UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549







FORM
10-Q







xQUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period
ended June 30, 2008


or


oTRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period
from _____to_____.





Commission
File Number: 000-14801




Mikros
Systems Corporation


(Exact
name of registrant as specified in its charter)





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





707 Alexander Road,
      Building Two, Suite 208, Princeton, New Jersey
  08540(Address
      of principal executive offices)





(609)
      987-1513(Issuer’s
      Telephone Number, Including Area
Code)




Indicate
by check mark whether the registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934  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. xYes oNo




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of  “large accelerated filer”, “accelerated filer” and
“ smaller reporting company” in Rule 12b-2 of the Exchange Act.




Large accelerated filer
            o
            Accelerated filer
            oNon-accelerated
      filer
            o(Do not check if a
      smaller reporting company)
            Smaller reporting company
            x




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




APPLICABLE
ONLY TO CORPORATE ISSUERS




State the
number of shares outstanding of each of the issuer's classes of common stock, as
of the latest practicable date:  There were 31,766,753 issued and
outstanding shares of the issuer’s common stock, $.01 par value per share, on
August 12, 2008.









TABLE OF
CONTENTS




PAGE
      #PART
      I.
            FINANCIAL
      INFORMATION
            1Item
      1.
            Financial
      Statements.
            1Condensed
      Balance Sheets as of December 31, 2007 and June 30, 2008
      (unaudited)
            1Condensed
      Statements Of Income for the Three and Six Months Ended June 30, 2008 and
      2007 (unaudited)
            3Condensed
      Statements Of Cash Flows for the Six Months Ended June 30, 2008 and 2007
      (unaudited)
            4Notes
      To The Unaudited Condensed Financial Statements
            5Item
      2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            13Item
      4T.
            Controls
      and Procedures.
            19PART
      II.
            OTHER
      INFORMATION
            19Item
      6.
            Exhibits.
            19SIGNATURES
            20









PART
I.  FINANCIAL INFORMATION





Item
1. Financial Statements


MIKROS
SYSTEMS CORPORATION


CONDENSED
BALANCE SHEET


(UNAUDITED)




June
      30,
              2008
            
            
            December
      31,
              2007ASSETSCURRENT
      ASSETSCash
      and Cash Equivalents
            
            $
            468,873
            
            
            
            404,557Receivables
      on Government Contracts
            
            
            295,079
            
            
            
            303,469Other
      Current Assets
            
            
            38,262
            
            
            
            17,547TOTAL
      CURRENT ASSETS
            
            
            802,214
            
            
            
            725,573Patents
      and Trademarks
            
            
            5,383
            
            
            
            5,383Less:
      Accumulated Amortization
            
            
            (591
            )
            
            
            (422
            )4,792
            
            
            
            4,961PROPERTY
      AND EQUIPMENTEquipment
            
            
            14,625
            
            
            
            14,625Furniture
      and Fixtures
            
            
            9,264
            
            
            
            9,26423,889
            
            
            
            23,889Less:
      Accumulated Depreciation
            
            
            (13,430
            )
            
            
            (10,786
            )10,459
            
            
            
            13,103Deferred
      Tax Asset
            
            
            30,757
            
            
            
            70,500TOTAL
      ASSETS
            
            $
            848,222
            
            
            
            814,137




See
Accompanying Notes to Unaudited Condensed Financial Statements.




1




MIKROS
SYSTEMS CORPORATION


CONDENSED
BALANCE SHEET (UNAUDITED)


(continued)





June
      30,
              2008
            
            
            December
      31,
              2007LIABILITIES
      AND SHAREHOLDERS’ EQUITYCURRENT
      LIABILITIESAccrued
      Payroll and Payroll Taxes
            
            $
            103,689
            
            
            $
            86,757Accounts
      Payable and Accrued Expenses
            
            
            180,883
            
            
            
            217,545Taxes
      Payable
            
            
            4,249
            
            
            
            14,009TOTAL
      CURRENT LIABILITIES
            
            
            288,821
            
            
            
