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, 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 August 12, 2009.









TABLE OF
CONTENTS




PAGE #PART
      I.
            FINANCIAL
      INFORMATION
            1Item
      1.
            Financial
      Statements
            1Condensed  Balance
      Sheets as of June 30, 2009 and December 31, 2008
    (unaudited)
            1Condensed
      Statements Of Operations for the Three and  Six Months
      Ended  June 30, 2009 and 2008 (unaudited)
            3Condensed
      Statements Of Cash Flows for the Six Months Ended  June 30, 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
            17PART
      II.
            OTHER
      INFORMATION
            17Item
      6.
            Exhibits
            17SIGNATURES
            18










PART
I.  FINANCIAL INFORMATION





Item
1. Financial Statements




MIKROS
SYSTEMS CORPORATION


CONDENSED
BALANCE SHEETS


(UNAUDITED)




June
      30,
                                            2009
                                          
                                          
                                          December
      31,
                                            2008ASSETSCURRENT
      ASSETSCash
      and Cash Equivalents
                                          
                                          $
                                          432,604
                                          
                                          
                                          
                                          608,530Receivables
      on Government Contracts
                                          
                                          
                                          215,484
                                          
                                          
                                          
                                          169,766Other
      Current Assets
                                          
                                          
                                          63,529
                                          
                                          
                                          
                                          17,903TOTAL
      CURRENT ASSETS
                                          
                                          
                                          711,617
                                          
                                          
                                          
                                          796,199Patents
      and Trademarks
                                          
                                          
                                          5,383
                                          
                                          
                                          
                                          5,383Less:
      Accumulated Amortization
                                          
                                          
                                          (929)
                                          
                                          
                                          
                                          (760)4,454
                                          
                                          
                                          
                                          4,623PROPERTY
      AND EQUIPMENTEquipment
                                          
                                          
                                          16,515
                                          
                                          
                                          
                                          14,625Furniture
      and Fixtures
                                          
                                          
                                          9,264
                                          
                                          
                                          
                                          9,26425,779
                                          
                                          
                                          
                                          23,889Less:
      Accumulated Depreciation
                                          
                                          
                                          (16,759)
                                          
                                          
                                          
                                          (15,235)9,020
                                          
                                          
                                          
                                          8,654Deferred
      Tax Asset
                                          
                                          
                                          9,303
                                          
                                          
                                          
                                          18,000TOTAL
      ASSETS
                                          
                                          $
                                          734,394
                                          
                                          
                                          
                                          827,476






See
Accompanying Notes to Condensed Financial Statements.




1




MIKROS
SYSTEMS CORPORATION


CONDENSED
BALANCE SHEET (UNAUDITED)


(continued)






June
      30,
                              2009
                            
                            
                            December
      31,
                              2008LIABILITIES
      AND SHAREHOLDERS’ EQUITYCURRENT
      LIABILITIESAccrued
      Payroll and Payroll Taxes
                            
                            $
                            109,716
                            
                            
                            $
                            98,193Accounts
      Payable and Accrued Expenses
                            
                            
                            16,927
                            
                            
                            
                            143,654TOTAL
      CURRENT LIABILITIES
                            
                            
                            126,643
                            
                            
                            
                            241,847Long-term
      Liabilities
                            
                            
                            8,950
                            
                            
                            
                            11,170TOTAL
      LIABILITIES
                            
                            
                            135,593
                            
                            
                            
                            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
                            
                            
                            11,483,887
                            
                            
                            
                            11,468,662Accumulated
      Deficit
                            
                            
                            (11,303,678)
                            
                            
                            
                            (11,312,795)TOTAL
      SHAREHOLDERS’ EQUITY
                            
                            
                            598,801
                            
                            
                            
                            494,009TOTAL
      LIABILITIES AND SHAREHOLDERS’ EQUITY
                            
                            $
                            734,394
                            
                            
                            $
                            827,476







See
Accompanying Notes to Condensed Financial Statements.




2




MIKROS
SYSTEMS CORPORATION


CONDENSED
STATEMENTS OF OPERATIONS (UNAUDITED)





Three
      Months Ended
                    
                    
                    
                    Six
      Months EndedJune
      30, 2009
                    
                    
                    
                    June
      30, 2008
                    
                    
                    
                    June
      30, 2009
                    
                    
                    
                    June
      30, 2008Contract
      Revenue
                    
                    $
                    636,476
                    
                    
                    $
                    1,062,832
                    
                    
                    $
                    1,143,785
                    
                    
                    $
                    1,714,114Cost
      of Revenue
                    
                    
                    282,591
                    
                    
                    
                    617,672
                    
                    
                    
                    484,721
                    
                    
                    
