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** **

 

** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

#### **Washington, D.C. 20549**

#### ** **

##### **FORM 10-Q**

##### ** **

**(Mark One)**

| **x****Quarterly Report Pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934**  |
|--------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                   |
| **For the  Quarter Ended June 30, 2008**                                                                |
|                                                                                                         |   |   |
| **or**                                                                                                       |
|                                                                                                         |   |   |
| **o****Transition Report Pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934** |

** **

**For thetransition period from                 to                 **

 

**CommissionFile Number 000-09273**

** **

**MOCON, INC.**

(Exactname of registrant as specified in its charter)

 

| **Minnesota**                   | ** ** | **41-0903312**      |
|---------------------------------|------------|---------------------|
| (State or other jurisdiction of |       | (I.R.S. employer    |
| incorporation or organization)  |       | identification no.) |

 

**7500 Boone Avenue North, Minneapolis,Minnesota 55428**

(Address of principal executiveoffices)           (Zipcode)

 

**(763) 493-6370**

(Registrant’s telephone number, including area code)

 

Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

 

YES x  NO o

 

Indicate bycheck mark whether the registrant is a large accelerated filer, an acceleratedfiler, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large acceleratedfiler,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2of the Exchange Act.  Large acceleratedfiler  o  Accelerated filer  o  Non-accelerated filer (do not check if asmaller reporting company)  o  Smaller reporting company x

 

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

 

YES o NO x

 

5,577,118Common Shares were outstanding as of July 31, 2008.

 

 

 

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MOCON, INC. AND SUBSIDIARIES

 

INDEX TO FORM 10-Q

For the Quarter Ended June 30,2008

 
| ** **                       | ** **                                                                                                   | ** ** | **Page  Number** |
|----------------------------------|--------------------------------------------------------------------------------------------------------------|------------|------------------|
| PART I.                     | FINANCIAL  INFORMATION                                                                                       |       |             |
|                             |                                                                                                         |       |             |
| Item 1.                          | Financial Statements  Consolidated Balance Sheets  June 30, 2008 (Unaudited) and December 31, 2007 |       | 1                |
|                             |                                                                                                         |       |             |
|                             | Consolidated Statements of Income (Unaudited)  Three months and six months ended June 30, 2008 and 2007 |       | 2                |
|                             |                                                                                                         |       |             |
|                             | Consolidated Statements of Cash Flows (Unaudited)  Six months ended June 30, 2008 and 2007              |       | 3                |
|                             |                                                                                                         |       |             |
|                             | Notes to Consolidated Financial Statements (Unaudited)                                                       |       | 4-10             |
|                             |                                                                                                         |       |             |
| Item 2.                          | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                  |       | 11-21            |
|                             |                                                                                                         |       |             |
| Item 3.                          | Quantitative and Qualitative Disclosures About Market  Risk                                                  |       | 21               |
|                             |                                                                                                         |       |             |
| Item 4T.                         | Controls and Procedures                                                                                      |       | 21-22            |
|                             |                                                                                                         |       |             |
| PART II.  OTHER INFORMATION |                                                                                                         |       |
|                             |                                                                                                         |       |             |
| Item  1A.                        | Risk  Factors                                                                                                |       | 23               |
|                             |                                                                                                         |       |             |
| Item 2.                          | Unregistered Sales of Equity Securities, Use of  Proceeds and Issuer Purchases of Equity Securities          |       | 23               |
|                             |                                                                                                         |       |             |
| Item 4.                          | Submission of Matters to a Vote of Security Holders                                                          |       | 24               |
|                             |                                                                                                         |       |             |
| Item 6.                          | Exhibits                                                                                                     |       | 24               |
|                             |                                                                                                         |       |             |
| Signatures                       |                                                                                                         | 25         |
|                             |                                                                                                         |       |             |
| Exhibit Index               |                                                                                                         | 26         |
|                                  |                                                                                                              |            |                  |  |

 

*In this report, references to“MOCON,” “the Company,” “we,” “our,” or “us,” unless the context otherwiserequires, refer to MOCON, Inc. and its subsidiaries.*

* *

*Alltrademarks or trade names referred to in this report are the property of theirrespective owners.*

 

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PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

MOCON, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

(Unaudited)
| ** **                                                                                                                                        | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                        | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| ** **                                                                                                                                        | ** ** | ** **        | ** ** | ** **            | ** ** |
| ASSETS                                                                                                                                            |       |              |       |                  |       |
| Current  assets:                                                                                                                                  |       |              |       |                  |       |
| Cash  and cash equivalents                                                                                                                        |       | $                 | 5,455,529  |                  | $          | 5,207,105 |   |
| Marketable  securities, current                                                                                                                   |       | 5,947,542         |       | 7,028,812             |       |
| Trade  accounts receivable, less allowance for doubtful accounts of $97,364 in 2008  and $125,797 in 2007                                         |       | 4,211,680         |       | 4,291,224             |       |
| Other  receivables                                                                                                                                |       | 178,662           |       | 186,273               |       |
| Inventories                                                                                                                                       |       | 4,183,666         |       | 3,965,446             |       |
| Prepaid  expenses                                                                                                                                 |       | 592,477           |       | 335,104               |       |
| Deferred  income taxes                                                                                                                            |       | 291,943           |       | 291,943               |       |
| Total  current assets                                                                                                                             |       | 20,861,499        |       | 21,305,907            |       |
|                                                                                                                                              |       |              |       |                  |       |
| Marketable  securities, noncurrent                                                                                                                |       | 5,092,313         |       | 2,788,964             |       |
| Property,  plant and equipment, net of accumulated depreciation of $4,534,644 in 2008  and $4,290,311 in 2007                                     |       | 1,524,654         |       | 1,583,387             |       |
|                                                                                                                                              |       |              |       |                  |       |
| Other  assets:                                                                                                                                    |       |              |       |                  |       |
| Goodwill                                                                                                                                          |       | 3,096,317         |       | 3,096,317             |       |
| Technology  rights and other intangibles, net                                                                                                     |       | 585,317           |       | 572,675               |       |
| Deferred  income taxes                                                                                                                            |       | 265,627           |       | 252,729               |       |
| Other                                                                                                                                             |       | 75,295            |       | 73,518                |       |
| Total  other assets                                                                                                                               |       | 4,022,556         |       | 3,995,239             |       |
|                                                                                                                                              |       |              |       |                  |       |
| TOTAL  ASSETS                                                                                                                                     |       | $                 | 31,501,022 |                  | $          | 29,673,497 |   |
|                                                                                                                                              |       |              |       |                  |       |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                                                        |       |              |       |                  |       |
| Current  liabilities:                                                                                                                             |       |              |       |                  |       |
| Accounts  payable                                                                                                                                 |       | $                 | 1,744,345  |                  | $          | 1,591,306 |   |
| Accrued  compensation and vacation                                                                                                                |       | 1,189,603         |       | 1,340,500             |       |
| Other  accrued expenses                                                                                                                           |       | 259,962           |       | 304,750               |       |
| Accrued  product warranties                                                                                                                       |       | 209,340           |       | 201,373               |       |
| Accrued  income taxes                                                                                                                             |       | —            |       | 68,670                |       |
| Dividends  payable                                                                                                                                |       | 473,978           |       | 442,244               |       |
| Total  current liabilities                                                                                                                        |       | 3,877,228         |       | 3,948,843             |       |
|                                                                                                                                              |       |              |       |                  |       |
| Obligations  to former employees                                                                                                                  |       | 64,774            |       | 60,387                |       |
| Accrued  income taxes                                                                                                                             |       | 276,900           |       | 279,000               |       |
| Total  noncurrent liabilities                                                                                                                     |       | 341,674           |       | 339,387               |       |
|                                                                                                                                              |       |              |       |                  |       |
| Total  liabilities                                                                                                                                |       | 4,218,902         |       | 4,288,230             |       |
|                                                                                                                                              |       |              |       |                  |       |
| Stockholders’  equity:                                                                                                                       |       |              |       |                  |       |
| Capital  stock – undesignated – authorized 3,000,000 shares                                                                             |       | —            |       | —                |       |
| Common  stock – $0.10 par value. Authorized 22,000,000 shares; issued and outstanding  5,576,218 shares in 2008 and 5,528,051 shares in 2007 |       | 557,622           |       | 552,805               |       |
| Capital  in excess of par value                                                                                                                   |       | 2,683,918         |       | 2,127,183             |       |
| Retained  earnings                                                                                                                                |       | 23,125,586        |       | 22,106,178            |       |
| Accumulated  other comprehensive gain                                                                                                             |       | 914,994           |       | 599,101               |       |
| Total  stockholders’ equity                                                                                                                  |       | 27,282,120        |       | 25,385,267            |       |
|                                                                                                                                              |       |              |       |                  |       |
| TOTAL  LIABILITIES AND STOCKHOLDER’S EQUITY                                                                                                  |       | $                 | 31,501,022 |                  | $          | 29,673,497 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

