The institute's report called for Seoul to hit back hard against any strike by the North.
"The only way to deter a pre-emptive attack by the North is to make it clear that the South Korean forces will assume it is a precursor to a full-out war and strike back regardless of the nature of the aggression, even if it is a small-scale regional guerilla war."
While the North has fewer combat aircraft than in 1986, its air power has been boosted by top-class MiG-29 fighter jets since the 1990s, the institute said. It also said there have notable increase in the number of submarines.
But experts say most of the North's naval and air force equipment are aged, and that its low fuel supplies mean it would be unable to sustain a long military operation.
Most of the impoverished North's finances are used to develop its programs to build weapons of mass destruction.
The North has come under international sanctions since 2006 for testing nuclear devices and long-range missiles. In late 2010, it unveiled a uranium enrichment facility, which has opened a second route to make an atomic bomb along with its plutonium program.
Analysts say that the young and inexperienced new leader, Kim Jong-un, who is heading a third generation of dynastic rule in the North, will stick to his father's militaristic approach.
They say he could take action, such as a military attack or more nuclear or missile tests, to burnish his credentials as an iron-fisted leader in the same mould as his father and grandfather.
The North has threatened to turn the South's capital, Seoul, into a "sea of fire" on numerous occasions and repeated that rhetoric again last week.
North Korea has a long history of using bellicose language against the South, especially since the conservative government of Lee Myung-bak took office in 2008 and ended a policy of engagement with the North.