                    924,026Gross
      Margin
                    
                    
                    353,885
                    
                    
                    
                    445,160
                    
                    
                    
                    659,064
                    
                    
                    
                    790,088Expenses:Engineering
                    
                    
                    142,582
                    
                    
                    
                    157,055
                    
                    
                    
                    297,147
                    
                    
                    
                    285,430General
      & Administrative
                    
                    
                    167,900
                    
                    
                    
                    210,801
                    
                    
                    
                    340,999
                    
                    
                    
                    405,597Total
      Expenses
                    
                    
                    310,482
                    
                    
                    
                    367,856
                    
                    
                    
                    638,146
                    
                    
                    
                    691,027Income  from
      Operations
                    
                    
                    43,403
                    
                    
                    
                    77,304
                    
                    
                    
                    20,918
                    
                    
                    
                    99,061Interest
      Income
                    
                    
                    -
                    
                    
                    
                    695
                    
                    
                    
                    3
                    
                    
                    
                    2,191Income  Before
      Income Tax Expense
                    
                    
                    43,403
                    
                    
                    
                    77,999
                    
                    
                    
                    20,921
                    
                    
                    
                    101,252Income
      Tax Expense
                    
                    
                    24,407
                    
                    
                    
                    43,633
                    
                    
                    
                    11,804
                    
                    
                    
                    56,133Net  Income
                    
                    $
                    18,996
                    
                    
                    $
                    34,366
                    
                    
                    $
                    9,117
                    
                    
                    $
                    45,119Basic
      and diluted (loss) earnings per share
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -Basic
      weighted average number of Shares outstanding
                    
                    
                    31,766,753
                    
                    
                    
                    31,766,753
                    
                    
                    
                    31,766,753
                    
                    
                    
                    31,766,753Diluted
      weighted average number of Shares outstanding
                    
                    
                    35,401,734
                    
                    
                    
                    35,231,234
                    
                    
                    
                    35,393,074
                    
                    
                    
                    35,237,012







See
Accompanying Notes to Condensed Financial Statements.




3




MIKROS
SYSTEMS CORPORATION


CONDENSED
STATEMENTS OF CASH FLOWS


(UNAUDITED)




Six
      Months EndedJune
      30,
                                2009
                              
                              
                              June
      30,
                                2008Cash
      Flow From Operating Activities:Net
      Income
                              
                              $
                              9,117
                              
                              
                              $
                              45,119Adjustments
      to reconcile Net (Loss) Income toNet
      Cash used in Operating Activities:Depreciation
      and Amortization
                              
                              
                              1,693
                              
                              
                              
                              2,813Deferred
      Tax Expense
                              
                              
                              8,697
                              
                              
                              
                              39,743Stock
      Compensation Expense
                              
                              
                              15,225
                              
                              
                              
                              19,813Net
      Changes in Operating Assets and Liabilities:(Increase)
      Decrease in Receivables on Government Contracts
                              
                              
                              (45,718)
                              
                              
                              
                              8,390Increase
      in Other Current Assets
                              
                              
                              (45,626)
                              
                              
                              
                              (20,715)Decrease
      in Accounts Payable, accrued expenses and other
liabilities
                              
                              
                              (128,947)
                              
                              
                              
                              (83,462)Increase  in
      Accrued Payroll and Payroll Taxes
                              
                              
                              11,523
                              
                              
                              
                              16,932Net
      Cash used in Operating Activities
                              
                              
                              (174,036)
                              
                              
                              
                              (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
      increase (decrease) Increase in Cash and Cash Equivalents
                              
                              
                              (175,926)
                              
                              
                              
                              64,316Cash
      and Cash Equivalents, beginning of the period
                              
                              
                              608,530
                              
                              
                              
                              404,557Cash
      and Cash Equivalents, end of period
                              
                              $
                              432,604
                              
                              
                              $
                              468,873






See
Accompanying Notes to Condensed Financial Statements.




4




MIKROS
SYSTEMS CORPORATION


NOTES
TO CONDENSED FINANCIAL STATEMENTS


(UNAUDITED)







NOTE 1 – Basis of
Presentation:




The accompanying unaudited interim
condensed Financial Statements of Mikros Systems Corporation  (the
“Company”) were prepared in accordance with accounting principles generally
accepted in the United States of America and the interim financial statements
rules and regulations of the Securities and Exchange Commission (“SEC”). In the
opinion of management, these financial statements include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the Company’s results of operations, financial position and cash
flows for the interim periods presented. The interim operating results are not
necessarily indicative of the results for a full year or for any interim period.
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 relating to interim financial statements. The Condensed
Financial Statements included in this Form 10-Q should be read in conjunction
with Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this Form 10-Q and included together with the
Company's Financial Statements and Notes thereto included in the Company's 2008
Annual Report on Form 10-K.




