**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**







**FORM
      10-QSB**





x**QUARTERLY
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR
      THE
      QUARTERLY PERIOD ENDED September 30, 2007**




**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 small business issuer as specified in its charter)





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





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





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




Check
        whether the issuer (1) filed all reports required to be filed by Section
        13 or
        15(d) of the Exchange Act during the past 12 months (or for such shorter
        period
        that the registrant was required to file such reports), and (2) has been
        subject
        to such filing requirements for the past 90 days. xYes oNo





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




**APPLICABLE
      ONLY TO CORPORATE ISSUERS**




State
        the
        number of shares outstanding of each of the issuer’s classes of common equity,
        as of November 12, 2007:
  **Class**
                
                **Number
                    of Shares**Common
                    Stock, par value $.01
                
                31,766,753


Transitional
      Small Business Disclosure format (check one): oYes xNo









**TABLE
        OF CONTENTS**
  **PART
                I.**
              **FINANCIAL
                INFORMATION****PAGE
                  #**Item
                  1.
              Financial
                Statements.CONDENSED
                    BALANCE SHEET As of September 30, 2007
              1CONDENSED
                    STATEMENTS OF INCOME For the Three and Nine Months Ended September
                    30,
                    2007 and 2006
              3CONDENSED
                SATEMENTS OF CASH FLOWS For
                the Nine Months Ended September 30, 2007 and 2006
              4NOTES
                  TO THE CONDENSED FINANCIAL STATEMENTS
              5Item
                  2.
              Management’s
                  Discussion and Analysis.
              11Item
                  3.
              Controls
                  and Procedures.
              17**PART
                  II.**
              **OTHER
                  INFORMATION**Item
                  2.
              Unregistered
                  Sales of Equity Securities
                  and Use of Proceeds.
              17Item
                  6.
              Exhibits.
              17SIGNATURES
              18




**PART
        I.  FINANCIAL INFORMATION**
 
 **Item
        1. Financial Statements**




**MIKROS
        SYSTEMS CORPORATION**
 **CONDENSED
        BALANCE SHEET**
 **(UNAUDITED)**
  **September
                    30,**
                  **2007**ASSETSCURRENT
                    ASSETSCash
                    and Cash Equivalents
                
                $
                364,874Receivables
                    on Government Contracts
                
                
                214,950Other
                    Current Assets
                
                
                26,276Deferred
                    Tax Asset
                
                
                42,000TOTAL
                    CURRENT ASSETS
                
                
                648,100Patents
                    & Trademarks
                
                
                5,383Less:
                    Accumulated Amortization
                
                
                (337
                )5,046Equipment
                
                
                13,114Less:
                    Accumulated Depreciation
                
                
                (8,825
                )4,289Furniture
                    & Fixtures
                
                
                9,264Less:
                    Accumulated Depreciation
                
                
                (523
                )8,741Deferred
                    Tax Asset
                
                
                34,700TOTAL
                    ASSETS
                
                $
                700,876




**See
        Accompanying Notes to Condensed Financial Statements.**
  1




**MIKROS
        SYSTEMS CORPORATION**
 **CONDENSED
        BALANCE SHEET (UNAUDITED)**
 **(continued)**




**September
                  30, 2007**LIABILITIES
                  AND SHAREHOLDERS’  EQUITYCURRENT
                  LIABILITIESAccrued
                  Payroll and Payroll Taxes
              
              $
              80,187Accounts
                  Payable
              
              
              120,350Taxes
                  Payable
              
              
              12,930TOTAL
                  CURRENT LIABILITIES
              
              
              213,467Long-term
                  Liabilities
              
              
              15,138TOTAL
                  LIABILITIES
              
              
              228,605REDEEMABLE
                SERIES C PREFERRED STOCK par value $.01 per share, authorized 150,000
                shares,issued
                  and outstanding 5,000 shares (involuntary liquidation value -
                  $80,450)
              
              
              80,450SHAREHOLDERS’
                  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)
              
              
              11,024Preferred
                Stock, convertible, par value $.01 per share, authorized 2,000,000
                shares,
                issued andoutstanding
                  255,000 shares (involuntary liquidation value - $255,000)
              
              
              2,550Preferred
                Stock, Series D, par value $.01 per share 690,000 shares authorized,
                issued and outstanding(involuntary
                  liquidation value - $1,518,000)
              
              
              6,900Common
                Stock, par value $.01 per share, authorized 60,000,000 shares, issued
                and
                outstanding31,766,753
                  shares
              
              
              317,668Capital
                  in excess of par value
              
              
              11,422,976Accumulated
                  Deficit
              
              
              (11,369,297
              )TOTAL
                  SHAREHOLDERS’ EQUITY
              
              
              391,821TOTAL
                  LIABILITIES AND SHAREHOLDERS’ EQUITY
              
              $
              700,876




**See
        Accompanying Notes to Condensed Financial Statements.**
  2




**MIKROS
        SYSTEMS CORPORATION**
 **CONDENSED
        STATEMENTS OF INCOME**
 **(UNAUDITED)**
  **Three
                    Months Ended,**
                ****
                ****
                **Nine
                    Months Ended**
                ********
                ****
                **September
                    30, 2007**
                ****
                ****
                **September
                    30, 2006**
                ****
                ****
                **September
                    30, 2007**
                ****
                ****
                **September
                    30, 2006**Revenues:Contract
                    Revenue
                
                $
                663,256
                
                
                $
                626,290
                
                
                $
                2,303,142
                
                
                $
                1,576,283Cost
                    of Sales
                
                
                362,232
                
                
                
