity compensation plans as of
December 31, 2007:





(a)
            (b)
            (c)Number
      of securities
              to
      be issued upon
              exercise
      of outstanding
              options,
      warrants
              and
      rights
            Weighted
      –average
              exercise
      price of
              outstanding
      options,
              warrants
      and rights
            Number
      of securities
              remaining
      available for
              future
      issuance under
              equity
      compensation plans
              (excluding
      securities
              reflected
      in column (a)Plan
      CategoryEquity
      compensation plans approved by security holders
            361,818
            $0.1658
            0Equity
      compensation plans not approved by security holders
            430,000
            $0.55
            2,570,000Total
            791,000
            $0.38
            2,570,000





2007 Stock Incentive
Plan





On August
6, 2007, we adopted the Mikros Systems Corporation 2007 Stock Incentive Plan
(the "Plan").  Awards  may be made under the Plan for up to
3,000,000 shares of our common stock in the form of stock  options or
restricted stock awards.  Awards may be made to our employees,
officers or directors as well as our consultants or advisors.  The
Plan is administered by our Board of Directors which has full and final
authority to interpret the Plan, select the persons to whom awards may be
granted, and determine the amount, vesting and all other terms of any
awards.  To the extent permitted by applicable law, our Board may
delegate any or all of its powers under the Plan to one or more committees
or


subcommittees
of the Board.  The Plan is not subject to the provisions of the
Employee Retirement Income Security Act of 1974, as amended, and is not a
"qualified plan" under Section 401(a) of the Internal Revenue Code of 1986, as
amended.  The Plan has not been approved by our
shareholders.  As a result, "incentive stock options" as defined under
Section 422 of the Internal Revenue Code may not be granted under the Plan until
such approval is received for the Plan. The Plan terminates on August 5,
2017.





All stock
options granted under the Plan are exercisable for a period of up to ten years
from the date of grant, are subject to vesting as determined by the Board upon
grant, and have an exercise price equal to not less than the fair market value
of our common stock on the date of grant.  Unless otherwise determined
by the Board, awards may not be transferred except by will or the laws of
descent and distribution.  The Board has discretion to determine the
effect on any award granted under the Plan of the death, disability, retirement,
resignation, termination  or other change in employment or other
status of any participant in the Plan.  The maximum number of shares
of common stock for which awards may be granted to a participant under the Plan
in any calendar year is 300,000.





Upon the
occurrence of a "reorganization event", defined as the merger of the Company
with or into another corporation as a result of which our common stock is
converted into or exchanged for cash, securities or other property or is
cancelled, the exchange of all shares of our common stock for cash, securities
or other property pursuant to a share exchange, or the liquidation of the
Company, the Board may take any number of actions.  These actions
include, providing for all options outstanding under the Plan to be assumed by
the acquiring corporation or to become immediately vested and exercisable in
full, and in the case of a reorganization event in which holders of our common
stock receive a cash payment, to provide for a cash payment to holders of
options equal to the excess, if any, of the per share cash payment over the
exercise price of such options.  As of the date of this report, we
have issued options under the Plan to purchase 430,000 shares of common
stock.




28





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





Thomas J.
Meaney is the guarantor of our obligations to Sun National Bank under our
$50,000 revolving line of credit which is secured by substantially all of our
assets.  Mr. Meaney is the President, Chief Financial Officer, and a
director of the Company.





We pay
Wayne E. Meyer $1,500 per month for use of office space at Three Crystal Park,
2231 Crystal Drive, Suite 1005 in Arlington, Virginia.  Mr. Meyer is
the Chairman of the Board of Directors of the Company.





Director
Independence





Upon
consideration of the criteria and requirements regarding director independence
set forth in the rules of the National Association of Securities Dealers, Inc.
(“NASD”), our board of directors has determined that Paul G. Casner,
Thomas  C. Lynch, Tom L. Schaffnit (Chair) and Wayne E. Meyer, who
constitute a majority of its members, are independent.





With
regard to our audit committee, the board of directors has determined that
Messrs. Casner, Lynch and Schaffnit are independent and that Mr. Meyer does not
satisfy the independence criteria for audit committee members set forth in NASD
Rule 4350(d) and Rule 10A-3(b)(1) of the Exchange Act.





ITEM
13.  EXHIBITS





The
following exhibits are filed as part of this report:





3.1
            Certificate
      of Incorporation [Exhibit 2(I)].3.2
            By-laws
      [Exhibit 2(II)].3.3
            Form
      of Certificate of Amendment to Certificate of Incorporation [Exhibit
      2(III)].3.4
            Form
      of Certificate of Amendment of Incorporation with respect to increase of
      authorized shares [Exhibit IV)].3.5
            Certificate
      of Designations of Series B Preferred Stock and Series  C
      Preferred Stock [Exhibit 4.1 to Form 8-K filed September 12,
      1988].3.6
            Certificate
      of Designations of Series D Preferred Stock [Exhibit 4.16 to Form 10-K for
      1993 filed March 30, 1994].10.1
            Mikros
      Systems Corporation 2007 Stock Incentive Plan [Exhibit 10.1 to Form 8-K
      filed August 9, 2007]14.1
            Mikros
      Systems Corporation Code of Business Conduct and Ethics [Exhibit 14 to
      Form 10-QSB filed August 11, 2006].31.1
            Certification
      of principal executive officer and principal financial officer pursuant to
      Section 302 of the Sarbanes-Oxley  Act of
  2002.32.1
            Certification
      of principal executive officer and principal financial officer pursuant to
      Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
    1350.