NOTE 2 – RECENT ACCOUNTING
PRONOUNCEMENTS




In May
2009, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standard No. 165, “Subsequent Events” (“SFAS
165”).  SFAS 165 establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or available to be issued.  SFAS 165
is effective for interim and annual periods ending after June 15, 2009 and
should be applied prospectively.  The implementation of SFAS 165 did
not have a material impact on the Company’s financial statements.  In
accordance with SFAS No. 165, the Company assessed subsequent events through
August 14, 2009, the date of issuance of these condensed consolidated financial
statements.




In June
2009, the FASB issued SFAS No. 168, the FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles, a replacement of
FASB Statement No. 162.  SFAS 168 replaces SFAS No. 162, The Hierarchy
of Generally Accepted Accounting Principles, to establish the FASB Accounting
Standards Codification as the source of authoritative accounting principles
recognized by the FASB to be applied by nongovernmental entities in preparation
of financial statements in conformity with generally accepted accounting
principles in the United States.  SFAS 168 is effective for interim
and annual periods ending after September 15, 2009.  The Company does
not expect the adoption of this standard to have an impact on its financial
position or results of operations.





In April
2009, the FASB released FASB Staff Position (“FSP”) 107-1 and Accounting
Principles Board (“APB”) Opinion No. 28-1, Interim Disclosures about Fair Value
of Financial Instruments, which requires disclosures about the fair value of
financial instruments (“FSP SFAS 107-1 and APB 28-1”)  This
pronouncement amends FASB 107, Disclosures about Fair Value of Financial
Instruments, to require disclosures about fair value of  financial
instruments in the interim financial statements as well as in the annual
financial statements.  FSP SFAS 107-1 and APB 28-1 also amends APB
Opinion No. 28, Interim Financial Reporting, to require those disclosures in
summarized financial information in interim financial statements.  In
addition, the FSP requires disclosures of the methods and significant
assumptions used to estimate the fair value of those financial
instruments.  The adoption of the FSP did not have any impact on the
Company’s financial statements.





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.




5




MIKROS
SYSTEMS CORPORATION


NOTES
TO CONDENSED FINANCIAL STATEMENTS


(UNAUDITED)






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 June 30, 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
June 30, 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 June 30,
2009.




NOTE 6 – EARNINGS PER
SHARE





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




Three
      Months Ended
                            
                            
                            Six
      Months EndedJune
      30, 2009
                            
                            
                            June
      30, 2008
                            
                            
                            June
      30, 2009
                            
                            
                            June
      30, 2008Net
      income applicableto
      common Stockholders
                            
                            $
                            18,966
                            
                            
                            $
                            34,366
                            
                            
                            $
                            9,117
                            
                            
                            $
                            45,119Average
      basicshares
      outstanding
                            
                            
                            31,766,753
                            
                            
                            
                            31,766,753
                            
                            
                            
                            31,766,753
                            
                            
                            
                            31,766,753Assumed
      conversionof
      preferred stock
                            
                            
                            3,562,299
                            
                            
                            
                            3,307,299
                            
                            
                            
                            3,562,299
                            
                            
                            
                            3,307,299Effect
      of dilutiveOptions
                            
                            
                            72,682
                            
                            
                            
                            157,182
                            
                            
                            
                            64,022
                            
                            
                            
                            162,690Average
      dilutedshares
      outstanding
                            
                            
                            35,401,734
                            
                            
                            
                            35,231,234
                            
                            
                            
                            35,393,074
                            
                            
                            
                            35,237,012Net
      earnings per common sharebasic
      and diluted
                            
                            $
                            0.00
                            
                            
                            $
                            0.00
                            
                            
                            $
                            0.00
                            
                            
                            $
                            0.00






For the
three and six months ended June 30, 2009 and 2008, the following potential
shares of common stock and their effects on income were excluded from the
diluted net income per share calculation because their effect would be
anti-dilutive:




At
      June 30, 2009 and 2008, options to purchase 420,000 shares and 440,000
      shares of common stock, respectively, at prices ranging from $0.55 to
      $0.62 per share 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 decreased its net deferred tax assets by $8,697 and
$39,743 during the six months ended June 30, 2009 and 2008,
respectively.   Income tax expense includes expense associated
with state tax liabilities




NOTE 7 – SHARE BASED
COMPENSATION





During
the three and six months ended June 30, 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 $7,988
and $10,650 for the three months ended June 30, 2009 and 2008, respectively, and
$15,225 and $19,814 for the six months ended June 30, 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 and
six months ended June 30, 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. Additional ADEPT development was completed through a
series of SBIR grants and contracts. 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.