                365,936
                
                
                
                1,368,713
                
                
                
                939,865Gross
                    Margin
                
                
                301,024
                
                
                
                260,354
                
                
                
                934,429
                
                
                
                636,418Expenses:Engineering
                
                
                117,528
                
                
                
                87,168
                
                
                
                309,232
                
                
                
                233,899General
                    & Administrative
                
                
                158,698
                
                
                
                97,897
                
                
                
                469,447
                
                
                
                296,805Total
                    Expenses
                
                
                276,226
                
                
                
                185,065
                
                
                
                778,679
                
                
                
                530,704Income
                    from Operations
                
                
                24,798
                
                
                
                75,289
                
                
                
                155,750
                
                
                
                105,714Other
                    Income: Interest
                
                
                1,570
                
                
                
                0
                
                
                
                4,160
                
                
                
                285Income
                    Before Income Tax Expense
                
                
                26,368
                
                
                
                75,289
                
                
                
                159,910
                
                
                
                105,999Income
                    Tax Expense (Benefit)
                
                
                12,572
                
                
                
                (2,800
                )
                
                
                (4,498
                )
                
                
                9,200Net
                    Income
                
                $
                13,796
                
                
                $
                78,089
                
                
                $
                164,408
                
                
                $
                96,799Basic
                    and diluted earnings per share
                
                $
                0.00
                
                
                $
                0.00
                
                
                $
                0.00
                
                
                $
                0.00Basic
                    weighted average number of Shares outstanding
                
                
                31,766,753
                
                
                
                31,766,753
                
                
                
                31,766,753
                
                
                
                31,766,753Diluted
                    Weighted Average number of Shares outstanding
                
                
                35,598,562
                
                
                
                35,449,489
                
                
                
                35,589,175
                
                
                
                35,453,895
  **See
          Accompanying Notes to Condensed Financial Statements.**
  3


**MIKROS
        SYSTEMS CORPORATION**
 **CONDENSED
        STATEMENTS OF CASH FLOWS** **(UNAUDITED)**


**Nine
                  Months Ended**
              ********
              **September
                  30, 2007**
              ****
              ****
              **September
                  30, 2006**Cash
                  Flow From Operating Activities:Net
                  Income
              
              $
              164,408
              
              
              $
              96,799Adjustments
                to reconcile Net Income tonet
                  cash provided by Operating Activities:Depreciation
                  and Amortization
              
              
              3,720
              
              
              
              7,581Deferred
                  Tax Provision
              
              
              (28,700
              )
              
              
              200Net
                  Changes in Operating Assets and LiabilitiesIncrease
                  in:Receivables
                  on Government Contracts
              
              
              (13,228
              )
              
              
              (66,093
              )Other
                  Current Assets
              
              
              (10,476
              )
              
              
              (7,057
              )Increase
                  in:Accounts
                  Payable
              
              
              17,711
              
              
              
              20,820Accrued
                  Payroll and Payroll Taxes
              
              
              5,068
              
              
              
              19,882Other
                  Accrued Expenses
              
              
              6,176
              
              
              
              3,141Net
                  Cash provided by Operating Activities
              
              
              144,679
              
              
              
              75,273Cash
                  Flow from Investing Activities:Purchase
                  of Furniture and Fixtures
              
              
              (9,264
              )
              
              
              0Purchase
                  of Equipment
              
              
              0
              
              
              
              (1,590
              )Costs
                  associated with Patent andTrademark
                  Development
              
              
              0
              
              
              
              (2,158
              )Net
                  Cash used in Investing Activities
              
              
              (9,264
              )
              
              
              (3,748
              )Net
                  Increase in Cash and Cash Equivalents
              
              
              135,415
              
              
              
              71,525Cash
                  and Cash Equivalents, beginning of the period
              
              
              229,459
              
              
              
              110,154Cash
                  and Cash Equivalents, end of period
              
              $
              364,874
              
              
              $
              181,679




See
      Accompanying Notes to Condensed Financial
      Statements.




4




**MIKROS
        SYSTEMS CORPORATION**
 **NOTES
        TO CONDENSED FINANCIAL STATEMENTS**
 **SEPTEMBER
        30, 2007**
 **(UNAUDITED)**
 
 Note
        1
– Basis of Presentation:
  The
        financial statements included herein have been prepared by the Company, without
        audit, pursuant to the rules and regulations of the Securities and Exchange
        Commission.  Certain information and footnote disclosures normally
        included in financial statements prepared in accordance with accounting
        principles generally accepted in the United States of America have been
        condensed or omitted pursuant to such rules and regulations.  These
        financial statements should be read in conjunction with the financial statements
        and notes thereto included in the Company’s Annual Report on Form 10-KSB for the
        year ended December 31, 2006.
  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 September 30, 2007, and the results of its operations and its cash flows
        for
        the three and nine months ended September 30, 2007.
  Interim
        results are not necessarily indicative of results for the full fiscal
        year.
  Certain
        amounts for the three and nine months ended September 30, 2006 have been
        reclassified to conform with their 2007 financial statement presentation.
        These
        reclassifications had no effect on net income and relate to the reclassification
        of fringe benefits from general and administrative costs to engineering
        overhead.
   NOTE
        2 –
REDEEMABLE SERIES C PREFERRED STOCK AND SHAREHOLDERS’ EQUITY
  REDEEMABLE
        SERIES C PREFERRED STOCK
 