            318,311Long-term
      Liabilities
            
            
            13,103
            
            
            
            14,460TOTAL
      LIABILITIES
            
            
            301,924
            
            
            
            332,771REDEEMABLE
      SERIES C PREFERRED STOCK par value $.01 per share, authorized 150,000
      shares,Issued
      and outstanding 5,000 shares (involuntary liquidation value -
      $80,450)
            
            
            80,450
            
            
            
            80,450SHAREHOLDERS’
      EQUITYPreferred
      Stock, Series B convertible, par value $.01 per share, authorized
      1,200,000 shares, issuedand
      outstanding 1,102,433 shares (involuntary liquidation value -
      $1,102,433)
            
            
            11,024
            
            
            
            11,024Preferred
      Stock, convertible, par value $.01 per share, authorized 2,000,000 shares,
      issued andoutstanding
      255,000 shares (involuntary liquidation value - $255,000)
            
            
            2,550
            
            
            
            2,550Preferred
      Stock, Series D, par value $.01 per share 690,000 shares authorized,
      issued and outstanding(involuntary
      liquidation value - $1,518,000)
            
            
            6,900
            
            
            
            6,900Common
      Stock, par value $.01 per share, authorized 60,000,000 shares, issued and
      outstanding31,766,753
      shares
            
            
            317,668
            
            
            
            317,668Capital
      in excess of par value
            
            
            11,450,482
            
            
            
            11,430,668Accumulated
      Deficit
            
            
            (11,322,776
            )
            
            
            (11,367,894
            )TOTAL
      SHAREHOLDERS’ EQUITY
            
            
            465,848
            
            
            
            400,916TOTAL
      LIABILITIES AND SHAREHOLDERS’ EQUITY
            
            $
            848,222
            
            
            $
            814,137




See
Accompanying Notes to Unaudited Condensed Financial Statements.




2




MIKROS
SYSTEMS CORPORATION


CONDENSED
STATEMENTS OF INCOME


(UNAUDITED)




Three
      Months Ended,
            
            
            Six
      Months EndedJune
      30, 2008
            
            
            June
      30, 2007
            
            
            June
      30, 2008
            
            
            June
      30, 2007Revenues:Contract
      Revenue
            
            $
            1,062,832
            
            
            $
            844,935
            
            
            $
            1,714,114
            
            
            $
            1,639,885Cost
      of Sales
            
            
            617,672
            
            
            
            520,246
            
            
            
            924,026
            
            
            
            1,006,480Gross
      Margin
            
            
            445,160
            
            
            
            324,689
            
            
            
            790,088
            
            
            
            633,405Expenses:Engineering
            
            
            157,055
            
            
            
            96,271
            
            
            
            285,430
            
            
            
            191,704General
      & Administrative
            
            
            210,801
            
            
            
            157,540
            
            
            
            405,597
            
            
            
            310,749Total
      Expenses
            
            
            367,856
            
            
            
            253,811
            
            
            
            691,027
            
            
            
            502,453Income
      from Operations
            
            
            77,304
            
            
            
            70,878
            
            
            
            99,061
            
            
            
            130,952Other
      Income: Interest
            
            
            695
            
            
            
            2,419
            
            
            
            2,191
            
            
            
            2,589Income
      Before Income Tax Expense
            
            
            77,999
            
            
            
            73,297
            
            
            
            101,252
            
            
            
            133,541Income
      Tax Expense (Benefit)
            
            
            43,633
            
            
            
            (46,700)
            
            
            
            56,133
            
            
            
            (17,070)Net
      Income
            
            $
            34,366
            
            
            $
            119,997
            
            
            $
            45,119
            
            
            $
            150,611Basic
      and diluted earnings per share
            
            $
            0.00
            
            
            $
            0.00
            
            
            $
            0.00
            
            
            $
            0.00Basic
      weighted average number of Shares outstanding
            
            
            31,766,753
            
            
            
            31,766,753
            
            
            
            31,766,753
            
            
            
            31,766,753Diluted
      Weighted Average number of Shares outstanding
            
            
            35,231,234
            
            
            
            35,449,489
            
            
            
            35,237,012
            
            
            
            35,453,895




See
Accompanying Notes to Unaudited Condensed Financial Statements.




