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 March 31, 2009
 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(Registrant’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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). oYes   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
              Smaller reporting company
              x
 (Do not check if a smaller
reporting company)
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). oYes   xNo
  Indicate
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 May 12, 2009.
  
  TABLE OF
CONTENTS
  PAGE
      #PART
      I.
              FINANCIAL
      INFORMATION
              1Item
      1.
              Financial
      Statements.
              1Condensed  Balance
      Sheets as of  March 31, 2009 and December 31, 2008
      (unaudited)
              1Condensed
      Statements Of  Operations for the Three Months
      Ended  March 31, 2009 and 2008 (unaudited)
              3Condensed
      Statements Of Cash Flows for the Three Months Ended  March 31,
      2009 and 2008 (unaudited)
              4Notes
      To The Unaudited Condensed Financial Statements
              5Item
      2.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              11Item
      4T.
              Controls
      and Procedures
              16PART
      II.
              OTHER
      INFORMATION
              16Item
      6.
              Exhibits
              16SIGNATURES
              17
  
 
 PART
I.  FINANCIAL INFORMATION
 
 Item
1. Financial Statements
  MIKROS
SYSTEMS CORPORATION
 CONDENSED
BALANCE SHEET
 
  March
      31,
                2009
                (unaudited)
              
              
              December
      31,
                2008
                (unaudited)ASSETSCURRENT
      ASSETSCash
      and Cash Equivalents
              
              $
              380,956
              
              
              
              608,530Receivables
      on Government Contracts
              
              
              225,371
              
              
              
              169,766Other
      Current Assets
              
              
              56,892
              
              
              
              17,903TOTAL
      CURRENT ASSETS
              
              
              663,219
              
              
              
              796,199Patents
      and Trademarks
              
              
              5,383
              
              
              
              5,383Less:
      Accumulated Amortization
              
              
              (845)
              
              
              
              (760)4,538
              
              
              
              4,623PROPERTY
      AND EQUIPMENTEquipment
              
              
              16,515
              
              
              
              14,625Furniture
      and Fixtures
              
              
              9,264
              
              
              
              9,26425,779
              
              
              
              23,889Less:
      Accumulated Depreciation
              
              
              (15,918)
              
              
              
              (15,235)9,861
              
              
              
              8,654Deferred
      Tax Asset
              
              
              27,312
              
              
              
              18,000TOTAL
      ASSETS
              
              $
              704,930
              
              
              
              827,476
   See
Accompanying Notes to Condensed Financial Statements.
  1
  MIKROS
SYSTEMS CORPORATION
 CONDENSED
BALANCE SHEET
 (continued)
   March
      31,
                2009
                (unaudited)
              
              
              December
      31,
                2008
                (unaudited)LIABILITIES
      AND SHAREHOLDERS’ EQUITYCURRENT
      LIABILITIESAccrued
      Payroll and Payroll Taxes
              
              $
              103,320
              
              
              $
              98,193Accounts
      Payable and Accrued Expenses
              
              
              19,733
              
              
              
              143,654TOTAL
      CURRENT LIABILITIES
              
              
              123,053
              
              
              
              241,847Long-term
      Liabilities
              
              
              10,060
              
              
              
              11,170TOTAL
      LIABILITIES
              
              
              133,113
              
              
              
              253,017REDEEMABLE
      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
      outstanding  31,766,753 shares
              
              
              317,668
              
              
              
              317,668Capital
      in excess of par value
              
              
              11,475,899
              
              
              
              11,468,662Accumulated
      Deficit
              
              
              (11,322,674)
              
              
              
              (11,312,795)TOTAL
      SHAREHOLDERS’ EQUITY
              
              
              491,367
              
              
              
              494,009TOTAL
      LIABILITIES AND SHAREHOLDERS’ EQUITY
              
              $
              704,930
              
              
              $
              827,476
 
  See
Accompanying Notes to Condensed Financial Statements.
  2
  MIKROS
SYSTEMS CORPORATION
 CONDENSED
STATEMENTS OF OPERATIONS (UNAUDITED)
   Three
      Months Ended,March
      31,
                2009
              
              
              March
      31,
                2008Contract
      Revenue
              
              $
              507,310
              
              
              $
              651,282Cost
      of Revenue
              
              
              202,130
              
              
              