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MOCON, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OFINCOME

(Unaudited)

 
| ** **                                    | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                    | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                    | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| Sales:                                        |       |                             |       |                           |       |   |   |   |   |
| Products                                      |       | $                                | 6,923,120  |                           | $          | 6,137,290 |   | $ | 14,025,573 |   | $ | 12,624,461 |   |
| Consulting  services                          |       | 455,602                          |       | 520,596                        |       | 815,583 |   | 909,974 |   |
| Total  sales                                  |       | 7,378,722                        |       | 6,657,886                      |       | 14,841,156 |   | 13,534,435 |   |
|                                          |       |                             |       |                           |       |   |   |   |   |
| Cost  of sales:                               |       |                             |       |                           |       |   |   |   |   |
| Products                                      |       | 2,734,813                        |       | 2,586,411                      |       | 5,654,425 |   | 5,264,052 |   |
| Consulting  services                          |       | 244,157                          |       | 244,509                        |       | 478,460 |   | 503,042 |   |
| Total  cost of sales                          |       | 2,978,970                        |       | 2,830,920                      |       | 6,132,885 |   | 5,767,094 |   |
|                                          |       |                             |       |                           |       |   |   |   |   |
| Gross  profit                                 |       | 4,399,752                        |       | 3,826,966                      |       | 8,708,271 |   | 7,767,341 |   |
|                                          |       |                             |       |                           |       |   |   |   |   |
| Selling,  general and administrative expenses |       | 2,441,291                        |       | 2,098,043                      |       | 5,023,925 |   | 4,326,930 |   |
|                                          |       |                             |       |                           |       |   |   |   |   |
| Research  and development expenses            |       | 483,013                          |       | 434,580                        |       | 1,026,964 |   | 970,100 |   |
|                                          |       |                             |       |                           |       |   |   |   |   |
| Operating  income                             |       | 1,475,448                        |       | 1,294,343                      |       | 2,657,382 |   | 2,470,311 |   |
|                                          |       |                             |       |                           |       |   |   |   |   |
| Other  income                                 |       | 156,921                          |       | 140,523                        |       | 288,614 |   | 267,906 |   |
|                                          |       |                             |       |                           |       |   |   |   |   |
| Income  before income taxes                   |       | 1,632,369                        |       | 1,434,866                      |       | 2,945,996 |   | 2,738,217 |   |
|                                          |       |                             |       |                           |       |   |   |   |   |
| Income  taxes                                 |       | 581,000                          |       | 503,000                        |       | 1,009,000 |   | 973,000 |   |
|                                          |       |                             |       |                           |       |   |   |   |   |
| Net  income                                   |       | $                                | 1,051,369  |                           | $          | 931,866 |   | $ | 1,936,996 |   | $ | 1,765,217 |   |
|                                          |       |                             |       |                           |       |   |   |   |   |
| Net  income per common share:                 |       |                             |       |                           |       |   |   |   |   |
| Basic                                         |       | $                                | 0.19       |                           | $          | 0.17 |   | $ | 0.35 |   | $ | 0.32 |   |
| Diluted                                       |       | $                                | 0.18       |                           | $          | 0.16 |   | $ | 0.34 |   | $ | 0.31 |   |
|                                          |       |                             |       |                           |       |   |   |   |   |
| Weighted  average shares outstanding:         |       |                             |       |                           |       |   |   |   |   |
| Basic                                         |       | 5,552,869                        |       | 5,489,160                      |       | 5,542,651 |   | 5,481,089 |   |
| Diluted                                       |       | 5,688,737                        |       | 5,696,456                      |       | 5,670,962 |   | 5,688,666 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

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MOCON, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OFCASH FLOWS

(Unaudited)