ITEM
14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES.





Audit
Fees





We have
engaged Beard Miller Company LLP for the audit of our financial statements for
the years ended December 31, 2007 and 2006 and the reviews of the
financial statements included in each of our quarterly reports on Form 10-QSB
during the years ended December 31, 2007 and 2006 for a fee of $30,986
and $28,261, respectively.





Audit-Related
Fees





There
were no fees billed by our independent accountants for audit-related services
during the fiscal years ended December 31, 2007 and 2006.




29





Tax Fees





There
were no fees billed by our independent accountants for tax fees for the years
ended December 31, 2007 and 2006.




All Other
Fees





There
were no fees billed by our independent accountants for non-audit services during
the years ended December 31, 2007 and 2006.





Audit Committee Pre-Approval
Policies and Procedures





All
auditing services and non-audit services (other than the de minimis exceptions
provided by Exchange Act) provided to us by our independent accountants must be
pre-approved by the Audit Committee. Any future Audit-Related Fees and Tax Fees
will be pre-approved by the Audit Committee.




30





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.







MIKROS SYSTEMS
      CORPORATIONDated:
      March 27, 2008
              By:
              /s/ Thomas
      J. MeaneyThomas
      J. Meaney
                President
      and Chief Financial Officer
                (Principal
      Accounting Officer)





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 indicated and on the date indicated.




SIGNATURES
              
              
              DATE/s/
      Wayne E. Meyer,
              
              
              March
      27, 2008Wayne
      E. Meyer, Chairman




/s/
      Paul G. Casner,
                
                
                March
      27, 2008Paul
      G. Casner, Director
 /s/
      Thomas C. Lynch
                  
                  
                  March
      27, 2008Thomas
      C. Lynch, Director
 /s/
      Thomas J. Meaney
                    
                    
                    March
      27, 2008Thomas
      J. Meaney, Director
 /s/Tom
      L. Schaffnit
                      
                      
                      March
      27, 2008Tom
      L. Schaffnit, Director
 
 31




Report
of Independent Registered Public Accounting Firm





To the
Board of Directors and Shareholders of


MIKROS
SYSTEMS CORPORATION





We have
audited the accompanying balance sheet of Mikros Systems Corporation (the
Company) as of December 31, 2007, and the related statements of income,
shareholders’ equity, and cash flows for the years ended December 31, 2007 and
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 audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the 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 audits 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 audits provide a reasonable basis for our opinion.





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Mikros Systems Corporation as of
December 31, 2007, and the results of its operations and its cash flows for the
years ended December 31, 2007 and 2006 in conformity with accounting principles
generally accepted in the United States of America.





/s/ Beard Miller Company
LLP


Beard
Miller Company LLP


Reading,
Pennsylvania


March 26,
2008




32




MIKROS
SYSTEMS CORPORATION
 BALANCE
SHEET
 
 DECEMBER
      31,
                2007ASSETSCURRENT
      ASSETSCash
              
              $
              404,557Receivables
      on Government Contracts
              
              
              303,469Other
      Current Assets
              
              
              17,547TOTAL
      CURRENT ASSETS
              
              
              725,573Patents
      and Trademarks
              
              
              5,383Less:
      Accumulated Amortization
              
              
              (422
              )4,961PROPERTY
      AND EQUIPMENTEquipment
              
              
              14,625Furniture
      & Fixtures
              
              
              9,26423,889Less:  Accumulated
      Depreciation
              
              
              (10,786
              )13,103Deferred
      Tax Asset
              
              
              70,500TOTAL
      ASSETS
              
              $
              814,137LIABILITIES AND
      SHAREHOLDERS’ EQUITYCURRENT
      LIABILITIESAccrued
      Payroll and Payroll Taxes
              
              $
              86,757Accounts
      Payable
              
              
              217,545Taxes
      Payable
              
              
              14,009TOTAL
      CURRENT LIABILITIES
              
              
              318,311Long-term
      Liabilities
              
              
              14,460TOTAL
      LIABILITIES
              
              
              332,771REDEEMABLE
      SERIES C PREFERRED STOCKpar
      value $.01 per share, authorized 150,000 shares, issuedand
      outstanding 5,000 shares (involuntary liquidation value -
      $80,450)
              
              
              80,450SHAREHOLDERS’
      EQUITYPreferred
      Stock, Series B convertible, par value $.01 per share,authorized
      1,200,000 shares, issued and outstanding 1,102,433shares
      (involuntary liquidation value - $1,102,433)
              
              
              11,024Preferred
      Stock, convertible, par value $.01 per share, authorized2,000,000
      shares, issued and outstanding 255,000 shares (involuntaryliquidation
      value - $255,000)
              
              
              2,550Preferred
      Stock, Series D, par value $.01 per share, 690,000 sharesauthorized,
      issued and outstanding (involuntary liquidation value-
      $1,518,000)
              
              
              6,900Common
      Stock, par value $.01 per share, authorized 60,000,000
    shares,issued
      and outstanding 31,766,753 shares
              