              306,354Gross
      Margin
              
              
              305,180
              
              
              
              344,928Expenses:Engineering
              
              
              154,565
              
              
              
              128,375General
      & Administrative
              
              
              173,100
              
              
              
              194,795Total
      Expenses
              
              
              327,665
              
              
              
              323,170Income
      (loss) from Operations
              
              
              (22,485
              )
              
              
              21,758Interest
      Income
              
              
              3
              
              
              
              1,495Income
      (Loss) Before Income Tax Expense
              
              
              (22,482
              )
              
              
              23,253Income
      Tax (Benefit) Expense
              
              
              (12,603
              )
              
              
              12,500Net
      (Loss) Income
              
              $
              (9,879
              )
              
              $
              10,753Basic
      and diluted (loss) earnings per share
              
              $
              -
              
              
              $
              -Basic
      weighted average number of Shares outstanding
              
              
              31,766,753
              
              
              
              31,766,753Diluted
      weighted average number of Shares outstanding
              
              
              31,766,753
              
              
              
              35,496,992
   See
Accompanying Notes to Condensed Financial Statements.
  3
  MIKROS
SYSTEMS CORPORATION
 CONDENSED
STATEMENTS OF CASH FLOWS
 (UNAUDITED)
   Three
      Months EndedMarch
      31,
                2009
              
              
              March
      31,
                2008Cash
      Flow From Operating Activities:Net
      (Loss) Income
              
              $
              (9,879)
              
              
              $
              10,753Adjustments
      to reconcile Net (Loss) Income toNet
      Cash used in Operating Activities:Depreciation
      and Amortization
              
              
              768
              
              
              
              1,496Deferred
      Tax (Benefit) Expense
              
              
              (9,312)
              
              
              
              9,300Stock
      Compensation Expense
              
              
              7,237
              
              
              
              9,164Net
      Changes in Operating Assets and Liabilities:(Increase)
      Decrease in Receivables on Government Contracts
              
              
              (55,605)
              
              
              
              40,255Increase
      in Other Current Assets
              
              
              (42,280)
              
              
              
              (32,374)(Decrease)
      in Accounts Payable and Accrued Expenses
              
              
              (29,940)
              
              
              
              (126,528)(Decrease)
      Increase  in Accrued Payroll and Payroll Taxes
              
              
              (86,673)
              
              
              
              19,629Net
      Cash used in Operating Activities
              
              
              (225,684)
              
              
              
              (68,305)Cash
      Flow from Investing Activities:Purchase
      of Furniture and Fixtures and Equipment
              
              
              (1,890)
              
              
              
              -Net
      Cash used in Investing Activities
              
              
              (1,890)
              
              
              
              -Net
      Decrease in Cash and Cash Equivalents
              
              
              (227,574)
              
              
              
              (68,305)Cash
      and Cash Equivalents, beginning of the period
              
              
              608,530
              
              
              
              404,557Cash
      and Cash Equivalents, end of period
              
              $
              380,956
              
              
              $
              336,252
   See
Accompanying Notes to Condensed Financial Statements.
  4
  MIKROS
SYSTEMS CORPORATION
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 (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-K for the year ended December 31, 2008.
  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 March 31, 2009, and the results of its operations and its cash flows for the
three months ended March 31, 2009 and 2008.
  Interim
results are not necessarily indicative of results for the full fiscal
year.
 