 
| ** **                                                                         | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                         | ** ** | **June 30,**              | ** ** |
| ** **                                                                         | ** ** | **2008**                       | ** ** | **2007** | ** ** |
| Cash  flows from operating activities:                                             |       |                           |       |   |   |
| Net  income                                                                        |       | $                              | 1,936,996  |   | $ | 1,765,217 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |                           |       |   |   |
| Share-based  compensation expense                                                  |       | 154,068                        |       | 202,001 |   |
| Loss  on disposition of long-term assets                                           |       | 20,668                         |       | 14,589 |   |
| Depreciation  and amortization                                                     |       | 278,156                        |       | 294,041 |   |
| Deferred  income taxes                                                             |       | (12,898                        | )          | (24,696 | ) |
| Excess  tax benefit from employee stock plans                                      |       | (23,978                        | )          | — |   |
| Changes  in operating assets and liabilities:                                      |       |                           |       |   |   |
| Trade  accounts receivable                                                         |       | 161,384                        |       | (390,554 | ) |
| Other  receivables                                                                 |       | 8,998                          |       | (95,768 | ) |
| Inventories                                                                        |       | (176,574                       | )          | (19,204 | ) |
| Prepaid  expenses                                                                  |       | (268,933                       | )          | 52,929 |   |
| Accounts  payable                                                                  |       | 97,688                         |       | (401,851 | ) |
| Accrued  compensation and vacation                                                 |       | (168,325                       | )          | (211,754 | ) |
| Other  accrued expenses                                                            |       | (47,679                        | )          | (76,399 | ) |
| Accrued  product warranties                                                        |       | 5,292                          |       | (10,346 | ) |
| Accrued  income taxes                                                              |       | (40,473                        | )          | (101,401 | ) |
| Net  cash provided by operating activities                                         |       | 1,924,390                      |       | 996,804 |   |
|                                                                               |       |                           |       |   |   |
| Cash  flows from investing activities:                                             |       |                           |       |   |   |
| Purchases  of marketable securities                                                |       | (4,410,216                     | )          | (3,220,418 | ) |
| Proceeds  from maturities of marketable securities                                 |       | 3,173,675                      |       | 3,577,917 |   |
| Cash  paid for acquisitions                                                        |       | —                         |       | (574,568 | ) |
| Purchases  of property and equipment                                               |       | (152,255                       | )          | (156,557 | ) |
| Proceeds  from sale of property and equipment                                      |       | 7,858                          |       | — |   |
| Purchases  of patents and trademarks                                               |       | (84,617                        | )          | (55,729 | ) |
| Other                                                                              |       | (1,777                         | )          | (3,435 | ) |
| Net  cash used in investing activities                                             |       | (1,467,332                     | )          | (432,790 | ) |
|                                                                               |       |                           |       |   |   |
| Cash  flows from financing activities:                                             |       |                           |       |   |   |
| Proceeds  from the exercise of stock options                                       |       | 385,475                        |       | 299,480 |   |
| Purchases  and retirement of common stock                                          |       | (1,969                         | )          | — |   |
| Excess  tax benefit from employee stock plans                                      |       | 23,978                         |       | — |   |
| Dividends  paid                                                                    |       | (885,854                       | )          | (821,357 | ) |
| Net  cash used in financing activities                                             |       | (478,370                       | )          | (521,877 | ) |
|                                                                               |       |                           |       |   |   |
| Effect  of exchange rate changes on cash                                           |       | 269,736                        |       | 54,737 |   |
|                                                                               |       |                           |       |   |   |
| Net  increase in cash and cash equivalents                                         |       | 248,424                        |       | 96,874 |   |
|                                                                               |       |                           |       |   |   |
| Cash  and cash equivalents:                                                        |       |                           |       |   |   |
| Beginning  of period                                                               |       | 5,207,105                      |       | 3,549,042 |   |
| End  of period                                                                     |       | $                              | 5,455,529  |   | $ | 3,645,916 |   |
|                                                                               |       |                           |       |   |   |
| Supplemental  disclosures of cash flow information:                                |       |                           |       |   |   |
| Cash  paid during the period for income taxes                                      |       | $                              | 1,043,617  |   | $ | 1,098,647 |   |
|                                                                               |       |                           |       |   |   |
| Supplemental  schedule of noncash investing and financing activities:              |       |                           |       |   |   |
| Unrealized  holding loss on available-for-sale securities                          |       | $                              | —     |   | $ | (2,192 | ) |
| Amortization  of cumulative unrealized gain on marketable securities               |       | $                              | (14,462    | ) | $ | — |   |
| Dividends  accrued                                                                 |       | $                              | 473,978    |   | $ | 440,517 |   |

 

See accompanying notes to consolidated financialstatements.

 

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MOCON, INC. AND SUBSIDIARIES

 

NOTES TOCONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1 – Consolidated Financial Statements

 

Theconsolidated balance sheet as of June 30, 2008, and the consolidatedstatements of income and cash flows for the three- and six-month periods ended June 30,2008 and 2007 have been prepared by us, without audit.  However, all adjustments (consisting solelyof normal recurring adjustments) which are, in the opinion of management,necessary to present fairly the financial position, results of operations andcash flows at June 30, 2008, and for all periods presented, have beenmade.  The results of operations for thethree- and six-month periods ended June 30, 2008 are not necessarilyindicative of operating results for the full year.

 

Certain information and footnote disclosures normally included infinancial statements prepared in accordance with accounting principles generallyaccepted in the United States of America have been condensed or omitted.  It is suggested that these consolidatedfinancial statements be read in conjunction with the consolidated financialstatements and notes included in our Annual Report on Form 10-K for thefiscal year ended December 31, 2007, previously filed with the Securitiesand Exchange Commission.

 

We operate in a single industry segment: the developing, manufacturing,and marketing of measurement, analytical, monitoring and consulting productsfor customers in the barrier packaging, food, pharmaceutical, consumerproducts, industrial hygiene, air quality monitoring, oil and gas explorationand other industries throughout the world.

 

*Principles of Consolidation*

 

Theconsolidated financial statements include the accounts of MOCON, Inc. andits subsidiaries after elimination of inter-company transactions and accounts.

 

*Foreign Currency Translation*

* *

Thefinancial statements for operations outside the United States are maintained intheir local currency.  All assets andliabilities of our foreign subsidiary are translated to United States dollarsat period-end exchange rates, while revenue and expense accounts are translatedat the average exchange rates during the period transactions occurred.  Translation adjustments arising from the useof differing exchange rates are included in accumulated other comprehensiveincome or loss in stockholders’ equity. Gains and losses on foreign currency transactions are included in otherincome or loss.

 

*Use of Estimates*

 

Thepreparation of consolidated financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the consolidated financial statements and the reported amountsof revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

 

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*New Accounting Pronouncements*

* *

InSeptember 2006, the Financial Accounting Standards Board (FASB) issued theStatement of Financial Accounting Standard (SFAS) No. 157, *Fair Value Measurement* (SFAS 157).  This statement did not require any new fairvalue measurements, but rather, it provided enhanced guidance to otherpronouncements that require or permit assets or liabilities to be measured atfair value.  The changes to currentpractice resulting from the application of this statement related to thedefinition of fair value, the methods used to estimate fair value, and therequirement for expanded disclosures about estimates of fair value.  This statement became effective for usbeginning in 2008.  The effective datefor this statement for all non-financial assets and non-financial liabilities,except for items that are recognized or disclosed at fair value in thefinancial statements on a recurring bases, has been delayed by one year.  We adopted the provisions of SFAS 157 relatedto financial assets and financial liabilities on January 1, 2008.  The partial adoption of this statement didnot have an impact on our consolidated financial statements.  It is expected that the remaining provisionsof this statement will not have a material effect on our consolidated financialstatements.

 

InFebruary 2008, the FASB issued FASB Staff Position (FSP) No.157-1, *Application of FASB Statement No. 157 to FASB Statement No. 13and Its Related Interpretive Accounting Pronouncements That Address LeasingTransactions*, and FSP FAS 157-2, *Effective Date of FASBStatement No. 157*.  FSPFAS 157-1 removes leasing from the scope of SFAS 157, *Fair ValueMeasurements*.  FSP FAS 157-2delays the effective date of SFAS 157 from 2008 to 2009 for all nonfinancialassets and nonfinancial liabilities, except those that are recognized ordisclosed at fair value in the financial statements on a recurring basis (atleast annually).  See SFAS 157 discussionabove.  Adoption of FSP FAS 157-1 did nothave an effect on our consolidated financial statements.