              
              317,668Capital
      in excess of par value
              
              
              11,430,668Accumulated
      Deficit
              
              
              (11,367,894
              )TOTAL
      SHAREHOLDERS’ EQUITY
              
              
              400,916TOTAL
      LIABILITIES AND SHAREHOLDERS’ EQUITY
              
              $
              814,137


See
Notes to Financial Statements




33




MIKROS
SYSTEMS CORPORATION


STATEMENTS
OF INCOME








Years
      Ended December 31,2007
            
            
            2006Contract
      Revenues
            
            $
            3,078,492
            
            
            $
            2,274,868Cost
      of sales
            
            
            1,828,184
            
            
            
            1,361,255Gross
      margin
            
            
            1,250,308
            
            
            
            913,613ExpensesEngineering
            
            
            436,104
            
            
            
            324,357General
      and Administrative
            
            
            651,155
            
            
            
            429,391Total
      expenses
            
            
            1,087,259
            
            
            
            753,748Income
      from operations
            
            
            163,049
            
            
            
            159,865Other
      Income:Interest
            
            
            5,543
            
            
            
            285Net
      income before income taxes
            
            
            168,592
            
            
            
            160,150Income
      tax expense
            
            
            2,781
            
            
            
            30,350Net
      income
            
            $
            165,811
            
            
            $
            129,800Basic
      and diluted earnings per share
            
            $
            0.00
            
            
            $
            0.00Weighted
      average number of shares outstanding
            
            
            31,766,753
            
            
            
            31,766,753








See
Notes to Financial Statements




34




MIKROS
      SYSTEMS CORPORATION
              STATEMENTS
      OF SHAREHOLDERS’ EQUITY
              YEARS
      ENDED DECEMBER 31, 2007 AND 2006Preferred
      Stock Series B
            
            
            Preferred
      Stock
            
            
            Preferred
      Stock Series D$0.01
      Par Value
            
            
            $0.01
      Par Value
            
            
            $0.01
      Par ValueNumber
            
            
            Par
            
            
            Number
            
            
            Par
            
            
            Number
            
            
            Parof
      shares
            
            
            Value
            
            
            of
      shares
            
            
            Value
            
            
            of
      shares
            
            
            ValueBalance,
      January 1, 2006
            
            
            1,102,433
            
            
            $
            11,024
            
            
            
            255,000
            
            
            $
            2,550
            
            
            
            690,000
            
            
            $
            6,900Net
      Income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Balance,
      December 31 ,2006
            
            
            1,102,433
            
            
            $
            11,024
            
            
            
            255,000
            
            
            $
            2,550
            
            
            
            690,000
            
            
            $
            6,900Stock
      Compensation - Options
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Net
      income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Balance,
      December 31, 2007
            
            
            1,102,433
            
            
            $
            11,024
            
            
            
            255,000
            
            
            $
            2,550
            
            
            
            690,000
            
            
            $
            6,900Capital
      inCommon
      Stock
              $0.01
      Par Value
            
            
            Excess
      of
              Par
      Value
            
            
            Accumulated
              Deficit
            
            
            TotalNumber
            
            
            Parof
      shares
            
            
            ValueBalance,
      January 1, 2006
            
            
            31,766,753
            
            
            $
            317,668
            
            
            $
            11,422,976
            
            
            $
            (11,663,505
            )
            
            $
            (97,613
            )Net
      Income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            129,800
            
            
            
            129,800Balance,
      December 31, 2006
            
            
            31,766,753
            
            
            $
            317,668
            
            
            $
            11,422,976
            
            
            $
            (11,533,705
            )
            
            $
            227,413Stock
      Compensation - Options
            
            
            -
            
            
            
            -
            
            
            
            7,692
            
            
            
            -
            
            
            
            7,692Net
      Income
            
            
            -
            
            
            
            -
            
            
            
            
            
            
            
            165,811
            
            
            
            165,811Balance,
      December 31, 2007
            
            
            31,766,753
            
            
            $
            317,668
            
            
            $
            11,430,668
            
            
            $
            (11,367,894
            )
            
            $
            400,916





See
Notes to Financial Statements




35





MIKROS
SYSTEMS CORPORATION


STATEMENTS
OF CASH FLOWS








Years
      Ended December 312007
            
            
            2006Cash
      Flow From Operating Activities:Net
      income
            
            $
            165,811
            
            
            $
            129,800Adjustments
      to reconcile net incometo
      net cash provided by operating activities:Depreciation
      and Amortization
            
            
            5,243
            
            
            
            9,170Deferred
      Tax (Benefit) Expense
            
            
            (22,500
            )
            
            
            17,000Stock Compensation - Options
            
            
            7,692
            
            
            
            0Net
      Changes in Operating Assets and LiabilitiesIncrease
      in Receivables on Government Contracts
            
            
            (101,747
            )
            
            
            (99,363
            )Increase
      in Other Current Assets
            
            
            (1,747
            )
            
            
            1,093Increase
      in Accounts Payable
            
            
            114,906
            
            
            
            44,468Increase
      in Accrued Payroll and Payroll Taxes
            
            
            11,639
            
            
            
            24,681Increase
      in Accrued Expenses and Other Liabilities
            
            
            6,576
            
            
            
            904Net
      Cash Provided By Operating Activities
            
            
            185,873
            
            
            
            127,753Cash
      Flow From Investing Activities:Purchase
      of Property and Equipment
            
            
            (10,775
            )
            
            
            (1,590
            )Costs
      associated with patent and trademark development
            
            
            0
            
            
            
            (6,858
            )Net
      Cash Used In Investing Activities:
            
            
            (10,775
            )
            
            
            (8,448
            )Net
      Increase in Cash
            
            
            175,098
            
            
            