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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.





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.





In June
2009, we were awarded a $225,000 contract by DRS C3 Systems of Gaithersburg, MD
for the interface definition of distance support applications for the Common
Digital Sensor Architecture (CDSA) program. The CDSA Program will provide a
common computing platform for above water sensors and will reduce the knowledge
and skills required to operate and maintain the sensor systems, as well as
improve the quality, quantity, and compatibility of collected field data.
Sharing of sensor data using existing and planned US Navy distance support
technologies is a key element for successful. This work is an extension of the
distance support experience Mikros gained under Adaptive Diagnostic Electronic
Portable Testset (ADEPT) development contracts with the US Navy.





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 June 30, 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.





Results of
Operations




Three Months
Ended  June 30, 2009 and 2008




We
generated revenues of $636,476 during the three months ended June 30, 2009
compared to $1,062,832 during the three months ended June 30, 2008, a decrease
of $426,356 or 40.1%.  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 June 30, 2009 were $282,591 compared to
$617,672 for the three months ended June 30, 2008, a decrease of $335,081 or
54.2%.  The decrease was primarily due to the delay in receipt of
follow-on contracts from the Federal Government resulting in lower subcontractor
and material costs and the change of distribution of direct costs from 2008 to
2009.




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 June 30, 2009 were $142,582 compared to $157,055 for the
three months ended June 30, 2008, a decrease of $14,473 or
9.2%.  The decrease was due primarily to incentive compensation and
consultant fees which was offset by an increase in engineering
salaries.




14




General
and administrative expenses (“G&A”) 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, 2009 were $167,900
compared to $210,801 for the three months ended June 30, 2008, a decrease
of $42,901 or 20.3 %.  The decrease was due primarily to a
reduction of G&A salaries, outside services, G&A travel and consultants,
and no incentive compensation costs.





The
application of the estimated effective income tax rate to the financial activity
of the three months  ended June 30, 2009 resulted in a tax expense of
$24,407.   At June 30, 2009, the anticipated effective income tax rate
of 62.1% is attributable to state income taxes and income tax related to
permanent differences.





We
generated net income of $18,996 during the three months ended June 30, 2009 as
compared to net income of $34,366 during the three months ended June 30,
2008.  The decrease was due to a delay in receiving follow-on
contracts from the Federal Government.





Six Months Ended June 30,
2009 and 2008





We
generated revenues of $1,143,785 during the six months ended June 30, 2009
compared to $1,714,114 for the same period in 2008, a decrease of $570,329 or
33.3%.  The decrease was primarily due to the delay in receipt of
follow-on contracts from the Federal Government.





Cost of
revenues for the six months ended June 30, 2009 were $484,721 compared to
$924,026 for the six months ended June 30, 2008, a decrease of $439,305 or
47.5%.   The decrease was primarily due to the delay in receipt of
follow-on contracts from the Federal Government resulting in lower subcontractor
and material costs and the change of distribution of direct costs from 2008 to
2009.





Engineering
costs for the six months ended June 30, 2009 were $297,147 compared to $285,430
for the six months ended June 30, 2008, an increase of $11,717 or
4.1%.  The increase was due to additional engineering salaries and
medical benefit expenses, offset by a decrease in engineering consultant costs
and no incentive compensation costs.




15




General
and administrative costs for the six months ended June 30, 2009 were $340,999
compared to $405,597 for the six months ended June 30, 2008, a decrease
of $64,598 or 16%.  The decrease was due primarily to a reduction
of G&A salaries, outside services, G&A travel and consultants, and no
incentive compensation costs.





The
application of the estimated effective income tax rate to the financial activity
of the six months ended June 30, 2009 results in a tax expense of $11,804. At
June 30, 2009, the anticipated effective income tax rate of 62.1% is
attributable to state income taxes and income tax related to permanent
differences.





We
generated net income of $9,117 during the six months ended June 30, 2009 as
compared to net income of $45,119 during the six months ended June 30,
2008.  The decrease 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 six months ended June 30, 2009, net cash used in operations was $174,036
compared to $68,305 during the six months ended June 30, 2008. The increase
was due primarily to the payment of $91,800 of accrued incentive compensation, a
$45,718 increase in accounts receivable, and a decrease in accounts
payable.  We had working capital of $584,974 as of June 30, 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.




16




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  June 30, 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 June 30, 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  June 30, 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




Exhibit
      No.
              Description31.1
              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.


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.




17




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
      14, 2009
              By:
              /s/ Thomas
      J. MeaneyThomas
      J. Meaney
                President
      (Principal Executive Officer and
                Principal
      Financial Officer)






18