 

InFebruary 2007, the FASB issued SFAS No. 159, *The FairValue Option for Financial Assets and Financial Liabilities – Including anamendment of FASB Statement 115* (SFAS 159).  This statement permits entities to choose tomeasure many financial instruments and certain other items at fair value.  The objective is to improve financial reportingby providing entities with the opportunity to mitigate volatility in reportedearnings caused by measuring related assets and liabilities differently withouthaving to apply complex hedge accounting provisions.  SFAS 159 was effective for us beginning in2008 and was to be applied prospectively. As we did not elect to measure existing assets and liabilities at fairvalue, the adoption of this statement did not have an effect on ourconsolidated financial statements.

 

InDecember 2007, the FASB issued SFAS No. 141 (revised 2007), *Business Combinations* (SFAS 141(R)).  SFAS 141(R) retains the fundamentalrequirements of the original pronouncement requiring that the purchase methodbe used for all business combinations. SFAS 141(R) defines the acquirer as the entity that obtains controlof one or more businesses in the business combination, establishes theacquisition date as the date that the acquirer achieves control and requiresthe acquirer to recognize the assets acquired, liabilities assumed and anynoncontrolling interest at their fair values as of the acquisition date.  SFAS 141(R) also requires thatacquisition-related costs be recognized separately from the acquisition.  SFAS 141(R) becomes effective forbusiness combinations occurring on or after January 1, 2009, and earlyadoption is prohibited.

 

InDecember 2007, the FASB issued SFAS No. 160, *NoncontrollingInterests in Consolidated Financial Statements* (SFAS 160).  SFAS 160 clarifies that a noncontrollinginterest in a subsidiary should be reported as equity in the consolidatedfinancial statements.  Consolidated netincome should include the net income for both the parent and the noncontrollinginterest with disclosure of both amounts on the consolidated statement ofincome.  The calculation of earnings pershare will continue to be based on income amounts attributable to theparent.  SFAS 160 is effective for usbeginning in 2009.  We currently do nothave any subsidiaries in which we hold a noncontrolling interest and,therefore, we believe this pronouncement will have no impact on ourconsolidated financial statements.

 

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InMarch 2008, the FASB issued SFAS No. 161, *Disclosuresabout Derivative Instruments and Hedging Activities* (SFAS 161), anamendment of SFAS No. 133.  SFAS 161establishes, among other things, the disclosure requirements for derivativeinstruments and for hedging activities. The intent is to provide users of financial statements with an enhancedunderstanding of a) how and why an entity uses derivative instruments, b) howderivative instruments and related hedged items are accounted for under SFAS133 and its related interpretations, and c) how derivative instruments andrelated hedged items affect an entity’s financial position, financialperformance, and cash flows.  To meetthose objectives, the Statement requires qualitative disclosures aboutobjectives and strategies for using derivatives, quantitative disclosures aboutfair value amounts of and gains and losses on derivative instruments, anddisclosures about credit-risk-related contingent features in derivativeagreements.  SFAS 161 is effective for usbeginning in 2009.  We currently have noderivative instruments or hedging activities but will assess the impact of SFAS161 if and when we engage in these types of transactions.

 

Note 2 – Inventories

 

Inventories consist of the following:

 

| ** **         | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|--------------------|------------|-------------------------|------------|-----------------------------|------------|
| Finished  products |       | $                       | 753,036    |                        | $          | 687,979 |   |
| Work-in-process    |       | 1,322,697               |       | 1,391,620                   |       |
| Raw  materials     |       | 2,107,933               |       | 1,885,847                   |       |
|               |       | $                       | 4,183,666  |                        | $          | 3,965,446 |   |

 

Note 3 – Net Income Per Common Share

 

Basic net income per common share is computed by dividing net income bythe weighted average number of shares of common stock outstanding during theperiod.  Diluted net income per commonshare is computed using the treasury stock method to compute the weighted averagecommon stock outstanding assuming the conversion of potential dilutive commonshares.

 

The following table presents a reconciliation of the denominators usedin the computation of net income per common share – basic, and net income percommon share – diluted, for the three- and six-month periods ended June 30, 2008and 2007:

 

| ** **                                                              | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                              | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Weighted  shares of common stock outstanding – basic               |       | 5,552,869                                       |       | 5,489,160                                     |       | 5,542,651 |   | 5,481,089 |   |
| Weighted  shares of common stock assumed upon exercise of stock options |       | 135,868                                         |       | 207,296                                       |       | 128,311 |   | 207,577 |   |
| Weighted  shares of common stock outstanding – diluted             |       | 5,688,737                                       |       | 5,696,456                                     |       | 5,670,962 |   | 5,688,666 |   |

 

Note 4 – Goodwill and Intangible Assets

 

Asof both June 30, 2008 and December 31, 2007, unamortized goodwilltotaled $3,096,317.  Other identifiableintangible assets (all of which are being amortized except projects in process)are as follows:

 

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| ** **                  | ** ** | **As of June 30, 2008** | ** ** |
|-----------------------------|------------|---------------------------------------------|------------|
| ** **                  | ** ** | **Carrying  Amount**                        | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** | **Estimated  Useful Lives** | ** ** |
| Patents                     |       | $                                           | 831,069    |   | $ | (343,798 | ) | $ | 487,271 |   | 10 to 17  years |   |
| Trademarks  and trade names |       | 441,139                                     |       | (343,093 | ) | 98,046 |   | 5 to 17  years |   |
|                        |       | $                                           | 1,272,208  |   | $ | (686,891 | ) | $ | 585,317 |   |   |   |

 
| ** **                  | ** ** | **As of December 31, 2007** | ** ** |
|-----------------------------|------------|-------------------------------------------------|------------|
| ** **                  | ** ** | **Carrying  Amount**                            | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** | **Estimated  Useful Lives** | ** ** |
| Patents                     |       | $                                               | 790,269    |   | $ | (328,883 | ) | $ | 461,386 |   | 10 to 17  years |   |
| Trademarks  and trade names |       | 418,101                                         |       | (306,812 | ) | 111,289 |   | 5 to 17  years |   |
|                        |       | $                                               | 1,208,370  |   | $ | (635,695 | ) | $ | 572,675 |   |   |   |

 

Totalamortization expense for the three- and six-month periods ended June 30,2008 and 2007 was $28,404 and $40,375, and $56,462 and $73,098,respectively.  Projects in process arenot amortized until the patent or trademark is granted by the regulatoryagency.  Estimated amortization expensefor the remainder of 2008 and each of the four succeeding fiscal years and thereafterbased on the intangible assets as of June 30, 2008 is as follows:

 

| ** **          | ** ** | **Estimated  Expense** | ** ** |
|---------------------|------------|------------------------|------------|
| 2008                |       | $                      | 56,833     |   |
| 2009                |       | $                      | 45,439     |   |
| 2010                |       | $                      | 37,912     |   |
| 2011                |       | $                      | 24,329     |   |
| 2012                |       | $                      | 19,327     |   |
| 2013 and thereafter |       | $                      | 106,423    |   |

 

### Note 5 – Marketable Securities

###  

As of January 1, 2008, the method of accountingfor our marketable securities was changed from available-for-sale toheld-to-maturity.  This change was madedue to our positive intent and ability to hold these securities until maturityor the call date as the case may be. Currently, all of our marketable securities mature within two andone-half years.  Under the prior method,these securities were recorded at fair value and the unrealized holding gainsand losses were excluded from income and reported as a separate component ofstockholders’ equity until realized. Held-to-maturity securities are measured at amortized cost and areadjusted for the amortization or accretion of premiums or discounts.  For the debt securities that were outstandingat December 31, 2007, there was approximately $25,000 of unrealized gainthat was recorded in stockholders’ equity, which is being amortized over theremaining life of the securities.  At June 30,2008 and 2007, the net cumulative unrealized gain (loss) was $10,820 and($3,669), respectively.