            119,305Cash,
      beginning of year
            
            
            229,459
            
            
            
            110,154Cash,
      end of year
            
            $
            404,557
            
            
            $
            229,459Supplementary
      Cash Flows Information:Income
      taxes paid
            
            $
            7,242
            
            
            $
            6,610








See
Notes to Financial Statements
  36




MIKROS
SYSTEMS CORPORATION


NOTES TO
FINANCIAL STATEMENTS








NOTE
1 -  THE COMPANY





Mikros
Systems Corporation (“Mikros”, “the Company”, “we” or “us”) is an advanced
technology company specializing in the research and development of electronic
systems technology primarily for military applications.  Classified by
the U.S. Department of Defense (DoD) as a small business, our capabilities
include technology management, electronic systems engineering and integration,
radar systems engineering, combat/command, control, communications, computers
and intelligence (C4I) systems engineering, and communications
engineering.





Our
headquarters are located at 707 Alexander Road, Suite 208, in Princeton, New
Jersey.





Our
primary business focus is to pursue Small Business Innovation Research (SBIR)
programs from the U.S. Department of Defense, Department of Homeland Security,
and other governmental authorities, and to expand this government funded
research and development into products, services, and business areas of the
Company.  Since 2002, we have been awarded a number of Phase I, II,
and III SBIR contracts.




NOTE
2 - SIGNIFICANT ACCOUNTING POLICIES





Use of
Estimates





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenues and expenses during
the reporting period.  Actual results could differ from those
estimates.





Receivables on Government
Contracts





Receivables
on Government Contracts are stated at outstanding balances, less an allowance
for doubtful accounts, if necessary.  When necessary, the allowance
for doubtful accounts is established through provisions charged against
operations.  Receivables deemed to be uncollectible are charged
against the allowance and subsequent recoveries, if any, are credited to the
allowance.  The allowance for doubtful accounts is maintained at a
level considered adequate to provide for losses that can be reasonably
anticipated. Management’s periodic evaluation of the adequacy of the allowance
is based on past experience, agings of the receivables, adverse situations that
may affect a customers’ ability to pay, current economic conditions and other
relevant factors.  This evaluation is inherently subjective as it
requires estimates that may be susceptible to significant
change.  Unpaid balances remaining after the stated payment terms are
considered past due.  No allowance for doubtful accounts was deemed
necessary by management at December 31, 2007.





Cash





Cash
balances consist of balances that are immediately available to the Company and
are held by financial institutions.  These balances may, at times,
exceed FDIC insured limits.





Property and
Equipment





Equipment
is stated at cost. Depreciation is computed using the straight-line method based
on estimated useful lives of  3 years. Depreciation expense amounted
to $4,050 and $3,615 for years ended December 31, 2007 and 2006,
respectively.




37





Furniture
and Fixtures is stated at cost.  Depreciation expense is computed
using the straight-line method based on estimated useful lives of  7
years.  Depreciation expense amounted to $854 and $0 for the years
ended December 31, 2007 and 2006.





Earnings per Common
Share





The
Company reports earnings per share in accordance with the provisions of
Statement of Financial Accounting Standards No. 128 (SFAS No. 128), Earnings Per
Share.  SFAS No. 128 requires the presentation of basic and
diluted earnings per share in conjunction with the disclosure of the methodology
used in computing such earnings per share.  Basic earnings per share
excludes the dilutive effect of securities and other contracts and is computed
by dividing income available to common stockholders by the weighted average
common shares outstanding during the period.  Diluted earnings per
share takes into account the potential dilution that could occur if securities
or other contracts to issue common stock were exercised and converted into
common stock.





Stock
Options





The
Company has various fixed stock option plans which are described in Note 5 that
provide for the grant of stock options to eligible employees and
directors.





Prior to
January 1, 2006, the Company’s stock option plans were accounted for under the
recognition and measurement provisions of APB Opinion No. 25 (Opinion 25),
“Accounting for Stock Issued to Employees,” and related Interpretations, as
permitted by FASB Statement No. 123, “Accounting for Stock Based Compensation.”
No stock-based employee compensation cost was recognized in the Company’s
statements of income through December 31, 2005, as all options granted under the
plan had an exercise price equal to the market value of the underlying common
stock on the date of the grant.  Statement No. 123(R ) replaces
Statement No. 123, supersedes APB Opinion No. 25 and requires compensation costs
related to share-based payment transactions to be recognized in the financial
statements over the period that an employee provides service in exchange for the
award.  Effective January 1, 2006, the Company adopted the fair value
recognition provisions of FASB Statement No. 123(R ), “Share Based Payment,”
using the modified-prospective transition method.  Under that
transition method, compensation cost recognized after January 1, 2006 includes:
(a) compensation cost for all share-based payments granted prior to, but not yet
vested, as of January 1, 2006 based on the grant-date fair value calculated in
accordance with the provision of Statement No. 123, and (b) compensation cost
for all share-based payments granted subsequent to December 31, 2005, based on
the grant-date fair value calculated in accordance with the provision of
Statement 123(R ).  The Company had no unvested stock options at
December 31, 2005, therefore, the adoption of Statement 123( R) relates only to
share-based payments granted after January 1, 2006.  The Company
granted no stock options in 2006.