 NOTE 2 – RECENT ACCOUNTING
PRONOUNCEMENTS
 
 In June
2008, the Emerging Issues Task Force (“EITF”) ratified Issue No. 07-5,
“Determining Whether an Instrument (or Embedded Feature) Is Indexed to an
Entity’s Own Stock” (“EITF 07-5”).  EITF 07-5 clarifies how to
determine whether certain instruments or features were indexed to an entity’s
own stock.   The consensus will replace EITF 01-6 as a critical
component of the literature applied to evaluating financial instruments for debt
or equity classification and embedded features for bifurcation as
derivatives.  EITF 07-5 became effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years.  The adoption of EITF 07-5 on January 1,
2009 did not have a material effect on the Company’s financial
statements.
  In May
2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff
Position (“FSP”) No. APB 14-1,Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement) (FSP APB 14-1). FSP APB 14-1 requires the issuer of
convertible debt instruments with cash settlement features to separately account
for the liability and equity components of the instrument. The debt is
recognized at the present value of its cash flows discounted using the issuer’s
nonconvertible debt borrowing rate. The equity component is recognized as the
difference between the proceeds from the issuance of the note and the fair value
of the liability. FSP APB 14-1also requires an accretion of the resultant debt
discount over the expected life of the debt. The adoption of FSP APB 14-1 did
not have any impact on the Company’s Financial Statements.
  In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
No. 157”).  SFAS No. 157 establishes a common definition for fair
value to be applied to U.S. GAAP requiring use of fair value, establishes a
framework for measuring fair value, and expands disclosure about such fair value
measurements. SFAS No. 157 is effective for financial assets and financial
liabilities for fiscal years beginning after November 15, 2007. Issued in
February 2008, FSP 157-1 “Application of FASB Statement No. 157 to FASB
Statement No. 13 and Other Accounting Pronouncements That Address Fair Value
Measurements for Purposes of Lease Classification or Measurement under Statement
13” removed leasing transactions accounted for under Statement 13 and related
guidance from the scope of SFAS No. 157. FSP 157-2 “Partial Deferral of the
Effective Date of Statement 157” (“FSP 157-2”), deferred the effective date of
SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities that are
not recognized or disclosed at fair value in an entity’s financial statements on
a recurring basis (at least annually) to fiscal years beginning after November
15, 2008.  The Company did not have any nonfinancial items required to
be disclosed at fair value as of March 31, 2009. FSP 157-3 “Determining the Fair
Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP
157-3”) was released in October 2008 and was effective upon issuance. FSP 157-3
clarifies the application of SFAS 157 in a market that is not
active.  The implementation of SFAS No. 157 did not have a material
impact on the Company’s financial statements.  The Company does not
have any assets or liabilities required to be disclosed at fair
value.
  5
 MIKROS
SYSTEMS CORPORATION
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 (UNAUDITED)
   In
November 2007, the EITF reached a consensus on EITF 07-1: “Accounting for
Collaborative Arrangements” (“EITF 07-1”).   EITF No. 07-01
provides guidance for whether an arrangement constitutes a collaborative
arrangement, how costs incurred and revenue generated on sales to third parties
should be reported by the partners to a collaborative arrangement in each of
their respective income statements, how payments made to or received by a
partner pursuant to a collaborative arrangement should be presented in the
income statement, and what participants should disclose in the notes to the
financial statements about a collaborative arrangement. EITF 07-1 shall be
effective for annual periods beginning after December 15, 2008. Entities
are required to report the effects of applying EITF 07-1 as a change in
accounting principle through retrospective application to all periods to the
extent practicable. Upon application of EITF 07-1, the following is
required to be disclosed: a) a description of the prior-period information
that has been retrospectively adjusted, if any, and b) the effect of the
change on revenue and operating expenses (or other appropriate captions of
changes in the applicable net assets or performance indicator) and on any other
affected financial statement line item. The adoption of EITF 07-1 did not
have a material effect on the Company’s financial statements.
  In
November 2008, the SEC released a proposed roadmap regarding the potential use
by U.S. issuers of financial statements prepared in accordance with
International Financial Reporting Standards (IFRS).  IFRS is a
comprehensive series of accounting standards published by the International
Accounting Standards Board (“LASB”). Under the proposed roadmap, the Company may
be required to prepare financial statements in accordance with IFRS as early as
2014.  The SEC will make a determination in 2011 regarding the
mandatory adoption of IFRS.  The Company is currently assessing the
impact that this potential change would have on its financial statements, and it
will continue to monitor the development of the potential implementation of
IFRS.
  NOTE 3 – 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, per contractual
requirements. As of March 31, 2009 and December 31, 2008, we had no
unbilled revenues.  Billings to customers in excess of revenue earned
are classified as advanced billings, and shown as a liability.  As
of March 31, 2009 and December 31, 2008, we had no advanced
billings.
  6
  MIKROS
SYSTEMS CORPORATION
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 (UNAUDITED)
   NOTE 4 – REDEEMABLE SERIES C
PREFERRED STOCK
 
 The
Redeemable Series C Preferred Stock is not convertible into any other class of
the Company’s stock, is subject to redemption at the Company’s option at any
time, and if certain events occur, such as capital reorganizations,
consolidations, mergers, or sale of all or substantially all of the Company’s
assets, is subject to mandatory redemption.  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
$16.09 for each share of Redeemable Series C Preferred Stock held by such
holder.
 