 

Note 6 – Comprehensive Income

 

Othercomprehensive income pertains to net unrealized gains and losses on marketablesecurities and foreign currency translation adjustments that are not includedin net income but rather are recorded directly in stockholders’ equity.  For 2008, there was no unrealized gain orloss on marketable securities recorded due to the change in accounting forthese securities as explained in Note 5 above.

 

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| ** **                                                           | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                           | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net  income                                                          |       | $                                               | 1,051,369  |                                          | $          | 931,866 |   | $ | 1,936,996 |   | $ | 1,765,217 |   |
| Foreign  currency translation adjustment                             |       | (1,338                                          | )          | 31,760                                        |       | 330,355 |   | 63,072 |   |
| Net  unrealized loss on marketable securities                        |       | —                                          |       | (1,160                                        | )          | — |   | (2,192 | ) |
| Amortization  of cumulative unrealized gain on marketable securities |       | (14,462                                         | )          | —                                        |       | (14,462 | ) | — |   |
| Comprehensive  income                                                |       | $                                               | 1,035,569  |                                          | $          | 962,466 |   | $ | 2,252,889 |   | $ | 1,826,097 |   |

 

Note 7 – Warranty

 

We provide a warranty for most of our products.  Warranties are for periods ranging fromninety days to one year, and cover parts and labor for non-maintenance repairs,at our location.  Operator abuse,improper use, alteration, damage resulting from accident, or failure to followmanufacturer’s directions are excluded from warranty coverage.

 

Warranty expense is accrued at the time of sale based on historical claimsexperience.  Warranty reserves are alsoaccrued for special rework campaigns for known major productmodifications.  We also offer extendedwarranty service contracts for select products when the factory warranty periodexpires.

 

Warranty provisions and claims for the six-month periods ended June 30,2008 and 2007 were as follows:

 

| ** **           | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------|------------|-----------------------------------------------|------------|
| ** **           | ** ** | **2008**                                      | ** ** | **2007** | ** ** |
| Beginning  balance   |       | $                                             | 201,373    |   | $ | 246,737 |   |
| Warranty  provisions |       | 171,957                                       |       | 133,335 |   |
| Warranty  claims     |       | (163,990                                      | )          | (142,049 | ) |
| Ending  balance      |       | $                                             | 209,340    |   | $ | 238,023 |   |

 

Note 8 – Income Taxes

 

The Company adopted the provisions of FASB Interpretation No. 48, *Accounting for Uncertainty in Income Taxes, an Interpretation of FASBStatement No. 109* (FIN 48) on January 1, 2007.  This interpretation clarifies the accountingfor uncertainty in income taxes recognized in an entity’s financial statementsin accordance with SFAS 109, *Accounting for IncomeTaxes*.  It prescribes arecognition threshold and measurement attribute for financial statementdisclosure of tax positions taken or expected to be taken on a tax return.  As of December 31, 2007, the liabilityfor gross unrecognized tax benefits was $220,000, which included potentialbenefits of $157,000 that if recognized would affect the effective tax rate onincome from continuing operations. During the three months ended June 30, 2008, there were nosignificant changes to the total gross unrecognized tax benefits.  It is expected that the amount ofunrecognized tax benefits for positions which we have identified will notchange significantly in the next twelve months.

 

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MOCON, Inc. or one of its subsidiaries filesincome tax returns in the U.S. Federal jurisdiction, several statejurisdictions and Germany.  With limitedexceptions, we are no longer subject to income tax examinations by taxing authoritiesfor taxable years before 2004.

 

Note 9 – Share-Based Compensation

 

As of June 30, 2008, we have reserved318,900 shares of common stock for options and other share-based incentiveawards that are still available for grant under our 2006 stock incentive plan,and 793,690 shares for options that have been granted under either the 2006stock incentive plan or the 1998 stock option plan but have not yet beenexercised.  We issue new shares of commonstock upon exercise of stock options.  There were no options granted in the secondquarter of 2008.

 

Amountsrecognized in the consolidated financial statements related to share-basedcompensation are as follows:

 
| ** **                                                  | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                  | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Total  cost of share-based compensation                     |       | $                                               | 76,429     |                                          | $          | 100,571 |   | $ | 154,068 |   | $ | 202,001 |   |
| Amount  capitalized in inventory and property and equipment |       | —                                          |       | —                                        |       | — |   | — |   |
| Amounts  charged against income, before income taxes        |       | 76,429                                          |       | 100,571                                       |       | 154,068 |   | 202,001 |   |
| Amount  of income tax benefit recognized in earnings        |       | (17,626                                         | )          | (15,518                                       | )          | (30,179 | ) | (28,644 | ) |
| Amount  charged against net income                          |       | $                                               | 58,803     |                                          | $          | 85,053 |   | $ | 123,889 |   | $ | 173,357 |   |

 

The fair value of each option grant is estimated on the date of grantusing the Black-Scholes option-pricing model (Black-Scholes).  We use historical data to estimate theexpected price volatility, expected option life and expected forfeiturerate.  We base our estimate of expectedvolatility for awards granted on daily historical trading data of our commonstock for a period equivalent to the expected term of the award.  The risk-free interest rate is based on theU.S. Treasury yield curve in effect at the time of grant for the estimated lifeof the option.  We estimate the expectedterm consistent with historical exercise and cancellation activity of ourprevious share-based grants with a ten-year contractual term.  Forfeitures are based on historicalexperience.  The dividend yield iscalculated based upon the dividend payments made during the prior four quartersas a percent of the average stock price for that period.

 

A summary of the option activity for the first six months of 2008 is asfollows:

 

| ** **                             | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise  Price per  Share** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|----------------------------------------|------------|----------------------------|------------|--------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------|------------|
| Outstanding  at December 31, 2007 |       | 856,437                    |       | $                                                      | 8.73       |                                                | 5.4        |                            | $          | 2,061,171 |   |
| Options  granted                       |       | —                     |       | —                                                 |       | —                                              |       |                            |       |
| Options  cancelled                     |       | (7,962                     | )          | $                                                      | 10.90      |                                                | —     |                            |       |   |
| Options  expired                       |       | (6,393                     | )          | $                                                      | 11.05      |                                                | —     |                            |       |   |
| Options  exercised                     |       | (48,392                    | )          | $                                                      | 7.97       |                                                | —     |                            |       |   |
| Outstanding  at June 30, 2008     |       | 793,690                    |       | $                                                      | 8.73       |                                                | 5.0        |                            | $          | 1,964,335 |   |
|                                   |       |                       |       |                                                   |       |                                                |       |                            |       |
| Exercisable  at June 30, 2008     |       | 631,685                    |       | $                                                      | 8.18       |                                                | 4.6        |                            | $          | 1,887,497 |   |

 

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The total intrinsic value of options exercised was $104,553 and $84,908during the three-month periods ended June 30, 2008 and 2007, respectively,and $141,788 and $138,628 during the first six months of 2008 and 2007,respectively.