On
October 3, 2007, the Company issued stock options to each member of their board
of directors, plus key employees and consultants under the Company’s 2007 Stock
Incentive Plan.  Directors were granted a total of 125,000 options,
which vest over a three-year period.  Key employees were granted a
total of 305,000 options, which vest over a five-year period.  The
options are exercisable at $.55 per share, the last sales price of the Company’s
common stock as reported on the OTCBB on the date of grant.  The
options have a term of 10 years and vest in equal annual installments over a
three or five year period, commencing on the date of grant.





In
accordance with the recognition provision on SFAS No. 123(R) the Company
recognized stock-based compensation expense of $7,692  for the year
ended December 31, 2007, in the accompanying financial statements.  No
tax benefits were recognized related to this stock based
compensation.  The fair value of each option grant is estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions:





3  year
      options
            5
      year optionsExpected
      Life
            3
            5Expected
      volatility
            80%
            95%Risk-free
      interest rate
            4.07%
            4.44%




38




The
expected life of options granted is based on the vesting period,
respectively.  The expected volatility is based on historical stock
prices.  The risk-free interest rate is determined using the U.S.
Treasury bill rate at the time of grant.  The Company has never paid a
dividend, and as such the dividend yield is zero.  The forfeiture rate
is unknown.





Revenue
Recognition





The
Company is engaged in contracts with the Federal Government to help fund the
costs of certain research and development activities as the Company attempts to
develop certain technology to be utilized by the US Department of
Defense.  The contracts are cost plus fixed fee contracts and the
Company recognizes revenue under the contracts as it incurs reimbursable
costs.  Each bill has a component for the reimbursable direct costs
and a portion of overhead and fixed fees.  The overhead and fixed fees
are being billed to the government at the rate permitted by the Defense Contract
Audit Agency.





Certain
arrangements are different from production-type contracts and qualify as
research and development by meeting all of the following
conditions:





-
            Activities
      performed in connection with the contractual arrangement qualify as
      research and development as defined by FASB Statement No. 2-
            The
      contractor retains a right to the data and results of the research and
      development activities-
            The
      contractual arrangement obligates the contractor to perform only on a
      best-efforts basis to achieve the agreed-upon objectives of the research
      and development activity, rather than to deliver a product or service
      meeting defined performance or other (such as design)
      specifications-
            At
      the inception of the contract, the contractor and the customer enter into
      the arrangement with the expectation that costs will be incurred in excess
      of amounts to be funded. This condition will be met if contractual or
      other documentation specifically evidences acknowledgment of this
      expectation by both the contractor and the customer. Implicit in this
      condition is the existence of significant uncertainty at the date the
      contractor enters into the arrangement regarding the likelihood of
      successfully securing follow-on contracts related to the research and
      development activity-
            The
      research and development arrangement is not combined with other contracts
      or segmented in accordance with paragraphs 35  through 42 of SOP
      81-1-
            The
      federal government is the sole or principal expected ultimate customer
      (including foreign military sales) for the research and development
      activity or products directly resulting from the R&D activity subject
      to the arrangements





Similarly,
when third party contractors are utilized in relation to these contracts, the
Company reviews their performance and upon the Company’s determination that the
costs are reimbursable under the contract, the Company records revenue for such
costs in the period incurred.





Patents and
Trademarks





The
Company holds two patents covering digital signal processing technology and its
base scheme of implementing Link-11.  The Company has also developed
and continues to develop intellectual property (technology and data) under its
SBIR contracts. Under the ADEPT® development program, the Company is in the
process of filing for a patent covering its key technology with the U.S. Patent
and Trademark Office. The request for a trademark for the product name “ADEPT”
has been approved by the U.S. Patent and Trademark Office, and ADEPT® is now a
registered trademark of the Company.




39





Under
SBIR data rights, the Company is protected from unauthorized use of
SBIR-developed technology and data for a period of five years after acceptance
of all items to be delivered under a particular SBIR contract or any follow-on
contract.





In 2007
and 2006, the Company amortized the costs of its patents and trademarks in the
amount of $339 and $5,555, respectively. These costs are being amortized over
their 10 year legal lives.





Income
Taxes





The
Company accounts for income taxes under the liability method prescribed by SFAS
No. 109, Accounting for Income
Taxes.  Deferred tax assets and liabilities are determined
based on the difference between the financial statement and the tax bases of
assets and liabilities as measured by the enacted tax rates that are expected to
be in effect when these differences reverse.  Deferred tax expense
(benefit) is the result of changes in deferred tax assets and
liabilities.  Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some portion
of a deferred tax asset will not be realized.





Deferred
Rent





Rent
expense under operating leases providing for rent abatements and fixed
non-contingent escalations is recognized on a straight-line basis over the term
of each individual underlying lease. The cumulative net excess of recorded rent
expense over lease payments made is reflected on the balance sheet within
long-term liabilities.





Recently Issued Accounting
Standards





In July
2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes – an interpretation of FASB Statement No. 109” (FIN 48), which
clarifies the accounting for uncertainty in tax positions.  This
Interpretation requires that companies recognize in their financial statements
the impact of a tax position, if that position is more likely than not of being
sustained on audit, based on the technical merits of the
position.  The provisions of FIN 48 were effective for fiscal years
beginning after December 15, 2006, with the cumulative effect of the change in
accounting principle recorded as an adjustment to opening retained
earnings.  Adoption of this pronouncement did not impact the Company’s
financial position.





In
September 2006, the FASB issued Statement No. 157, Fair Value Measurements,
which defines fair value, establishes a framework for measuring fair value under
GAAP, and expands disclosures about fair value measurements.  FASB
Statement No. 157 applies to other accounting pronouncements that require or
permit fair value measurements.  The new guidance is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and for interim periods within those fiscal years.