3




MIKROS
SYSTEMS CORPORATION


CONDENSED STATEMENTS
OF CASH FLOWS


(UNAUDITED)




Six
      Months EndedJune
      30, 2008
            
            
            June
      30, 2007Cash
      Flow From Operating Activities:Net
      Income
            
            $
            45,119
            
            
            $
            150,611Adjustments
      to reconcile Net Income tonet
      cash provided by Operating Activities:Depreciation
      and Amortization
            
            
            2,813
            
            
            
            2,323Deferred
      Tax Provision (Benefit)
            
            
            39,743
            
            
            
            (34,100)Recognition
      of  Stock Option Expense
            
            
            19,813
            
            
            
            -Net
      Changes in Operating Assets and Liabilities(Increase)
      Decrease in:Receivables
      on Government Contracts
            
            
            8,390
            
            
            
            (186,995)Other
      Current Assets
            
            
            (20,715)
            
            
            
            (19,885)Increase
      (Decrease) in:Accounts
      Payable
            
            
            (83,462)
            
            
            
            109,711Accrued
      Payroll and Payroll Taxes
            
            
            16,932
            
            
            
            10,594Other
      Accrued Expenses
            
            
            35,683
            
            
            
            22,137Net
      Cash provided by Operating Activities
            
            
            64,316
            
            
            
            54,396Cash
      Flow from Investing Activities:Purchase
      of Furniture and Fixtures
            
            
            -
            
            
            
            (9,264)Net
      Cash used in Investing Activities
            
            
            -
            
            
            
            (9,264)Net
      Increase in Cash and Cash Equivalents
            
            
            64,316
            
            
            
            45,132Cash
      and Cash Equivalents, beginning of the period
            
            
            404,557
            
            
            
            229,459Cash
      and Cash Equivalents, end of period
            
            $
            468,873
            
            
            $
            274,591




See
Accompanying Notes to Unaudited Condensed Financial Statements.




4




MIKROS
SYSTEMS CORPORATION


NOTES
TO CONDENSED FINANCIAL STATEMENTS


June
30, 2008


(UNAUDITED)




NOTE 1 – Basis of
Presentation:




The
financial statements included herein have been prepared by Mikros Systems
Corporation (the “Company”),  pursuant to the rules and regulations of
the Securities and Exchange Commission.  Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to such rules and
regulations.  These financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company’s Annual
Report on Form 10-KSB for the year ended December 31, 2007.




In the
opinion of the Company’s management, the accompanying unaudited financial
statements contain all adjustments, consisting solely of those which are of a
normal recurring nature, necessary to present fairly its financial position as
of June 30, 2008, the results of its operations for the three and six months
ended June 30, 2008 and 2007, and its cash flows for the six months ended June
30, 2008 and 2007.




Interim
results are not necessarily indicative of results for the full fiscal
year.





NOTE 2 – REVENUE
RECOGNITION




The
Company is engaged in research and development contracts with the Federal
Government to develop certain technology to be utilized by the US Department of
Defense. The contracts are cost plus fixed fee contracts and the Company
accounts for these contracts within the scope of Chapter 11 of Accounting
Research Bulletin No. 43, Government Contracts or Statement of Position 81-1,
Accounting for Performance of Construction-Type and Certain Production-Type
Contracts using the percentage-of -completion accounting method. Under this
method, revenue is recognized based on the extent of progress towards completion
of the long term contract.





The
Company generally uses a variation of the cost to cost method to measure
progress for all long term contracts unless it believes another method more
clearly measures progress towards completion of the contract.





Revenues
are recognized as costs are incurred and include estimated earned fees, or
profit, calculated on the basis of the relationship between costs incurred and
total estimated costs at completion.