 

A summary of the status ofour unvested option shares as of June 30, 2008 is as follows:

 

| ** **                          | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** |
|-------------------------------------|------------|----------------------------|------------|---------------------------------------------------------|------------|
| Unvested  at December 31, 2007 |       | 185,542                    |       | $                                                       | 2.93       |   |
| Options  granted                    |       | —                     |       | —                                                  |       |
| Options  cancelled                  |       | (6,787                     | )          | $                                                       | 2.79       |   |
| Options  vested                     |       | (16,750                    | )          | $                                                       | 3.21       |   |
| Unvested  at June 30, 2008     |       | 162,005                    |       | $                                                       | 2.90       |   |

 

As of June 30, 2008, there was $470,182 of total unrecognizedcompensation cost related to unvested share-based compensation granted underour plans.  That cost is expected to berecognized over a weighted-average period of 1.2 years.  The total fair value of option shares vestedduring the three-month periods ended June 30, 2008 and 2007 was $26,884and $41,811, respectively, and $53,768 and $83,339 during the six-month periodsended June 30, 2008 and 2007, respectively.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition andResults of Operations

 

ThisManagement’s Discussion and Analysis provides material historical andprospective disclosures intended to enable investors and other users to assessour financial condition and results of operations.  Statements that are not historical areforward-looking and involve risks and uncertainties discussed below under thecaption “Forward-Looking Statements.” The following discussion of the results of operations and financialcondition of MOCON should be read in conjunction with our consolidatedfinancial statements and the related notes thereto included elsewhere in thisreport.

 

### ***Overview***

### ** **

MOCON, Inc. designs, manufactures, markets andservices products and provides consulting services primarily in the measurementand analytical instrument and services markets. Our products include instruments that detect, measure and monitor gasesand chemical compounds.  Although some ofthe markets for our products are maturing, we continually seek growthopportunities through technological and product improvement, by acquiring anddeveloping new products, and by acquiring new companies.

 

We have three primary operating locations in theUnited States – Minnesota, Colorado and Texas – and foreign offices in Germanyand China.  We use a direct sales forceand independent sales representatives to market our products and services inthe United States, Canada, Germany and China and use a network of independentsales representatives to market and service our products and services in otherforeign countries.

 

Historically, a significant portion of our revenueshave come from international customers. In this regard, we acquired our subsidiary in Germany in 2004 tosolidify our presence and opportunities in Europe.  Similarly, in 2007, we opened our office inShanghai, China, to better serve our Asian customers.

 

Our current plans for growth include continuedfunding for research and development at levels consistent with amounts spent onthese activities in recent periods to foster new product development, togetherwith strategic acquisitions where appropriate.

 

### ***Results ofOperations***

### ** **

The following table sets forth the relationshipbetween various components of our results of operations, stated as a percent ofsales, for the three- and six-month periods ended June 30, 2008 and 2007:

 

| ** **                                    | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                    | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Sales                                         |       | 100.0                                           |       | 100.0                                         |       | 100.0 |   | 100.0 |   |
| Cost  of sales                                |       | 40.4                                            |       | 42.5                                          |       | 41.3 |   | 42.6 |   |
| Gross  profit                                 |       | 59.6                                            |       | 57.5                                          |       | 58.7 |   | 57.4 |   |
| Selling,  general and administrative expenses |       | 33.1                                            |       | 31.5                                          |       | 33.8 |   | 32.0 |   |
| Research  and development expenses            |       | 6.5                                             |       | 6.6                                           |       | 6.9 |   | 7.2 |   |
| Operating  income                             |       | 20.0                                            |       | 19.4                                          |       | 18.0 |   | 18.2 |   |
| Other  income                                 |       | 2.1                                             |       | 2.2                                           |       | 1.9 |   | 2.0 |   |
| Income  before income taxes                   |       | 22.1                                            |       | 21.6                                          |       | 19.9 |   | 20.2 |   |
| Income  taxes                                 |       | 7.9                                             |       | 7.6                                           |       | 6.8 |   | 7.2 |   |
| Net  income                                   |       | 14.2                                            |       | 14.0                                          |       | 13.1 |   | 13.0 |   |

 

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### *Comparison of Financial Resultsfor the Three- and Six-Month Periods Ended June 30, 2008 and 2007*

### * *

### *Sales*

###  

Sales for the three-month period ended June 30,2008 were $7,378,722, up 11% compared to $6,657,886 for the same period in2007. On a product line basis, this increase was primarily the result ofincreased international sales of our permeation products and services. We alsobenefitted from a weaker U.S. dollar in the current period, which made ourproducts and services more attractive in the European market. On a geographicalbasis, sales increased 30% in our foreign markets and decreased 5%domestically.

 

Sales for the six-month period ended June 30,2008 were $14,841,156, up 10% compared to $13,534,435 for the same period in2007. On a product line basis, this increase was primarily the result ofincreased sales of our permeation products and services, which was evident inboth our domestic and foreign markets. We also benefitted from a weaker U.S.dollar in the current period, which made our products and services moreattractive in the European market. On a geographical basis, sales increased 18%in our foreign markets and 2% in our domestic markets. There were nosignificant price increases or decreases during either the second quarter orfirst six months of 2008, compared to the same periods in 2007.

 

On a geographical basis, domestic and foreign salesaccounted for 47% and 53%, respectively, of our consolidated second quartersales in 2008, and 55% and 45%, respectively, for the same period in 2007.  Domestic and foreign sales accounted for 47%and 53% of our consolidated sales for the first six months of 2008, and eachaccounted for 50% of our consolidated sales for the same period in 2007.