 The
        Redeemable Series C Preferred Stock is not convertible into any other class
        of
        the Company’s stock and is subject to redemption at the Company’s option at any
        time or if certain events occur, such as capital reorganizations,
        consolidations, mergers, or sale of all or substantially all of the Company’s
        assets. Upon any liquidation, dissolution or winding up of the Company, each
        holder of Redeemable Series C Preferred Stock will be entitled to be paid,
        before any distribution or payment is made upon any other class of stock
        of the
        Company, an amount in cash equal to the redemption price for each share of
        Redeemable Series C Preferred Stock held by such holder, and the holders
        of
        Redeemable Series C Preferred Stock will not be entitled to any further payment.
        The redemption price per share is $16.09.
  5
  **MIKROS
          SYSTEMS CORPORATION**
 **NOTES
          TO CONDENSED FINANCIAL STATEMENTS**
 **SEPTEMBER
          30, 2007**
 **(UNAUDITED)**
 SERIES
        B CONVERTIBLE PREFERRED STOCK
 
 Each
        share of Series B Preferred Stock is convertible into three shares of the
        Company’s common stock at a price of $.33 per share of common stock to be
        received upon conversion and entitles the holder thereof to cast three votes
        on
        all matters to be voted on by the Company’s shareholders.  Upon any
        liquidation, dissolution, or winding up of the Company, each holder of Series
        B
        Preferred Stock will be entitled to be paid, after all distributions of payments
        are made upon the Redeemable Series C Preferred Stock and before any payment
        is
        made upon the Company’s Convertible Preferred Stock, an amount in cash equal to
        $1.00 for each share of Series B Preferred Stock held, and such holders will
        not
        be entitled to any further payment.
 
 CONVERTIBLE
        PREFERRED STOCK
 
 Each
        share of the convertible preferred stock can be redeemed at the Company’s option
        for $1.00 per share or can be converted into shares of the Company’s common
        stock.  Each share of convertible preferred stock is convertible into one
        share of common stock.  This conversion rate is subject to adjustment in
        certain circumstances.  Upon any liquidation, dissolution or winding up of
        the Company, each holder will be entitled to his or her redemption price
        once
        shareholders of Redeemable Series C Preferred Stock and Series B Preferred
        stock
        have been fully paid.
 
 SERIES
        D PREFERRED STOCK
 
 The
        Series D Preferred Stock provided for an annual cumulative dividend of $.10
        per
        share.  The shares are not convertible into any other class of stock
        and are subject to redemption at the Company’s option at any time at a
        redemption price of $1.00 per share plus all unpaid cumulative
        dividends.  Upon liquidation, dissolution or winding up of the
        Company, each holder of Series D Preferred Stock will be entitled to be paid,
        after all distributions or payments are made upon the Company’s Convertible
        Preferred Stock, Series B Preferred Stock, and Redeemable Series C Preferred
        Stock, an amount in cash equal to the Redemption Price for each share of
        Series
        D Preferred Stock held by such holder. The holders of Series D Preferred
        Stock
        will not be entitled to any further payment.
  During
        January 2006, the holders of the shares of Series D Preferred Stock agreed
        to
        waive future accumulation of dividends, effective as of January 1, 2006.
        As of
        September 30, 2007, there were dividends in arrears on shares of Series D
        Preferred Stock of $828,000.  Such waiver did not affect dividends
        accrued through December 31, 2005.
  6
 **MIKROS
            SYSTEMS CORPORATION**
 **NOTES
            TO CONDENSED FINANCIAL STATEMENTS**
 **SEPTEMBER
            30, 2007**
 **(UNAUDITED)**
   Note
          3
– Earnings Per Share
  The
            Company’s calculation of earnings per share is as follows for the periods
            presented:
  **Three
                    Months Ended**
                ****
                ****
                **Nine
                    Months Ended**
                ********
                ****
                **Sept.
                    30,2007**
                ****
                ****
                **Sept.
                    30,2006**
                ****
                ****
                **Sept.
                    30,2007**
                ****
                ****
                **Sept.
                    30,2006**Net
                    income applicableto
                    common Stockholders
                
                $
                13,796
                
                
                $
                78,089
                
                
                $
                164,408
                
                
                $
                96,799Average
                    basicshares
                    outstanding
                
                
                31,766,753
                
                
                
                31,766,753
                
                
                
                31,766,753
                
                
                
                31,766,753Assumed
                    conversionof
                    preferred stock
                
                
                3,562,299
                
                
                
                3,562,299
                
                
                
                3,562,299
                
                
                
                3,562,299Effect
                    of dilutiveoptions
                    and warrants
                
                
                269,510
                
                
                
                120,437
                
                
                
                260,123
                
                
                
                124,843Average
                    dilutedshares
                    outstanding
                
                
                35,598,562
                
                
                
                35,449,489
                
                
                
                35,589,175
                
                
                
                35,453,895Net
                    earnings per common sharebasic
                    and diluted
                
                $
                0.00
                
                
                $
                0.00
                
                
                $
                0.00
                
                
                $
                0.00
  No
        options had an anti-dilutive effect thus none were excluded for purposes
        of
        calculating diluted earnings per share for the three months and nine months
        ended September 30, 2007. Additionally, warrants that were excluded for purposes
        of the diluted earnings per share calculations for 2006, expired during November
        2006, thus there were no warrants outstanding during 2007.
  A
        total
        of 5,489,000 shares issuable upon exercise of stock options or warrants were
        not
        included in the computation of diluted earnings per share for the three and
        nine
        months ended September 30, 2006 because the exercise or conversion price
        of such
        securities was greater than the average market price of the Company’s common
        stock for the period.
   Note
        4
– Significant Accounting Policies and Recent Accounting
        Pronouncements
  For
        a
        complete description of the Company’s  Significant Accounting
        Policies, please see Note 2 to the Company’s Financial Statements included in
        the Company’s Annual Report on Form 10-KSB for the year ended December 31,
        2006.
  Revenue
        Recognition Policy
 