Unbilled
revenue reflects work performed, but not billed at the time, pending contractual
requirements. As of  June 30, 2008, we had $0 of unbilled
revenues.  Billings to customers in excess of revenue earned are
classified as advanced billings, and shown as a liability.  As of June
30, 2008, we had no advanced billings.




NOTE 3 – 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 at the option of the holder in the event of certain “organic changes”
(as defined in the Certificate of Designation of the Series C Preferred Stock),
such as capital reorganizations, consolidations, mergers, or sale of all or
substantially all of the Company’s assets. The Company has historically
interpreted this “organic change” to be outside its control.  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.




5




MIKROS
SYSTEMS CORPORATION


NOTES
TO CONDENSED FINANCIAL STATEMENTS


June
30, 2008


(UNAUDITED)







NOTE 4 – SHAREHOLDER’S
EQUITY




SERIES B CONVERTIBLE
PREFERRED STOCK




Shares of
Series B Preferred Stock are not entitled to any dividends. 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.  Each share of the Series B Preferred Stock 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.





CONVERTIBLE PREFERRED
STOCK





Each
share of convertible preferred stock is entitled to dividends when, as and if
declared by the Board of Directors of the Company and in the event any dividend
is payable to holders of the Company’s common stock, each share is entitled to
receive a dividend equal to the amount of such common stock dividend multiplied
by the number of shares of common stock into which each share of convertible
preferred stock may be converted.  Each share of the convertible
preferred stock can be redeemed at the Company’s option for $1.00 per share or
can be converted into shares of the Company’s common stock.  Each share of
convertible 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 his or her redemption price after holders of Redeemable Series C
Preferred Stock and Series B Preferred stock have been paid in
full.





SERIES D PREFERRED
STOCK





The
Series D Preferred Stock provided 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
Company, each holder of Series D Preferred Stock will be entitled to be paid,
after all distributions or payments are made upon the Company’s Convertible
Preferred Stock, Series B Preferred Stock, and Redeemable Series C Preferred
Stock, an amount in cash equal to $1.00 plus all unpaid cumulative dividends 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
undeclared dividends in arrears remain outstanding at June 30,
2008.




6




MIKROS
SYSTEMS CORPORATION


NOTES
TO CONDENSED FINANCIAL STATEMENTS


June
30, 2008


(UNAUDITED)






NOTE 5 – EARNINGS PER
SHARE




The
Company’s calculation of earnings per share is as follows for the periods
presented:




Three
      Months Ended
            
            
            Six
      Months EndedJune
      30, 2008
            
            
            June
      30, 2007
            
            
            June
      30, 2008
            
            
            June
      30, 2007Net
      income applicableto
      common Stockholders
            
            $
            34,366
            
            
            $
            119,997
            
            
            $
            45,119
            
            
            $
            150,611Average
      basicshares
      outstanding
            
            
            31,766,753
            
            
            
            31,766,753
            
            
            
            31,766,753
            
            
            
            31,766,753Assumed
      conversionof
      preferred stock
            
            
            3,307,299
            
            
            
            3,562,299
            
            
            
            3,307,299
            
            
            
            3,562,299Effect
      of dilutiveOptions
            
            
            157,182
            
            
            
            254,675
            
            
            
            162,960
            
            
            
            241,818Average
      dilutedshares
      outstanding
            
            
            35,231,234
            
            
            
            35,449,489
            
            
            
            35,237,012
            
            
            
            35,453,895Net
      earnings per common sharebasic
      and diluted
            
            $
            0.00
            
            
            $
            0.00
            
            
            $
            0.00
            
            
            $
            0.00




440,000
shares issuable upon exercise of options were excluded from calculating diluted
earnings per share due to their anti-dilutive effect for the three and six
months ended June 30, 2008.




No
options had an anti-dilutive effect, thus none were excluded for purposes of
calculating diluted earnings per share for the three and six months ended June
30, 2007.