 

The following table summarizes total sales by product line for thethree- and six-month periods ended June 30, 2008 and 2007:

 

| ** **                                                | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Permeation  products and services                         |       | $                                               | 4,302,125  |                                          | $          | 3,387,667 |   | $ | 8,236,178 |   | $ | 6,846,832 |   |
| Gas,  headspace, and other analyzer products and services |       | 2,751,485                                       |       | 2,909,034                                     |       | 5,780,563 |   | 5,981,048 |   |
| Other  instruments and services                           |       | 325,112                                         |       | 361,185                                       |       | 824,415 |   | 706,555 |   |
| Total  sales                                              |       | $                                               | 7,378,722  |                                          | $          | 6,657,886 |   | $ | 14,841,156 |   | $ | 13,534,435 |   |

 

The following table sets forth the relationshipbetween various components of domestic and foreign sales for the three- andsix-month periods ended June 30, 2008 and 2007:

 

| ** **           | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **           | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Domestic  sales      |       | $                                               | 3,456,007  |                                          | $          | 3,634,643 |   | $ | 6,948,938 |   | $ | 6,830,576 |   |
| Foreign  sales:      |       |                                            |       |                                          |       |   |   |   |   |
| Europe               |       | 1,790,772                                       |       | 1,147,856                                     |       | 3,773,673 |   | 2,442,683 |   |
| Asia                 |       | 1,491,505                                       |       | 1,252,241                                     |       | 2,924,700 |   | 2,958,241 |   |
| Other                |       | 640,438                                         |       | 623,146                                       |       | 1,193,845 |   | 1,302,935 |   |
| Total  foreign sales |       | 3,922,715                                       |       | 3,023,243                                     |       | 7,892,218 |   | 6,703,859 |   |
| Total  sales         |       | $                                               | 7,378,722  |                                          | $          | 6,657,886 |   | $ | 14,841,156 |   | $ | 13,534,435 |   |

 

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***Permeation Products and Services*** –Sales of our permeation products and services, which accounted forapproximately 58% and 51% of our consolidated second quarter sales in 2008 and2007, respectively, increased 27% during the second quarter 2008 compared tothe same period in 2007.  This increase,which was exclusively in our foreign markets, was due primarily to increaseddemand for our core permeation instruments. International sales of permeation products and services accounted for65% of the total sales of this product group in the second quarter 2008.

 

Sales of our permeation products and services, whichaccounted for approximately 55% and 51% of our consolidated sales during thefirst six months in 2008 and 2007, respectively, increased 20% during the firstsix months of 2008 compared to the same period in 2007.  This increase, which was primarily in ourforeign markets, was due primarily to increased demand for instruments andtesting services.  International sales ofpermeation products and services accounted for 66% of the total sales of thisproduct group in the first six months of 2008.

 

***Gas, Headspace, and Other Analyzer Products andServices*****– Sales of ourgas, headspace, and other analyzer products and services, which accounted for37% and 44% of our consolidated second quarter sales in 2008 and 2007,respectively, decreased 5% during the second quarter 2008 compared to the sameperiod in 2007.  Within this group, salesof our gas analyzer products through our Baseline subsidiary decreased 14% dueto a drop in instrument sales (i.e. gas chromatographs and total hydrocarbonanalyzers), which was partially offset by an increase in sales of sensors anddetectors (i.e. piD-TECH® sensors and FID detectors).

 

Sales of our packaging products, which includesheadspace analyzers and leak detection equipment, increased 9% during thesecond quarter 2008 compared to the same period in 2007.  We experienced an increase in foreign ordersfor leak detection equipment (primarily in Europe) due to customer acceptanceof the new Lippke 4000 product line. This was offset by a reduction in domesticorders for leak detection equipment while total sales of headspace analyzerswas consistent between the two periods.

 

Sales of our gas, headspace, and other analyzerproducts, which accounted for 39% and 44% of our consolidated sales during thefirst six months in 2008 and 2007, respectively, decreased 3% during the firstsix months of 2008 compared to the same period in 2007.  Within this group, sales of our gas analyzerproducts through our Baseline subsidiary decreased 9% due in part to a drop inshipments of our total hydrocarbon analyzers and gas chromatographs primarilyto our international customers.

 

Sales of our packaging products increased 4% duringthe first six months of 2008 compared to the same period in 2007.  This increase was due primarily to continuedmarket acceptance of our PAC CHECK® series of analyzers and the growing acceptanceof our Lippke 4000 leak detection instruments.

 

***Other Instruments and Services*****– Sales in our other instruments and servicescategory, which accounted for 5% of our consolidated sales in both the secondquarters of 2008 and 2007, decreased 10% in the second quarter 2008, comparedto the same period in 2007.  Thisdecrease was due primarily to a reduction in contract manufacturing of samplepreparation products for one exclusive customer.

 

For the six months ended June 30, 2008 and2007, sales of other instruments and services accounted for 6% and 5% of ourconsolidated sales, respectively, increasing 17% in the first six months of2008 as compared to the same period in 2007. The increase was primarily due to higher sales of sample preparationproducts which we manufacture under an exclusive contract, and also the salesof non-MOCON products by our German subsidiary.

 

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### *Gross Profit*

###  

The gross profit margins for our product sales were60.5% and 57.9% for the three-month periods ended June 30, 2008 and 2007,respectively.  This increase wasprimarily due to the increased shipments of our higher margin permeationinstruments.  The gross profit marginsfor our consulting services were 46.4% and 53.0%, respectively, for thethree-month periods ended June 30, 2008 and 2007.  This decrease was primarily due to lowersales volume in this area and the varying margins between consulting serviceprojects.

 

For the six months ended June 30, 2008 and 2007,the gross profit margins for our products were 59.7% and 58.3%,respectively.  The slightly higher marginfor the first six months of 2008 was due primarily to the increased percentageof permeation instruments sold which generally carry a higher gross margin.

 

For the six months ended June 30, 2008 and 2007,the gross profit margins for our consulting services were 41.3% and 44.7%,respectively.  This decrease wasprimarily due to decreased demand for our consulting and analytical testingservices which reduced the ability to fully absorb the related fixed overheadcosts.

 

*Selling, General andAdministrative Expenses*

 

Selling, general and administrative (SG&A)expenses in the three-month period ended June 30, 2008 were $2,441,291, or33.1% of sales, compared to $2,098,042, or 31.5% of sales in the second quarter2007.  The $343,249 increase in SG&Aexpenses was primarily due to increased headcount and related benefits,directors’ fees and other professional fees.

 

SG&A expenses were $5,023,925, or 33.8% ofsales, during the first six months of 2008, compared to $4,326,930, or 32.0% ofsales, for the same period in 2007.  Theincrease in SG&A expenses was primarily due to increased headcount andrelated benefits, increased marketing and travel expense, and higherprofessional fees.

 

### *Research and Development Expenses*

###  

Research and development (R&D) expenses were$483,013, or 6.5% of sales in the second quarter 2008, compared to $434,580, or6.6% of sales, in the same period of 2007. This level of expense is within our planned range of R&Dexpenditures.

 

R&D expenses were 6.9% and 7.2% of sales for thesix-month periods ended June 30, 2008 and 2007, respectively.  For the foreseeable future, we expect toallocate on an annual basis approximately 6% to 8% of sales to research anddevelopment.

 

### *Other Income*

###  

Other income for the second quarter ended June 30,2008 of $156,921 consisted of interest income of $141,169, foreign currencyexchange gain of $12,378 and miscellaneous other income of $3,374.  Other income for the second quarter ended June 30,2007 of $140,523 consisted of interest income of $139,949 and miscellaneousother income of $1,261, offset by a loss of $687 on foreign currency exchange.

 

For the six months ended June 30, 2008, otherincome of $288,614 consisted of interest income of $280,278, foreign currencyexchange gain of $5,793 and miscellaneous other income of $2,543.  For the six months ended June 30, 2007,other income of $267,906 consisted of interest income of $274,554 andmiscellaneous other income of $1,261, partially offset by a loss of $7,909 onforeign currency exchange.  Interestincome increased for the second quarter and six months ended June 30,2008, compared to the same periods in 2007, due to higher average interestbearing investments, 

 

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partially offset by lower average yields.