 The
        Company is engaged in contracts with the Federal Government to help fund
        the
        costs of certain research and development activities as it attempts to develop
        certain technology to be utilized by the US Department of
        Defense.  The contracts are cost plus fixed fee contracts and the
        Company recognizes revenue under the contracts as it incurs reimbursable
        costs.  Each bill has a component for the reimbursable direct costs
        and a portion of overhead and fixed fees.  The overhead and fixed fees
        are being billed to the government at the rate permitted by the Defense Contract
        Audit Agency.
  7
 **MIKROS
          SYSTEMS CORPORATION**
 **NOTES
          TO CONDENSED FINANCIAL STATEMENTS**
 **SEPTEMBER
          30, 2007**
 **(UNAUDITED)**
 These
        arrangements are different from production-type contracts and qualify as
        research and development contracts.
  Similarly,
        when third party contractors are utilized in relation to these contracts,
        the
        Company reviews their performance and upon its determination that the costs
        are
        reimbursable under the contract, it records revenue for such costs in the
        period
        incurred.
  Unbilled
        revenue reflects work performed, but not billed at the time, pending contractual
        requirements. As of September 30, 2007, 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 September
        30,
        2007 we had no advanced billings.
  Recent
        Accounting Pronouncements
  In
        July
        2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
        Income Taxes – an interpretation of FASB Statement No. 109” (FIN 48), which
        clarifies the accounting for uncertainty in tax positions.  This
        Interpretation requires that companies recognize in their financial statements
        the impact of a tax position, if that position is more likely than not of
        being
        sustained on audit, based on the technical merits of
        the
        position.  The provisions of FIN 48 were effective for fiscal years
        beginning after December 15, 2006, with the cumulative effect of the change
        in
        accounting principle recorded as an adjustment to opening retained
        earnings.  Adoption of this pronouncement did not impact the Company’s
        financial position.
  In
        September 2006, the FASB issued Statement No. 157, Fair Value Measurements,
        which defines fair value, establishes a framework for measuring fair value
        under
        GAAP, and expands disclosures about fair value measurements.  FASB
        Statement No. 157 applies to other accounting pronouncements that require
        or
        permit fair value measurements.  The new guidance is effective for
        financial statements issued for fiscal years beginning after November 15,
        2007,
        and for interim periods within those fiscal years.  The Company
        is  currently evaluating the potential impact, if any, of the adoption
        of FASB Statement No. 157 on its financial statements.
  In
        February 2007, the FASB Issued SFAS No. 159, “The Fair Value Option for
        Financial Assets and Financial Liabilities – Including an amendment of FASB
        Statement No. 115”.  SFAS No. 159 permits entities to choose to
        measure many financial instruments and certain other items at fair
        value.  Unrealized gains and losses on items for which the fair value
        option has been elected will be recognized in earnings at each subsequent
        reporting date.  SFAS No. 159 is effective for the Company January 1,
        2008.  The Company is evaluating the impact that the adoption of SFAS
        No. 159 will have on its financial statements.
  In
        May
        2007, the FASB issued FASB Staff Position (“FSP”) FIN 48-1 “Definition of
        Settlement in FASB Interpretation No. 48” (FSP FIN 48-1). FSP FIN 48-1 provides
        guidance on how to determine whether a tax position is effectively settled
        for
        the purpose of recognizing previously unrecognized tax benefits. FSP FIN
        48-1 is
        effective retroactively to January 1, 2007. The implementation of this standard
        did not impact the Company’s financial position or results of
        operations.
  8
 **MIKROS
          SYSTEMS CORPORATION**
 **NOTES
          TO CONDENSED FINANCIAL STATEMENTS**
 **SEPTEMBER
          30, 2007**
 **(UNAUDITED)**
  Note
        5
        - Income Tax Matters
  The
        Company routinely conducts an on-going analysis to review the deferred tax
        assets and the related valuation allowance that it has recorded against deferred
        tax assets, primarily associated with Federal net operating loss
        carryforwards.  As a result of this analysis and actual results of
        operations, the Company decreased its net deferred tax assets by $5,400 during
        the quarter ended September 30, 2007 and increased its net deferred tax assets
        by $28,700 during the nine months ended September 30, 2007. Income tax expense
        includes expense associated with its state tax liabilities.
   Note
        6
– Share Base Compensation
 