7




MIKROS
SYSTEMS CORPORATION


NOTES
TO CONDENSED FINANCIAL STATEMENTS


June
30, 2008


(UNAUDITED)






NOTE 6 – INCOME TAX
MATTERS





The
Company routinely conducts an on-going analysis to review the deferred tax
assets and the related valuation allowance that it has recorded against deferred
tax assets, primarily associated with Federal net operating loss
carryforwards.  As a result of this analysis and actual results of
operations, the Company decreased its net deferred tax assets by $39,743 during
the six months ended June 30, 2008.   Income tax expense includes
expense associated with state tax liabilities.




NOTE 7 – SHARE BASED
COMPENSATION





Incentive
Stock Option Plan





Stock
options were issued pursuant to an Incentive Stock Option Plan adopted by the
Company in 1992.  This plan provided for ten-year options to purchase
up to 2,000,000 shares of Common Stock at a price equal to the market price of
the shares on date of grant, exercisable at the cumulative rate of 25% per
annum. 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.





As of June 30, 2008, 361,818 options
granted under this plan are still outstanding, fully vested and
exercisable.





2007
Stock Incentive Plan





On August
6, 2007, the Board of Directors 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 common stock in the form of stock options or
restricted stock awards.  Awards may be made to the Company’s
employees, officers, directors, consultants or advisors.  The Plan is
administered by the 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, the Board of Directors 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 the Company’s
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.




8


MIKROS
SYSTEMS CORPORATION
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 June
30, 2008
 (UNAUDITED)


Upon the
occurrence of a “reorganization event”, defined as the merger of the Company
with or into another corporation as a result of which the Company’s 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 the
Company’s 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.




On
October 3, 2007, the Company issued options under our 2007 Stock Incentive Plan
to certain of its employees, officers, directors, advisors and consultants to
purchase an aggregate of 430,000 shares of common stock at an exercise price of
$.55 per share, the last sales price of the Company’s common stock on the date
of grant.  The 125,000 options issued to the Company’s directors have
a term of ten years and vest in three equal annual installments over the three
year period commencing on the date of grant. The 305,000 options issued to the
Company’s employees, officers, advisors and consultants have a term of ten years
and vest in five equal annual installments over the five year period commencing
on the date of grant.




On March
17, 2008, the Company issued options under the 2007 Incentive Plan to an
employee to purchase an aggregate of 10,000 shares of common stock at an
exercise price of $.62 per share, the last sales price of the Company’s common
stock on the date of the grant.  The 10,000 share option issued to the
Company employee has a term of ten years and vests in five equal annual
installments over the five year period commencing on the date of
grant.




In
accordance with the recognition provisions of  SFAS No. 123(R) the
Company recognized stock-based compensation expense of $10,650 and $19,813 for
the three and six months periods ended June 30, 2008, in the accompanying
financial statements. No tax benefits were recognized related to this
stock-based compensation. The fair value of each option granted is estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions:




2007
      Grants
            
            
            
            
            
            2008
      Grants3
      year vesting options
            
            
            5
      year vesting options
            
            
            5
      year vesting optionsExpected
      Life
            
            
            3
            
            
            
            5
            
            
            
            7.5Expected
      volatility
            
            
            80
            %
            
            
            95
            %
            
            
            122
            %Risk-free
      interest rate
            
            
            4.07
            %
            
            
            4.24
            %
            
            
            2.71
            %




The
expected life of options granted is based on each 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 $0.




As of
June 30, 2008, there were no options exercisable under the 2007 Stock Incentive
Plan.




9


MIKROS
SYSTEMS CORPORATION
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 June
30, 2008
 (UNAUDITED)


The
aggregate intrinsic value of options outstanding June 30, 2008 under the 2007
Stock Incentive Plan was approximately $0 because the exercise price exceeded
the market value.





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 June 30,
2008.  This amount changes based on the changes on the market value of
the Company’s common 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 440,000 unvested options under the 2007 Stock Incentive Plan at
June 30, 2008, with a fair value of approximately $166,000 and approximately
$139,000 to be recognized in expense as compensation in future
periods.





NOTE 8 – RECENT ACCOUNTING
PRONOUNCEMENTS




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 adoption of
this pronouncement on January 1, 2008 did not have an impact on the Company’s
financial position, results of operations, and related financial statement
disclosures.