In
December 2007, the FASB issued proposed FASB Staff Position (FSP) 157-b,
“Effective Date of FASB Statement No. 157,” that would permit a one-year
deferral in applying the measurement provisions of Statement No. 157 to
non-financial assets and non-financial liabilities (non-financial items) that
are not recognized or disclosed at fair value in an entity’s financial
statements on a recurring basis (at least annually). Therefore, if the change in
fair value of a non-financial item is not required to be recognized or disclosed
in the financial statements on an annual basis or more frequently, the effective
date of application of Statement 157 to that item is deferred until fiscal years
beginning after November 15, 2008 and interim periods within those fiscal
years. This deferral does not apply, however, to an entity that applies
Statement 157 in interim or annual financial statements before proposed FSP
157-b is finalized. The Company is currently evaluating the impact, if any, that
the adoption of FASB Statement No. 157 and FSP 157-b will have on the Company’s
operating income or net earnings.





In May
2007, the FASB issued FASB Staff Position (“FSP”) FIN 48-1 “Definition of
Settlement in FASB Interpretation No. 48” (FSP FIN 48-1). FSP FIN 48-1 provides
guidance on how to determine whether a tax position is effectively settled for
the purpose of recognizing previously unrecognized tax benefits. FSP FIN 48-1 is
effective retroactively to January 1, 2007. The implementation of this standard
did not impact the Company’s financial position or results of
operations.




40




In
February 2007, the FASB Issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – Including an amendment of FASB
Statement No. 115”.  SFAS No. 159 permits entities to choose to
measure many financial instruments and certain other items at fair
value.  Unrealized gains and losses on items for which the fair value
option has been elected will be recognized in earnings at each subsequent
reporting date.  SFAS No. 159 is effective for the Company January 1,
2008.  The Company is evaluating the impact, if any, that the adoption
of SFAS No. 159 will have on its financial statements.




FASB
statement No. 141 (R) “Business Combinations” was issued in December of 2007.
This Statement establishes principles and requirements for how the acquirer of a
business recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree. The Statement also provides guidance for recognizing and measuring the
goodwill acquired in the business combination and determines what information to
disclose to enable users of the financial statements to evaluate the nature and
financial effects of the business combination. The guidance will become
effective as of the beginning of a company’s fiscal year beginning after
December 15, 2008. This new pronouncement will impact the Company’s accounting
for business combinations completed beginning January 1, 2009.





In
December 2007, the FASB issued statement No. 160 “Noncontrolling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51” was issued in
December of 2007. This Statement establishes accounting and reporting standards
for the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. The guidance will become effective as of the beginning of a
company’s fiscal year beginning after December 15, 2008. The Company does not
expect  FASB No. 160 to have material impact on its financial
statements.





In
December 2007,  Staff Accounting Bulletin No. 110 (SAB 110)
amends and replaces Question 6 of Section D.2 of Topic 14,“Share-Based Payment,” of
the Staff Accounting Bulletin series. Question 6 of Section D.2 of Topic 14
expresses the views of the staff regarding the use of the “simplified” method in
developing an estimate of expected term of “plain vanilla” share options and
allows usage of the “simplified” method for share option grants prior to
December 31, 2007. SAB 110 allows public companies which do not have
historically sufficient experience to provide a reasonable estimate to continue
use of the “simplified” method for estimating the expected term of “plain
vanilla” share option grants after December 31, 2007.  SAB 110 is
effective January 1, 2008. The
Company does not expect SAB 110 to have a material impact on its financial
statements.





NOTE
3 – REDEEMABLE SERIES C PREFERRED STOCK AND SHAREHOLDERS’ EQUITY





Redeemable Series C
Preferred Stock





The
Redeemable Series C Preferred Stock is not convertible into any other class of
the Company’s stock and is subject to redemption at the Company’s option at any
time or if certain events occur, such as capital reorganizations,
consolidations, mergers, or sale of all or substantially all of the Company’s
assets. Upon any liquidation, dissolution or winding up of the Company, each
holder of Redeemable Series C Preferred Stock will be entitled to be paid,
before any distribution or payment is made upon any other class of stock of the
Company, an amount in cash equal to the redemption price for each share of
Redeemable Series C Preferred Stock held by such holder, and the holders of
Redeemable Series C Preferred Stock will not be entitled to any further payment.
The redemption price per share is $16.09.





Series B Convertible
Preferred Stock





Each
share of Series B Preferred Stock is convertible into three shares of the
Company’s common stock at a price of $.33 per share of common stock to be
received upon conversion and entitles the holder thereof to cast three votes on
all matters to be voted on by the Company’s shareholders.  Upon any
liquidation, dissolution, or winding up of the Company, each holder of Series B
Preferred Stock will be entitled to be paid, after all distributions of payments
are made upon the Redeemable Series C Preferred Stock and before any payment is
made upon the Company’s Convertible Preferred Stock, an amount in cash equal to
$1.00 for each share of Series B Preferred Stock held, and such holders will not
be entitled to any further payment.




41





Convertible Preferred
Stock





Each
share of the convertible preferred stock can be redeemed at the Company’s option
for $1 per share or can be converted into shares of the Company’s common stock.
Each share of preferred stock is convertible into one share of common stock.
This conversion rate is subject to adjustment in certain circumstances. Upon any
liquidation, dissolution or winding up of the Company, each holder will be
entitled to their redemption price once shareholders of Redeemable Series C
Preferred Stock and Series B Preferred stock have been fully paid.