 On
        August
        6, 2007, the Board of Directors adopted the Mikros Systems Corporation 2007
        Stock Incentive Plan (the “Plan”).  Awards may be made under the Plan
        for up to 3,000,000 shares of common stock in the form of stock options or
        restricted stock awards.  Awards may be made to the Company’s
        employees, officers, directors, consultants or advisors.  The Plan is
        administered by the Board of Directors which has full and final authority
        to
        interpret the Plan, select the persons to whom awards may be granted, and
        determine the amount, vesting and all other terms of any awards.  To
        the extent permitted by applicable law, the Board of Directors may delegate
        any
        or all of its powers under the Plan to one or more committees or subcommittees
        of the Board.  The Plan is not subject to the provisions of the
        Employee Retirement Income Security Act of 1974, as amended, and is not a
        “qualified plan” under Section 401(a) of the Internal Revenue Code of 1986, as
        amended.  The Plan has not been approved by the Company’s
        shareholders.  As a result, “incentive stock options” as defined under
        Section 422 of the Internal Revenue Code may not be granted under the Plan
        until
        such approval is received for the Plan.   The Plan terminates on
        August 5, 2017.
  All
        stock
        options granted under the Plan are exercisable for a period of up to ten
        years
        from the date of grant, are subject to vesting as determined by the Board
        upon
        grant, and have an exercise price equal to not less than the fair market
        value
        of our common stock on the date of grant.  Unless otherwise determined
        by the Board, awards may not be transferred except by will or the laws of
        descent and distribution.  The Board has discretion to determine the
        effect on any award granted under the Plan of the death, disability, retirement,
        resignation, termination  or other change in employment or other
        status of any participant in the Plan.  The maximum number of shares
        of common stock for which awards may be granted to a participant under the
        Plan
        in any calendar year is 300,000.
  Upon
        the
        occurrence of a “reorganization event”, defined as the merger of the Company
        with or into another corporation as a result of which the Company’s common stock
        is converted into or exchanged for cash, securities or other property or
        is
        cancelled, the exchange of all shares of our common stock for cash, securities
        or other property pursuant to a share exchange, or the liquidation of the
        Company, the Board may take any number of actions.  These actions
        include, providing for all options outstanding under the Plan to be assumed
        by
        the acquiring corporation or to become immediately vested and exercisable
        in
        full, and in the case of a reorganization event in which holders of the
        Company’s common stock receive a cash payment, to provide for a cash payment to
        holders of options equal to the excess, if any, of the per share cash payment
        over the exercise price of such options.
  9
 **MIKROS
          SYSTEMS CORPORATION**
 **NOTES
          TO CONDENSED FINANCIAL STATEMENTS**
 **SEPTEMBER
          30, 2007**
 **(UNAUDITED)**
  Note
        7
        - Subsequent Events
  On
        October 3, 2007, the Company issued options under our 2007 Stock Incentive
        Plan
        to certain of its employees, officers, directors, advisors and consultants
        to
        purchase an aggregate of 430,000 shares of common stock at an exercise price
        of
        $.55 per share, the last sales price of our common stock on the date of
        grant.  The 125,000 options issued to the Company’s directors have a
        term of ten years and vest in three equal annual installments over the three
        year period commencing on the date of grant. The 305,000 options issued to
        the
        Company’s employees, officers, advisors and consultants have a term of ten years
        and vest in five equal annual installments over the five year period commencing
        on the date of grant.
   CAUTIONARY
        STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
  This
        report contains “forward-looking statements” within the meaning of Section 27A
        of the Securities Act of 1933, as amended, and Section 21E of the Securities
        Exchange Act of 1934, as amended.  All statements other than
        statements of historical facts included or incorporated by reference in this
        report, including, without limitation, statements regarding our future financial
        position, business strategy, budgets, projected revenues, projected costs
        and
        plans and objective of management for future operations, are forward-looking
        statements.  In addition, forward-looking statements generally can be
        identified by the use of forward-looking terminology such as “may,” “will,”
“expects,” “intends,” “plans,” “projects,” “estimates,” “anticipates,” or
“believes” or the negative thereof or any variation thereon or similar
        terminology or expressions.
  These
        forward-looking statements are subject to risks and uncertainties that could
        cause actual results to differ materially from results proposed in such
        statements.  Although we believe that the expectations reflected in
        such forward-looking statements are reasonable, we can give no assurance
        that
        such expectations will prove to have been correct. Important
        factors that could cause actual results to differ materially from
        our
        expectations include, but are not limited to: changes in business conditions,
        changes in our sales strategy and product development plans, changes
        in the marketplace, continued services of our executive management team,
        our
        limited marketing experience, competition between us and other companies
        seeking SBIR grants, competitive pricing pressures, market acceptance
        of our products under development, delays in the development of
        products, and statements of assumption underlying any of the foregoing, as
        well
        as other factors set forth under the caption “Risk Factors” in
        our
        Annual Report on Form 10-KSB for the year ended December 31, 2006 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.
  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
        nine months ended September 30, 2007 and 2006.  We believe that we can
        utilize the intellectual property developed under our various SBIR awards
        to
        develop proprietary products for both the government and commercial
        marketplace.
  Contracts
  In
        September 2004, we were awarded a SBIR Phase III contract valued at
        approximately $2,400,000 from the Naval Surface Warfare Center – Dahlgren,
        Virginia, for the commercialization of the Company’s MFDAT (Multi-Functional
        Distributed Analysis Tool) SBIR-developed technology.  This contract
        resulted in the development of ADEPT® (a registered trademark of the Company), a
        computer-aided alignment and maintenance tool for the AN/SPY-1 radar system,
        which is the primary air and surface radar for the AEGIS Combat System installed
        on the Ticonderoga (CG-47) and Arleigh Burke (DDG-51) class guided missile
        warships.  Five Low Rate Initial Production (LRIP) ADEPT units were
        manufactured for U.S. Navy evaluation**.**
  In
        March
        2006, we were awarded an amendment to this SBIR Phase III contract valued
        at
        approximately $2,950,000 to expand the application of ADEPT to include all
        the
        SPY-1 radar variants aboard all of the AEGIS cruisers and
        destroyers.  In addition, we are developing a smaller, lighter version
        of ADEPT for applications where weight and size are critical
        factors.  ADEPT functional testing has been accomplished aboard the
        USS SAN JACINTO (CG-56) and continues at the Cruiser Modernization (CGM)
        SPY-1A
        Test Facility in Moorestown, New Jersey**.**
  In
        May
        2006, we were awarded an SBIR Phase II contract from Space and Naval Warfare
        Systems Command (SPAWAR), San Diego, as a follow-on to our SBIR Phase I work
        performed under the SBIR topic entitled Radar Wireless Spectral Efficiency
        (RWSE).  The total award is valued at approximately $750,000 divided
        into a $600,000 base program and a $150,000 option program.  This SBIR
        Phase II effort focuses on the real world implications of incorporating wireless
        networking into the aircraft carrier (CVN class ships) and amphibious assault
        ship (LHD class ships) environments.  Under this program, a prototype
        of an Interference-Aware Wireless Network Planning Tool is being developed
        to
        assist in the implementation and fielding of wireless networks on board U.S.
        Navy surface vessels.
  11
 