In
December 2007, the FASB issued FASB Staff Position (FSP) FAS 157-2, “Effective
Date of FASB Statement No. 157,” that permits 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 157-2 is finalized.
The adoption of FASB Statement No. 157 and FSP FAS 157-2 had no impact on the
Company’s financial statements.




10


MIKROS
SYSTEMS CORPORATION
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 June
30, 2008
 (UNAUDITED)


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 was effective for the Company January 1,
2008.  The adoption of SFAS No. 159 did not have any impact on the
Company.




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.  FASB No. 141(R ) will impact accounting for
business combinations after January 1, 2009.





In
December 2007, the FASB issued statement No. 160 “Noncontrolling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51”. 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 a
material impact on its financial statements.





In
December 2007, Staff Accounting Bulletin No. 110 (SAB 110) was
issued.  It 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 adoption of  SAB 110 did
not have a material impact on the Company’s financial statements.




11





CAUTIONARY
STATEMENT 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 Small Business
Innovative Research (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” in our Annual Report
on Form 10-KSB for the year ended December 31, 2007 filed with the Securities
and Exchange Commission.




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.




12





Item
2.   Management’s Discussion and Analysis of Financial Position
and Results of Operations




Mikros
Systems Corporation (the “Company”, “we” or “us”) was founded in 1978. We are 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.




Overview




Our
primary business focus is to pursue 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 three and
six months ended June 30, 2008 and 2007.  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.




Below is
a brief description of certain of the material projects we are working on at
this time.





Adaptive Diagnostic
Electronic Portable Testset (ADEPT®)




Originally
designated as the Multiple Function Distributed Test and Analysis Tool (MFDAT),
the Adaptive Diagnostic Electronic Programmable Test-Set (ADEPT®) began
as a SBIR investigation in 2002.   We produced an operational,
proof-of-concept, software demonstration/simulation model of an MFDAT system
during Phase I of the program.




During
Phase II, we produced a fully functioning, stand-alone prototype system capable
of performing alignment and maintenance procedures on the AN/SPY-1 radar, which
is part of the Navy’s Aegis Program. This system validated the concept of using
an automated test tool with a data collection capability to reduce AN/SPY-1A
alignment and calibration time.




We were
directed to commercialize the MFDAT technology in support of AN/SPY-1 Readiness
Initiatives, and our Navy customer has continued to fund ADEPT development
through a series of contracts awarded in Phase III of the SBIR
process.   We have reduced the size and weight of the initial
design by half, and established manufacturing processes necessary to
consistently produce the system in quantity.




13




Our
engineers recently completed integration of a SPY-1 transmitter alignment tool
developed by the radar’s manufacturer. This tool improves overall radar system
performance and is expected to be an invaluable tool for technicians aboard all
Aegis ships, especially those supporting the Navy’s Ballistic Missile Defense
(BMD) program.




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.




Radar Wireless Spectral
Efficiency




On May 1,
2006, we were awarded a follow-on SBIR Phase II contract valued at approximately
$750,000 to investigate implications of installing WiFi networks on aircraft
carriers (CVNs).  We developed the baseline version of the
AIRchitect-EMC “interference-aware” wireless network design tool, which is
designed to permit the Navy to optimize shipboard networks while avoiding
interference between the network and mission-critical shipboard RF systems, such
as radar and communications systems.




As part
of this program, our engineers 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, we measured the
shipboard RF environment during actual at-sea operating conditions aboard the
U.S. Navy amphibious assault ship USS KEARSARGE (LHD-3) during its underway
exercise in the Atlantic Ocean near Norfolk, Virginia.





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.




14




Additional
Contracts





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. We are
pursuing an SBIR Phase II follow-on contract with this customer. If
awarded,  we could receive $750,000 or more to further develop this
technology.