 NOTE 5 – SHAREHOLDER’S
EQUITY
  SERIES B CONVERTIBLE
PREFERRED STOCK
  Each
share of Series B Convertible 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 per
share 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.  Shares of convertible preferred
stock can be redeemed in whole but not in part, at the Company’s option for
$1.00 per share.  Holders of Convertible Preferred Stock are entitled
to cast one vote per share on all maters to be voted on by the Company’s
shareholders.  Each share of Convertible Preferred Stock is convertible at
any time into one share of common stock at a conversion price of $1.00 per
share, subject to adjustment in certain circumstances.  Upon any
liquidation, dissolution or winding up of the Company, each holder will be
entitled to be paid, after holders of Redeemable Series C Preferred Stock and
Series B Preferred Stock have been paid in full, $1.00 per share.
 
 SERIES D PREFERRED
STOCK
 
 The
Series D Preferred Stock provided for an annual cumulative dividend of $.10 per
share and entitles holders to cast one vote per share on all matters to be voted
on by the Company’s shareholders.  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.
  7
  MIKROS
SYSTEMS CORPORATION
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 (UNAUDITED)
   SERIES D PREFERRED
STOCK
 
 Effective
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 March 31,
2009.
  NOTE 6 – EARNINGS PER
SHARE
  The
Company’s calculation of weighted average shares outstanding for the three
months ended March 31, 2009 and 2008 is set forth below:
  Three
      Months EndedMarch
      31,
                2009
              
              
              March
      31,
                2008Weighted
      Average basicshares
      outstanding
              
              
              31,766,753
              
              
              
              31,766,753Assumed
      conversionof
      preferred stock
              
              
              -
              
              
              
              3,562,299Effect
      of dilutiveOptions
              
              
              -
              
              
              
              205,921Average
      dilutedshares
      outstanding
              
              
              31,766,753
              
              
              
              35,534,973
   For the
three months ended March 31, 2009, the following shares of common stock and
their effects on income were excluded from the diluted net loss per share
calculation because their effect would be anti-dilutive:
  ·
              At
      March 31, 2009 and 2008, options to purchase 781,818 shares and 440,000
      shares of common stock, respectively, at prices ranging from $0.15 to
      $0.62 per share were excluded from the
  calculation.
   ·
              At
      March 31, 2009 and 2008, 3,562,299 shares issuable upon conversion of two
      series of the Company’s Convertible Preferred Stock (See note
      5), representing the weighted average effect of assumed conversion of
      the two series of preferred stock, were excluded from the
      calculation.
  8
  MIKROS
SYSTEMS CORPORATION
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 (UNAUDITED)
   NOTE 6 – INCOME TAX
MATTERS
  The Company 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 the actual results of operations, the Company has increased its net
deferred tax assets by $9,312 during the three months ended March 31,
2009.
  NOTE 7 – SHARE BASED
COMPENSATION
 
 During
the three months ended March 31, 2009, the Company did not issue any stock
options  In accordance with the recognition provisions
of  SFAS No.123(R), the Company recognized stock-based compensation
expense of  $7,237 and $9,264  for the three months ended
March 31, 2009 and 2008, respectively.  No tax benefits were
recognized related to this stock-based compensation.
  9
  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 objectives 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, a decline or
redirection of the U.S. Defense budget, the termination of any contracts with
the U.S. Government, 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-K for the year ended
December 31, 2008 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.
  10
  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 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 three
months ended March 31, 2009 and 2008.  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.  Through a number of SBIR grants, we
have completed the development of ADEPT.  ADEPT is an automated
maintenance workstation designed to significantly reduce the man-hours required
to align the AN/SPY-1 Radar System aboard U.S. Navy AEGIS cruisers and
destroyers, while optimizing system performance and readiness.  ADEPT
represents a new approach to Navy shipboard maintenance, integrating modular
instrumentation cards in a  rugged enclosure with an onboard computer,
input and output devices, networking hardware, removable hard drives, and a
touch screen display.  A custom software application provides the user
interface and integrates the hardware with a database that stores user
information, instrument readings, maintenance requirements, and training
aids.  ADEPT is designed to be adapted to other complex shipboard
systems, and to provide integrated distance support capabilities for remote
diagnostics and troubleshooting by shore-based Navy experts.
  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.
 