Series D Preferred
Stock





The
Series D Preferred Stock provides for an annual cumulative dividend of $.10 per
share.  The shares are not convertible into any other class of stock
and are subject to redemption at the Company’s option at any time at a
redemption price of $1.00 per share plus all unpaid cumulative
dividends.  Upon liquidation, dissolution or winding up of the
Corporation, each holder of Series D Preferred Stock will be entitled to be
paid, after all distributions or payments are made upon the Corporation’s
Convertible Preferred Stock, Series B Preferred Stock, and Redeemable Series C
Preferred Stock, an amount in cash equal to the Redemption Price for each share
of Series D Preferred Stock held by such holder. The holders of Series D
Preferred Stock will not be entitled to any further payment


.


During
January 2006, the holders of the shares of Series D Preferred Stock agreed to
waive future accumulation of dividends, effective as of January 1, 2006. As of
December 31, 2005, there were dividends in arrears on shares of Series D
Preferred Stock of $828,000.  Such waiver does not affect dividends
accrued through December 31, 2005.  Accordingly, $828,000 of such
dividends in arrears remain outstanding at December 31, 2007.








NOTE
4 - INCOME TAXES





The
income tax provision is comprised of the following:





2007
            
            
            2006Current
      tax expense
            
            $
            25,281
            
            
            $
            13,350Deferred
      tax expense (benefit)
            
            
            (22,500
            )
            
            
            17,000Income
      Tax Expense
            
            $
            2,781
            
            
            $
            30,350





The
reconciliation between the statutory federal income tax rate and the Company’s
effective tax rate is as follows:








2007
            
            
            2006Federal
      statutory rate
            
            
            34.0
            %
            
            
            34.0
            %State
      taxes
            
            
            10.1
            
            
            
            6.0Permanent
      Differences
            
            
            9.1
            
            
            
            -Utilization
      of net operatingloss
      carry forwards andreduction
      of deferred tax assetvaluation
      allowance
            
            
            (51.6
            )
            
            
            (21.0
            )Effective
      tax rate
            
            
            1.6
            %
            
            
            19.0
            %








Total
available net operating loss carry forwards at December 31, 2007 are reflected
in the following schedule:




42




Year
            
            Available
      ForOf
            
            FederalExpiration
            
            Tax
      Purposes2010
            
            $
            236,0002011
            
            
            1,422,0002012
            
            
            339,0002019
            
            
            307,0002021
            
            
            77,0002022
            
            
            39,0002023
            
            
            107,000$
            2,527,000




During
2007, federal net operating loss carry forwards of approximately $205,000 were
utilized by the Company for purposes of the Company’s tax provision. The
Company’s valuation allowance associated with the related deferred tax assets
was reduced by approximately $79,000 and $35,000 in 2007 and 2006, respectively,
based on the Company’s anticipated profitability on existing contracts in the
near term. There were no net operating loss carry forwards available for state
tax purposes at December 31, 2007.





The
deferred tax asset consists of the following as of December 31:





2007Deferred
      tax asset:Fixed
      Assets & Other
            
            $
            15,306Net
      operating losscarry
      forwards
            
            
            859,165Valuation
      allowance
            
            
            (803,971
            )Net
      deferred tax asset
            
            $
            70,500





NOTE
5 - STOCK OPTIONS





Incentive
Stock Option Plan





The
Company has outstanding stock options for the purchase of the Company’s common
stock.  These options were issued pursuant to an Incentive Stock
Option Plan adopted by the Company in 1992. The ability to grant options under
this plan expired in 2002.  Specific terms of the remaining options
outstanding under this plan are set forth in individual stock option
agreements.  Generally, the exercise price of the options is the
market price of the Company’s stock on the date that the option was
granted.





A summary
of the status of the Company’s Incentive Stock Option Plan as of December 31,
2007 and 2006 is presented below:





Weighted
            
            
            
            
            
            
            
            
            WeightedWeighted
            
            
            Average
            
            
            
            
            
            Weighted
            
            
            AverageAverage
            
            
            Remaining
            
            
            
            
            
            Average
            
            
            RemainingExercise
            
            
            Contractual
            
            
            
            
            
            Exercise
            
            
            ContractualCommon
      Stock Options:
            
            2007
            
            
            Price
            
            
            Life
      (Years)
            
            
            2006
            
            
            Price
            
            
            Life
      (Years)Options
      outstanding beginning of year
            
            
            361,818
            
            
            $
            0.1658
            
            
            
            2.16
            
            
            
            391,818
            
            
            $
            0.1658
            
            
            
            3.38Granted
            
            
            -
            
            
            
            -
            
            
            
            
            
            
            
            -
            
            
            
            -
            
            
            
            -Exercised
            
            
            -
            
            
            
            -
            
            
            
            
            
            
            
            -
            
            
            
            -
            
            
            
            -Cancelled
            
            
            -
            
            
            
            -
            
            
            
            
            
            
            
            (30,000
            )
            
            
            -
            
            
            
            -Options
      outstanding end of year
            
            
            361,818
            
            
            $
            0.1658
            
            
            
            
            
            
            
            361,818
            
            
            $
            0.1658Options
      exercisable, end of year:
            
            
            361,818
            
            
            
            0.1658
            
            
            
            
            
            
            
            361,818
            
            
            
            0.1658





The
aggregate intrinsic value of options outstanding and exercisable under the
Incentive Stock Option Plan at December 31, 2007 and 2006 was approximately
$150,000 and $0, respectively.