In May
2008, we were awarded two new contracts for follow-on work based on the
AIRchitect-EMC wireless network design tool developed under the RWSE Phase II
contract.  These are both pilot programs where the Navy is using
AIRchitect-EMC to design shipboard wireless networks for LHD amphibious ships
and CVN aircraft carriers.  If these programs are successful, we
believe there are significant related future opportunities to apply
AIRchitect-EMC more broadly as the Navy continues to expand wireless network
deployments.





The first
program is a subcontract to the Navy’s Classified Wireless Networks for Embedded
Forces program, which is a pilot program run by PMW160 and funded by the Office
of Naval Research Rapid Technology Transition program.  AIRchitect-EMC
will be used to help design a shipboard network for use by USMC Marine
Expeditionary Forces, and networks will be installed on two LHD
ships.  This program is funded initially at $50,000 in 2008, with
additional funding expected in 2009





The
second program is funded directly by the Navy’s PMW750 CVN program office, and
covers network design studies for the new aircraft carrier USS Gerald R.
Ford.  This program is valued at $100,000 in 2008, and if successful
may also result in additional funding in 2009.




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.





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 carriers, 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.




15





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.  For 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.  Building off of our successful SBIR Phase I contract to develop
self-powered ocean buoys, we are collaborating with Ocean Power Technologies,
Inc. in pursuing additional opportunities with the DoD and other defense
contractors.




Changes to Critical
Accounting Policies and Estimates




Our
critical accounting policies and estimates are set forth in our Annual Report on
Form 10-KSB for the fiscal year ended December 31, 2007.  As of June
30, 2008, there have been no changes to such 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, if any, 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.





Results of
Operations




Three
Months Ended June 30, 2008 and 2007




We
generated revenues of $1,062,832 during the three months ended June 30, 2008
compared to $844,935 for the same period in 2007, an increase of $217,897 or
25.8%.  The higher revenues in 2008 were primarily attributable to two
additional contracts and an increase in direct labor and material directs
costs.  These costs were billed and recognized as
revenue.





Cost of
sales consist of direct contract costs such as labor,
material, subcontracts, travel, and other direct costs.  Cost of
sales increased $97,426 or 18.7% to $617,672 during the three months ended June
30, 2008 compared to $520,246 for the three months ended June 30,
2007.  The increase resulted directly from higher direct labor and
material costs in 2008 and offset by reductions in other direct contract
costs.




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 costs for the three months ended June 30, 2008
were $157,055 compared to $96,271 for the three months ended June 30, 2007, an
increase of $60,784 or 63%.  The increase was due primarily to the
additional fringe benefits, engineering salaries, and incentive compensation
costs.




16




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, stock registrar and public company related costs,
travel, and unallowable expenses.  General and administrative costs
for the three months ended June 30, 2008 were $210,801 compared to $157,540 for
the three months ended June 30, 2007, an increase of $53,261 or
33.8%.  The increase in 2008 was due primarily to the addition of
IR&D salaries and related costs, increased professional fees, incentive
compensation costs, and $11,000 non cash expenses related to stock option
compensation.





We
recorded an income tax provision/ (benefit) of approximately $43,633 and
$(46,700) for the three months June 30, 2008 and 2007, respectively.  The
income tax provision for the three months ended June 30, 2008 was based upon our
2008 estimated effective annual tax rate of approximately 56.13%.  The
difference between the federal statutory tax rate and the estimated effective
tax rate in 2008 is primarily related to state taxes and other permanent book to
tax differences.





The net
income tax expense for the three months ended June 30, 2008 includes $13,190 of
current state income taxes and a decrease in the deferred tax assets associated
with the federal net operating loss carryforwards in the amount of
$30,443.





We generated $34,366 of net income
during the three months ended June 30, 2008 as compared to $119,997 during the
three months ended June 30, 2007, a decrease of $85,631 or71.4 %.  The decrease in net
income was due to additional engineering salaries, additional professional fees,
stock option compensation expenses, and incentive compensation costs and the
reduction of net deferred tax assets.