 As
        part
        of this RWSE SBIR Phase II program, our engineers have performed Wi-Fi
        propagation surveys aboard the aircraft carrier USS GEORGE WASHINGTON (CVN-73)
        and the amphibious assault ship USS BATAAN (LHD-5).  The empirical
        results from these surveys were used to refine the Wi-Fi signal propagation
        algorithms embedded in the Wireless Network Planning Tool
        prototype.  In March 2007, our engineers sailed aboard the U.S. Navy
        amphibious assault ship USS KEARSARGE (LHD-3) during its underway exercise
        in
        the Atlantic Ocean near Norfolk, Virginia.  This afforded us the
        opportunity to measure the shipboard radio frequency environment during actual
        at-sea operating conditions.  This information is critical to
        analyzing potential interference to and from commercial wireless networks
        and to
        validate the interference aspect of the Interference-Aware Wireless Network
        Planning Tool currently under development.
  On
        April
        30, 2007, we were awarded a $2.4 million contract from the Naval Surface
        Weapons
        Center, Port Hueneme Division (NSWC PHD) for the continuing development of
        ADEPT®,  our automated maintenance tool 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.  NSWC PHD is the U.S. Navy’s In-Service Engineering Agency
        (ISEA) for the AN/SPY-1 Radar System.
  This
        contract provides for the continuing development of advanced capabilities
        for
        ADEPT, the finalizing of an ADEPT Integrated Logistics Support Plan required
        for
        fleet fielding, and the Low Rate Initial Production (LRIP) of ten (10) ADEPT(V)2
        units, which are half the size and weight of the original ADEPT(V)1 while
        maintaining the same functionality.   The contract follows
        successful testing and evaluation of ADEPT on one AEGIS cruiser along with
        testing at the Navy’s AN/SPY-1 Cruiser Modernization Test Facility in
        Moorestown, NJ.  It is expected that the ADEPT equipment will
        initially be installed on AEGIS cruisers undergoing modernization with
        introduction into the destroyers to follow.  The entire U.S. Navy
        AEGIS fleet consists of 22 cruisers and 62 destroyers.
  In
        May,
        2007, we were awarded SBIR Phase II funding through Space and Naval Warfare
        Systems Command (SPAWAR), San Diego.  This $750,000 effort is a spin off of
        work performed under the SBIR topic entitled Radar Wireless Spectral Efficiency
        (RWSE).  This SBIR Phase II effort, entitled ‘Kill Chain Vulnerability
        Analysis Tool’ focuses on the interaction between tactical data links and
        interferers such as hostile jammers.  We are working closely with engineers
        from the Naval Air Warfare Center Weapons Division (NAWCWD), located in China
        Lake, California, on this project.  NAWCWD, a division of Naval Air Systems
        Command (NAVAIR), is responsible for ‘Arming the Fleet’. The technical objective
        of this effort is to develop simulation models that can be used to predict
        the
        performance of data links in a jamming environment.
  In
        May,
        2007, we were awarded additional funding on SBIR Topic “A Study of Commercial
        Wireless LAN Interference Issues Aboard U.S. Navy Carriers” (CVNs).  The
        contract is a follow-on to the SBIR Phase I work we performed under Radar
        Wireless Spectral Efficiency (RWSE). The additional funding of $150,000 was
        awarded to us from Space and Naval Warfare Systems Command (SPAWAR) San Diego,
        bringing the total amount of the SBIR Phase II contract to $750,000. 
During the contract option period, together with our team partner Mobilisa
        Inc.,
        we plan to continue development of the Interference-aware Wireless Network
        Design tool (IWIND), a software package which allows the Navy to plan and
        optimize deployment of shipboard WiFi networks.  IWIND automatically places
        shipboard Access Points to optimize coverage based on  user-specified
        wireless requirements.  It also analyzes potential interference between
        network equipment and onboard RF systems such as radars, and where possible,
        mitigates interference using smart placement and channel selection
        algorithms.  IWIND will be used by the Navy to plan network deployments on
        aircraft carriers (CVNs) and other platforms.
  12
  On
        June
        1, 2007, we received a subcontract from Mobilisa, Inc. to assist in the
        development of a ”Radio Frequency/Microwave Hazard Assessment Tool
        (RHAZ)”.  RHAZ is a hazard analysis software tool designed to enable
        medics, range safety officers, and researchers to determine radio frequency
        personnel hazards in real time deployment environments.  Valued at
        approximately $33,000, the subcontract brings our expertise in radio frequency
        (RF) propagation and simulation to the issue of RF safety in deployed
        environments.  Working in conjunction with the U.S. Air Force, the
        Mobilisa/Mikros team will work to develop a tool to predict the RF hazards
        associated with the deployment of RF and Microwave assets.
 