 ADEPT is
being provided to the Navy’s Cruisers (CGs) and Destroyers (DDGs), through the
US Navy’s Cruiser and Destroyer modernization program.  On September
29, 2008, we were awarded an $800,000 modification to our contract with NSWCPHD
for eight ADEPT LRIP units and additional logistics development
work.  The logistics effort includes development of fielding support
and calibration plans required for widespread use of ADEPT aboard U.S. Navy
ships.  In April 2009, we received a $450,000 contract award for four ADEPT
V2 systems which are scheduled for delivery to the USS Mobile Bay (CG-53) and
the USS Philippine Sea (CG-58) by the end of 2009.
  11
 
 The goal
of this program is to obtain a multi-year Indefinite-Delivery,
Indefinite-Quantity (IDIQ) contract for production, engineering, and logistics
support.  We anticipate this contract award and additional orders for
ADEPT equipment in the third quarter of 2009.  It should be noted that
contracting with the Federal Government is a lengthy and complex process and
that many factors could materialize that would negatively impact our ability to
secure this contract and future ADEPT orders.
  Wireless Local Area Network
Systems
  Since
June 2004, we have been working with the Office of Naval Research regarding
emerging Wireless Local Area Network systems (WLANs) and DoD radar systems to,
among other things, evaluate and quantify the potential improvements which may
be afforded by selected mitigation techniques.  We continue to perform
contracts in connection with this project and are working closely with engineers
from the Naval Air Warfare Center Weapons Division (NAWCWD), located in China
Lake, California.  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 (RWSE)
  Since May
2006, we have been involved in research and development under the SBIR topic
entitled RWSE which is 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 the:  (1) identification and testing of potential
own-ship electromagnetic interference (EMI) issues; (2) development and testing
of viable mitigation technologies to overcome adverse EMI effects; and (3)
development of a CVN Wi-Fi network planning tool to support networking within a
highly reconfigurable shipboard environment.  This project was
initially for the CVN platform, but is expected to eventually be applicable to
other U.S. Navy ships.
  Our
engineers have performed Wi-Fi propagation surveys aboard the aircraft carrier
USS GEORGE WASHINGTON (CVN-73), the amphibious assault ship USS BATAAN (LHD-5),
and the U.S. Navy amphibious assault ship USS KEARSARGE (LHD-3).  This
project has evolved to include the development of AIRchitect - EMC, a software
package which allows the Navy to plan and optimize deployment of shipboard WiFi
networks, with our team partner Mobilisa Inc.  AIRchitect - EMC is
designed to place shipboard Access Points to optimize coverage based on 
user-specified wireless requirements and analyze potential interference between
network equipment and onboard RF systems such as radars, and where possible,
mitigate interference using smart placement and channel selection
algorithms.  AIRchitect - EMC is expected to be used by the Navy to plan
network deployments on aircraft carriers (CVNs) and other
platforms.
  Additional Contracts and
Recent Developments
  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.  This
contract was structured as a base effort worth $70,000, and an option worth
$30,000.  The option was exercised on October 30, 2008, and 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
February 2009, we were awarded a $68,000 production support contract on the
Navy’s Next Generation Command and Control Processor (NGC2P) program by Northrop
Grumman Corporation.  The NGC2P system is a tactical data link (TDL)
communications processor which provides warfighters with critical real-time
information during combat operations.  We anticipate future work with
Northrop Grumman in areas associated with our expertise in electronic systems
development and wireless technologies.
  12
 
 In
February 2009, we were awarded a $9,991 subcontract from Gnostech, Inc of
Warminster, Pennsylvania for engineering services in support of Gnostech’s
program "GPS Scenario Development and Test Support for both Electronic
Protection and Electronic Attack Threat Environment".
 