The
aggregate intrinsic value of stock options above represents the total pre-tax
intrinsic value (the amount by which the current market value of the underlying
stock exceeds the exercise price of the options) that would have been received
by the option holders had they exercised their options on December 31, 2007 and
2006.  This amount changes based on the changes in the market value in
Mikros Systems Corporation stock.





2007
Incentive Stock Option Plan





On
October 3, 2007, the Company issued stock options to each member of their board
of directors, key employees and consultants under the Company’s 2007 Stock
Incentive Plan.  Directors were granted options to purchase a total of
125,000 shares, which vest over a three-year period.  Key employees
were granted a total of 305,000 shares and these options vest over a five-year
period.  The options are exercisable at $.55 per share, the last sales
price of the Company’s common stock as reported on the OTCBB on the date of
grant.  The options have a term of 10 years and vest in equal annual
installments over a three or five year period, commencing on the date of
grant.




43





WeightedWeighted
            
            
            AverageAverage
            
            
            RemainingExercise
            
            
            ContractualCommon
      Stock Options:
            
            2007
            
            
            Price
            
            
            Life
      (Years)Options
      outstanding beginning of yearGranted
            
            
            430,000
            
            
            $
            0.55
            
            
            
            9.75Exercised
            
            
            -
            
            
            
            -Cancelled
            
            
            -
            
            
            
            -Options
      outstanding end of year
            
            
            430,000
            
            
            $
            0.55
            
            
            
            9.75Weighted-average
      fair value of options granted during the year
            
            
            
            
            
            $
            0.30





As of
December 31, 2007, there were no options exercisable.





The
aggregate intrinsic value of options outstanding at December 31, 2007 under the
2007 Stock Incentive Plan was approximately $12,900.





The
aggregate intrinsic value of stock options above represents the total pre-tax
intrinsic value (the amount by which the current market value of the underlying
stock exceeds the exercise price of the options) that would have been received
by the option holders had they exercised their options on December 31,
2007.  This amount changes based on the changes in the market value in
Mikros Systems Corporation stock.  The fair value (present value of
the estimated future benefit to the option holder) of each option grant is
estimated on the date of the grant using the Black-Scholes option pricing
model.





There
were a total of 430,000 unvested options at December 31, 2007, with a fair value
of approximately $ 132,000 and approximately $124,000 remained to be recognized
in expense.





NOTE
6 – EARNINGS PER SHARE





The
Company’s calculation of earnings per share is as follows:





2007
            
            
            2006Net
      income applicable to common shareholders
            
            $
            165,811
            
            
            $
            129,800Average
      basic shares outstanding
            
            
            31,766,753
            
            
            
            31,766,753Assumed
      conversion of preferred stock
            
            
            3,562,299
            
            
            
            3,562,299Effect
      of dilutive options
            
            
            170,182
            
            
            
            139,596Average
      dilutive shares outstanding
            
            
            35,499,234
            
            
            
            35,468,648Earnings
      per share – basic and diluted
            
            $
            0.00
            
            
            $
            0.00





430,000
shares issuable upon exercise of options were excluded due to their
anti-dilutive effect for the year ended December 31, 2007.





No shares were excluded due to their
anti-dilutive effect for the year ended December 31, 2006.




44




NOTE
7 – LINE OF CREDIT





On
November 16, 2006, Mikros Systems Corporation (the “Company”) entered into a
$50,000 revolving line of credit with Sun National Bank (the “Lender”) evidenced
by a Promissory Note (the “Note”) made by the Company in favor of the
Lender.  The revolving line of credit will be available to the Company
for two years.  Commencing on November 14, 2008, advances will no
longer be available under the revolving line of credit.  At that time,
the then outstanding principal balance will be converted into a five-year term
loan with payments based on a five-year amortization schedule.  The
term loan will be payable in 60 equal monthly installments and be due in full on
November 14, 2013. During the first five months of the revolving line of credit,
any outstanding principal balance will bear interest at 5.99% per
annum.  Thereafter, any outstanding principal balance will bear
interest equal to the Sun National Bank Prime Rate.  The loan is
secured by substantially all of the Company’s assets pursuant to a Commercial
Security Agreement (the “Security Agreement”) made by the Company in favor of
the Lender and is guaranteed by Thomas J. Meaney, the Company’s President and
Chief Executive Officer. There were no outstanding amounts under this line of
credit at December 31, 2007 and 2006.





NOTE
8 – COMMITMENTS





The
Company leases its executive office and marketing facilities through
month-to-month leases. The Company executed a lease for engineering office space
located in Fort Washington, Pennsylvania that commenced on September 1, 2005 and
continues for 63 months.  The terms of the lease include an annual
rate increase through the end of the lease.  The Company’s
engineering-research, design and development facility lease agreement runs
through November 30, 2010. Total rent expense during 2007 and 2006 was $62,237
and $57,582, respectively.  The rent expense during 2007 is shown net
of month-to-month sub-lease payments of approximately $225 by a related
party.  The Company’s obligation under the non cancellable operating
leases is as follow:





2008
            
            $
            66,2022009
            
            $
            67,9292010
            
            $
            63,755TOTAL
            
            $
            197,886











42