Six
Months Ended June 30, 2008 and 2007





We
generated revenues of $1,714,114 during the six months ended June 30, 2008
compared to $1,639,885 for the same period in 2007, a increase of $74,229 or
4.5%.  The higher revenues in 2008 were primarily attributable to two
additional contracts and an increase in direct labor costs which were billed and
recognized as revenue.





Cost of
sales consist of direct contract costs such as labor,
material, subcontracts, travel, and other direct costs.  Cost of
sales decreased $82,455 or 8.2% to $924,026 during the six months ended June 30,
2008 compared to $1,006,481 for the six months ended June 30,
2007.  The decrease resulted from lower subcontractor and direct other
contract costs during the six months ended June 30, 2008 as compared to the six
months ended June 30, 2007.




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 costs for the six months ended June 30 , 2008
were $285,430 compared to $191,704 for the six months ended June 30, 2007, an
increase of $93,726 or 49%.  The increase was due primarily to the
additional fringe benefits, engineering travel, salaries, consultant costs and
incentive compensation costs




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, stock registrar and public company related costs,
travel, and unallowable expenses.  General and administrative costs
for the six months ended June 30, 2008 were $405,597 compared to $310,749 for
the six months ended June 30, 2007, an increase of $94,848 or
30.5%.  The increase was due primarily to higher costs related to
increased general and administrative salaries, bid and proposal salaries and
related costs, additional legal, accounting and audit expenses, and
approximately $20,000 of non cash expenses related to stock option compensation
as compared to the six months ended June 30, 2008.




17





We
recorded an income tax provision/ (benefit) of approximately $56,133 and
$(17,070) for the six months June 30, 2008 and 2007, respectively.   The
income tax provision for the period ended June 30, 2008 is based upon our 2008
estimated effective annual tax rate of approximately 56.13%.  The
difference between the federal statutory tax rate and the estimated effective
tax rate in 2008 is primarily related to state taxes and other permanent book to
tax differences.





The net
income tax expense for the six months ended June 30, 2008 includes $16,390 of
current state income taxes and a decrease in the deferred tax assets associated
with the federal net operating loss carryforwards in the amount of
$39,743.





We
generated $45,119 of net income during the six months ended June 30,
2008 as compared to $150,611 during the six months ended June 30, 2007, a
decrease of $105,492 or 70%.  The decrease in net income was due to a
combination of increases in engineering and fringe benefits costs associated
with additional incentive compensation costs, additional professional fees,
and IR &D costs, and an increase of Income Tax Expense.




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.




During
the six months ended June 30, 2008, net cash provided  by operations
was $64,316 compared to $54,396 during the six months ended June 30,
2007.  The increase was primarily the result of an increase in other
accrued expenses and a decrease in government receivables during the six months
ended June 30, 2008.  We had working capital of $513,393 as of June
30, 2008 as compared to working capital of $407,261 at December 31,
2007.  The increase was due primarily to decreases in accounts payable
and accrued taxes of $93,000 and increases in cash of $64,000 and prepaid
insurance of $21,000 which were offset by an increase in incentive compensation
and payroll liability of $64,000.




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 June 30, 2008 and
2007.





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 any
such transaction will achieve profitability or positive cash flow.




18




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 $5,468.83, and is subject to an annual increase.




Off-Balance Sheet
Arrangements





As of
June 30, 2008, 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.





Item
4T.  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 June 30, 2008, 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.




There
were no changes in our internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) or 15d-15(f)) that occurred during the fiscal
quarter ended June 30, 2008, that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.




PART
II.  OTHER INFORMATION




Item
6.   Exhibits




Exhibits
      31.1
            Certification
      of principal executive officer and principal financial officer pursuant to
      Rules 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as
      amended, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of
      2002.





Exhibits
      32.1
            Certification
      of principal executive officer and principal financial officer pursuant to
      18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes
      Oxley Act of 2002.




19





SIGNATURES




Pursuant
to the requirements 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 CORPORATIONAugust
      13, 2008
              By:
              /s/ Thomas
      J. MeaneyThomas
      J. Meaney
                President,
      (Principal Executive Officer and
                  Principal
      Financial Officer)