 In April
2009, we were awarded a $22,000 purchase order from Ocean Power Technologies,
Inc. (OPT)  We  have teamed with OPT and Rutgers University
to develop and test the Littoral Expeditionary Autonomous Power Buoy system for
the US Navy’s NUWC Keyport Program Office.  The LEAP system is designed for
persistent littoral surveillance applications, and combines the OPT PowerBuoy
technology with advanced multistatic radar and data fusion capabilities
originally developed at Rutgers.  Mikros will provide system architecture,
design and integration support for the program.
 
 In May
2009, we were awarded a $45,000 contract by the Navy to continue wireless
network design studies for the new CVN-78 aircraft carrier USS Gerald R.
Ford.  This program is a follow-on to work we performed in 2008 on
network modeling and simulation for the Navy's PMW 750 Carrier Integration
group.
 
 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 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 2009,
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.
  13
  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.
 
 Changes to Critical
Accounting Policies and Estimates
  Our
critical accounting policies and estimates are set forth in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2008.   As
of March 31, 2009, 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, recoverability of long-lived assets,
income taxes and commitments.  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 the footnotes to our financial statements
included herein 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 March 31,
2009 and 2008
  We
generated revenues of $507,310 during the three months ended March 31, 2009
compared to $651,282 during the three months ended March 31, 2008, a decrease of
$143,972 or 22%.  The decrease was primarily due to the delay in
receipt of follow-on contracts from the Federal Government.
 
 Cost of
revenues consist of direct contract costs such as labor,
material, subcontracts, travel, and other direct costs.  Cost of
revenues for the three months ended March 31, 2009 were $202,130 compared to
$306,354 for the three months ended March 31, 2008, a decrease of $104,224 or 34
%.  The decrease was primarily due to the delay in receipt of
follow-on contracts from the Federal Government resulting in lower subcontractor
costs.
  Substantially
all 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 March 31, 2009 were $154,565 compared to $128,375 for the
three months ended March 31, 2008, an increase of $26,190 or
20%.  The increase was due to additional engineering labor and payroll
taxes, offset by a decrease in engineering consultants and incentive
compensation costs.
  14
  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 March 31, 2009 were $173,100 compared to $194,795 for
the three months ended March 31, 2008, a decrease of $21,695 or
11%.  The decrease was due primarily to a reduction of general and
administrative salaries and professional fees, which was offset by increased
costs related to bid and proposal efforts and public company costs.
 
 At March
31, 2009, Mikros estimates its annual effective tax rate for 2009 to be
56.06%.  The application of this estimated rate to the financial activity
of the quarter ended March 31, 2009 results in a tax benefit of $12,604 which
the Company is recognizing for the quarter ended March 31, 2009 because it fully
expects to realize this benefit during the year.  At March 31, 2009,
the increase in the effective federal income tax rate is attributable to state
income taxes and income tax related to permanent differences.
 
 We
incurred a net loss of $9,879 during the three months ended March 31, 2009 as
compared to net income of $10,753 during the three months ended March 31,
2008.  The loss was due to a delay in receiving follow-on contracts
from the Federal Government.
 
 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 three months ended March 31, 2009, net cash used in operations was $225,684
compared to $68,305 during the three months ended March 31, 2008. The
increase was due primarily to the payment of incentive compensation, increased
accounts receivable, and a reduction in accounts payable.   We
had working capital of $540,166 as of March 31, 2009 as compared to working
capital of $554,352 at December 31, 2008.
 
 On
January 9, 2009, we entered into a $50,000 line of credit agreement with Sun
National Bank (“Sun”).  The line of credit will be available to us for
one year.  The line of credit is secured by a $50,000 Certificate of
Deposit with Sun.
 
 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 generate positive cash
flow.
  15
  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 $5,613, and is subject to an annual increase.
 
 In
February 2009, we executed a lease for a facility in Largo, Florida which will
support production of our Advanced Diagnostic Electronic Portable Testset
(ADEPT) product line, including quality assurance, field support, and life cycle
management.  The lease agreement runs through February 2010 for a
total cost of $8,162 per year.
 
 Off-Balance Sheet
Arrangements
  As of March 31, 2009, 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 March 31, 2009, 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 March 31, 2009, 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.
  16
  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 CORPORATIONMay
      15, 2009
              By:
              /s/ Thomas
      J. MeaneyThomas
      J. Meaney
                President
      (Principal Executive Officer and
                Principal
      Financial Officer)
   17