 In
        October, 2007,  we were awarded an SBIR Phase I contract through Space
        and Naval Warfare Systems Command (SPAWAR), San Diego, CA.  This
        $100,000 effort  titled “Small Buoy for Energy Harvesting” will
        collaborate in the design and development of a miniaturized, self-powered
        ocean
        buoy which can be deployed at sea for extended periods to support various
        on-board payload packages, such as network communications nodes.  This
        communication package is designed to allow submarines to communicate with
        the
        Battle Group while operating at speed and depth.
  In
        October, 2007, we were awarded additional funding for continued development
        of
        the AIRchitect-EMC “interference-aware” wireless network design tool. The
        additional funding was awarded to us from Space and Naval Warfare Systems
        Command (SPAWAR) San Diego, CA.  A modification to the existing RWSE
        (Radar Wireless Spectral Efficiency) Phase II SBIR contract provides an
        additional $900,000 to support new feature upgrades to the AIRchitect-EMC
        software, including full three-dimensional modeling capabilities.
  Key
        Performance Indicator and
        Outlook
  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.
  13
 
 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.
  Changes
        to Critical Accounting Policies and Estimates
  Our
        critical accounting policies and estimates are set forth in our Annual Report
        on
        Form 10-KSB for the fiscal year ended December 31, 2006.  As of
        September 30, 2007, there have been no changes to such critical accounting
        policies and estimates.
 
 Results
        of Operations
  Three
        Months Ended September 30, 2007 and 2006
  We
        generated revenues of $663,256 during the three months ended September 30,
        2007
        compared to $626,290 for the same period in 2006, an increase of $36,966
        or
        6%.  The increase was due primarily to the additional Air Force RHAZ
        Phase I contract from Mobilisa and the additional RWSE Phase II contracts
        we
        secured during 2007.
  Cost
        of
        sales consist of direct contracts costs such as labor,
        material,  subcontracts, travel, and other direct
        costs.  Cost of sales remained relatively constant at $362,232 during
        the three months ended September 30, 2007 compared to $365,936 for the three
        months ended September 30, 2006.
  Engineering
        costs consist primarily of salary, wages and related fringe benefits paid
        to
        engineering employees, rent related costs, and consulting fees paid to
        engineering consultants.  Engineering costs for the three months ended
        September 30, 2007 were $117,528 compared to $87,168 for the three months
        ended
        September 30, 2006, an increase of $30,360 or 35%.  The increase was
        due primarily to the additional fringe benefits and engineering consultant
        costs.
  14
 
 General
        and administrative expenses consist primarily of salary,  consulting
        fees paid to bid and proposal consultant and related
        costs,  professional fees, business insurance, corporate taxes,
        register and public related costs, travel, and unallowable
        expenses.  General and Administrative costs for the three months ended
        September 30, 2007 were $158,698 compared to $97,897 for the three months
        ended
        September 30, 2006, an increase of $60,801 or 62%.  The increase was
        due primarily to higher costs related to increased general and administrative
        salaries, bid and proposal consulting fees, additional legal expenses, and
        the
        retention of a Sarbanes-Oxley 404 compliance consultant.
  We
        recognized a net income tax expense (benefit) of $12,572 and $(2,800) for
        the
        three months ended September 30, 2007 and September 30, 2006,
        respectively.  The net income tax expense for the three months ended
        September 30, 2007 includes $12,172 of federal and state taxes and an adjustment
        to the valuation allowance recorded against the deferred tax assets associated
        with the federal net operating loss carryforwards in the amount of
        $400.
  We
        generated net income for the three months ended September 30, 2007 of $13,796
        as
        compared to net income of $78,089 for the three months ended September 30,
        2006,
        a decrease of $64,293 or 82%.  The decrease in net income was due
        primarily to $91,161 of increased engineering and general and administrative
        costs associated with additional personnel, the retention of engineering
        and
        general and administrative consultants, and additional professional
        fees.  These amounts were offset by the $36,966 increase in
        revenue.
  Nine
        Months Ended September 30, 2007 and 2006
  We
        generated revenues of $2,303,142 during the nine months ended September 30,
        2007
        compared to $1,576,283 during the nine months ended September 30, 2006, an
        increase of $726,859 or 46%. Cost of sales were $1,368,713 for the nine months
        ended September 30, 2007 compared to $939,865 for the nine months ended
        September 30, 2006, an increase of $428,848 or 46%. These increases were
        due
        primarily to the additional Air Force RHAZ Phase I contract from Mobilisa
        and
        the additional RWSE Phase II contracts we secured during 2007.
  Engineering
        costs for the nine months ended September 30, 2007 were $309,232 compared
        to
        $233,899 for the nine months ended in 2006, an increase of $75,333 or
        32%.  The increase in engineering costs for the nine months ended
        September 30, 2007 was due primarily to the addition of fringe benefits,
        incentive compensation, and consultant costs.
  General
        and administrative expenses for the nine months ended September 30, 2007
        were
        $469,447 compared to $296,805 for the nine months ended September 30, 2006,
        an
        increase of $172,642 or 58%.  The increase was due primarily to higher
        costs related to increased bid and proposal consulting fees, bid and proposal
        and general and administrative salaries, hiring of a Sarbanes-Oxley 404
        compliance consultant, and additional travel expenses to secure new
        contracts.
  We
        recognized net income tax expense (benefit) for the nine months ended September
        30, 2007 of $(4,498) compared to $9,200 for the nine months ended September
        30,
        2006.  The net income tax benefit for the nine months ended September
        30, 2007 includes $81,000 of federal and state taxes which are offset by
        a
        reversal of a portion of the valuation allowance recorded against the deferred
        tax assets associated with the federal net operating loss carryforwards in
        the
        amount of $86,700.  The $9,200 recorded for the nine months ended
        September 30, 2006 represents the current income tax expense.
  15
  We
        generated net income for the nine months ended September 30, 2007 of $164,408
        compared to $96,799 for the nine months ended September 30, 2006, an increase
        of
        $67,609 or 70%.  The increase in net income was due primarily to the
        additional profits generated from the additional Air Force RHAZ Phase I contract
        form Mobilisa, SBIR Phase III and RWSE Phase II contracts in
        2007.  With regard to income tax expense, amounts recorded for both
        periods are impacted by actual contract profitability versus that estimated
        for
        purposes of recording our deferred tax assets and associated valuation
        allowance.
  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.
  For
        the
        nine months ended September 30, 2007, net cash provided by operations was
        $144,679 compared to $75,273 for the nine months ended September 30, 2006.
        The
        increase was primarily the result of the increase in net income between the
        two
        periods. We had working capital of $434,633 as of September 30, 2007 as compared
        to working capital of $263,353 at December 31, 2006.  The increase was
        due primarily to increases in cash of $135,414, accounts receivable of $13,228,
        and the current portion of deferred tax assets of $42,000 all of which were
        partially offset by an increase of $17,711 in accounts payable.
  On
        November 16, 2006, we entered into a $50,000 revolving line of credit with
        Sun
        National Bank (the “Lender”) evidenced by a promissory note in favor of the
        Lender.  The revolving line of credit will be available to us for two
        years.  On November 14, 2008, advances will no longer be able to be
        made under the revolving line of credit.  At that time, the then
        outstanding principal balance will be converted into a five-year term loan
        with
        payments based on a five-year amortization schedule.  The term loan
        will be payable in 60 equal monthly installments and be due in full on November
        14, 2013. During the first five months of the revolving line of credit, any
        outstanding principal balance was to bear interest at 5.99% per
        annum.  Thereafter, any outstanding principal balance will bear
        interest equal to the Sun National Bank Prime Rate.  The loan is
        secured by substantially all of our assets pursuant to a Commercial Security
        Agreement (the “Security Agreement”) in favor of the Lender and is guaranteed by
        Thomas J. Meaney, our President and Chief Executive Officer. There were no
        outstanding amounts under this line of credit at September 30,
        2007.
  We
        believe our available cash resources and expected cash flows from operations
        will be sufficient to fund operations for the next twelve months.  We
        do not expect to incur any material capital expenditures during the next
        twelve
        months.
  Contractual
        Obligations
  We
        lease
        our engineering office in Fort Washington, Pennsylvania pursuant to a five-year
        lease which continues through November 30, 2010.  Our current monthly
        lease payment is $5,468.83, and is subject to an annual increase.
  16
  Off-Balance
        Sheet Arrangements
  As
        of
        September 30, 2007, we did not have any relationships with unconsolidated
        entities or financial partners, such as entities often referred to as structured
        finance or special purpose entities, which had been 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
        3.  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 September 30, 2007, our disclosure controls and procedures
        were effective to ensure (i) that information we are required to disclose
        in
        reports that we file or submit under the Securities Exchange Act of 1934
        is
        recorded, processed, summarized and reported within the time periods specified
        in the SEC’s rules and forms and (ii) that such information is accumulated and
        communicated to management, including our president, in order to allow timely
        decisions regarding required disclosure.
  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 September 30, 2007 that have materially affected, or are
        reasonably likely to materially affect, our internal control over financial
        reporting.
   PART
        II.  OTHER INFORMATION
  Item
        2.  Unregistered Sales of Equity Securities and Use of
        Proceeds.
  On
        October 3, 2007, we issued options under our 2007 Stock Incentive Plan to
        certain of our employees, officers, directors, advisors and consultants to
        purchase an aggregate of 430,000 shares of common stock at an exercise price
        of
        $.55 per share, the last sales price of our common stock on the date of
        grant.  The 125,000 options issued to our directors have a term of ten
        years and vest in three equal annual installments over the three year period
        commencing on the date of grant.  The 305,000 options issued to our
        employees, officers, directors, advisors and consultants have a term of ten
        years and vest in five equal annual installments over the five year period
        commencing on the date of grant.  The foregoing securities were issued
        in a private placement transaction pursuant to the exemption from registration
        provided by Section 4(2) of the Securities Act of 1933, as amended, without
        engaging in any advertising or general solicitation of any kind and without
        payment of underwriting discounts or commissions to any person.
  Item
        6.   Exhibits
  Exhibit
        31.1   Certification of principal executive officer and principal
        financial officer pursuant to Section 302 of the Sarbanes Oxley Act of
        2002.
 Exhibit
        32.1   Certification of principal executive officer and principal
        financial officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002,
        18
        U.S.C. 1350.
  17
 
 SIGNATURES
  In
        accordance with the requirements of the Exchange Act, the registrant caused
        this
        report to be signed on its behalf by the undersigned, thereunto duly
        authorized.
  **MIKROS
                SYSTEMS
                CORPORATION**Date:
                  November
                  14, 2007
              By:
              /s/ Thomas
                J. MeaneyThomas
                J. MeaneyPresident,
                (Principal Executive
                Officer andPrincipal
                  Financial Officer)