 

### *Income Tax Expense*

###  

Our provision for income taxes was 35.6% of incomebefore income taxes for the second quarter ended June 30, 2008, comparedto 35.1% of income before income taxes for the second quarter ended June 30,2007.  Based on current operatingconditions and income tax laws, we expect the tax rate for the remainder of2008 to be in the range of 31% to 36%. This rate fluctuates over time based on the income tax rates in thevarious jurisdictions in which we operate, and also the level of profits inthose jurisdictions.

 

For the six months ended June 30, 2008, ourprovision for income taxes was 34.2% of income before income taxes compared to35.5% of income before income taxes for the six months ended June 30,2007.  The lower effective rate in thecurrent year period was due primarily to the increased amount of tax-exemptinterest earned by the Company in 2008.

 

### *Net Income*

###  

Net income was $1,051,369 in the second quarter2008, compared to $931,866 in the second quarter 2007.  Diluted net income was $0.18 and $0.16 pershare in the second quarters of 2008 and 2007, respectively.  For the six months ended June 30, 2008,net income was $1,936,996, or $0.34 per diluted share, compared to net incomeof $1,765,217, or $0.31 per diluted share in the prior year.

 

*Liquidity and Capital Resources*

 

We have historically financed our operations,capital expenditures and other liquidity needs through our cash flows generatedfrom operations.  Total cash, cashequivalents and marketable securities increased $1,470,503 during the first sixmonths of 2008 to $16,495,384 as of June 30, 2008, compared to $15,024,881at December 31, 2007.  Our workingcapital as of June 30, 2008 decreased $372,793 to $16,984,271, as comparedto $17,357,064 at December 31, 2007. Our investment in marketable securities consists primarily of municipalbonds, certificates of deposits and U.S. treasury obligations.  We do not currently have any funds investedin auction rate certificates.  We believethat a combination of our existing cash, cash equivalents and marketablesecurities, plus an expected continuation of cash flow from operations, willcontinue to be adequate to fund our operations, capital expenditures, dividendpayments and authorized stock repurchases for at least the next twelvemonths.  Purchases of property andequipment were relatively constant between the two periods mentioned above, andwe had no material commitments for capital expenditures as of June 30,2008.

 

One of our strategic objectives is, as market andbusiness conditions warrant, to consider acquisitions of businesses, productsor technologies.  We may need to fundsuch activities, should they arise, with a combination of cash on hand and debtand/or equity financing, although no assurance can be given that such debtand/or equity financing will be available at reasonable terms or at all.  We currently do not have any committed linesof credit or other credit facilities available for use.  If we raise additional funds by issuing debt,we may be subject to restrictive covenants that could limit our operationalflexibility and higher interest expense could dilute earnings per share.  Any plan to raise additional capital mayinvolve an equity-based or equity-linked financing, which may be dilutive toexisting shareholders.

 

*Cash Flow*

 

Cash Flow from Operating Activities

 

Our primary source of funds is cash provided byoperating activities which totaled $1,924,390 and $996,804 in the first sixmonths of 2008 and 2007, respectively. The key components of the cash 

 

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provided by operating activities in 2008 were thenet income, decreased accounts receivable and increased accounts payable,partially offset by increases in inventories and prepaid expenses and adecrease in accrued compensation.

 

### Cash Flow from Investing Activities

###  

Cash used in investing activities totaled $1,467,332and $432,790 in the first six months of 2008 and 2007, respectively.  The primary reasons for cash usage in 2008were net purchases of marketable securities of $1,236,541 and purchases ofproperty and equipment.  For 2007, theprimary reasons for the cash usage were the final earn-out payment of $574,568made for the Lippke acquisition and purchases of property and equipment,partially offset by the impact of net proceeds from the maturity of marketablesecurities of $357,499.  We presently donot believe that any significant property, plant and equipment expenditures arerequired to accommodate our current level of operations.

 

Cash Flow from Financing Activities

 

Cash used in financing activities totaled $478,370and $521,877 in the first six months of 2008 and 2007, respectively.  During the first six months of 2008 and 2007,we made dividend payments to our shareholders of $885,854 and $821,357,respectively.  Partially offsetting the impact of thesepayments were the proceeds from the exercise of stock options in the amounts of$385,475 and $299,480 in the first six months of 2008 and 2007, respectively.

 

Our Board of Directors has authorized, dependingupon market conditions and other factors, the repurchase of up to a total of$2,000,000 of our common stock.  As of June 30,2008, we had repurchased an aggregate of 41,725 shares of MOCON common stockunder the program at a total cumulative cost of $365,094.  There were 225 shares of common stockrepurchased in the quarter ended June 30, 2008 and there was $1,634,906remaining in this authorization at that date.

 

***ContractualObligations***

** **

We refer you to our Annual Report on Form 10-Kfor the year ended December 31, 2007 for a summary of our contractualobligations.  There has been no materialchange in this information.

 

### ***Off-Balance SheetArrangements***

### ** **

Exceptfor operating leases entered into in the ordinary course of business andcustomary indemnification obligations under certain of our agreements enteredinto in the ordinary course of business, we do not have any materialoff-balance sheet arrangements.

 

***New AccountingPronouncements***

*** ***

InSeptember 2006, the Financial Accounting Standards Board (FASB) issued theStatement of Financial Accounting Standard (SFAS) No. 157, *Fair Value Measurement* (SFAS 157).  This statement did not require any new fairvalue measurements, but rather, it provided enhanced guidance to otherpronouncements that require or permit assets or liabilities to be measured atfair value.  The changes to currentpractice resulting from the application of this statement related to thedefinition of fair value, the methods used to estimate fair value, and therequirement for expanded disclosures about estimates of fair value.  This statement became effective for usbeginning in 2008.  The effective datefor this statement for all non-financial assets and non-financial liabilities,except for items that are recognized or disclosed at fair value in thefinancial statements on a recurring bases, has been delayed by one year.  We adopted the provisions of SFAS 157 relatedto financial assets and financial liabilities on January 1, 2008.  The partial adoption of this statement didnot have an impact on our consolidated financial statements.  It is expected that the remaining provisionsof this statement will not have a material effect on our consolidated financialstatements.

 

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InFebruary 2008, the FASB issued FASB Staff Position (FSP) No.157-1, *Application of FASB Statement No. 157 to FASB Statement No. 13and Its Related Interpretive Accounting Pronouncements That Address LeasingTransactions*, and FSP FAS 157-2, *Effective Date of FASBStatement No. 157*.  FSPFAS 157-1 removes leasing from the scope of SFAS 157, *Fair ValueMeasurements*.  FSP FAS 157-2delays the effective date of SFAS 157 from 2008 to 2009 for all nonfinancialassets and nonfinancial liabilities, except those that are recognized ordisclosed at fair value in the financial statements on a recurring basis (atleast annually).  See SFAS 157 discussionabove.  Adoption of FSP FAS 157-1 did nothave an effect on our consolidated financial statements.

 

InFebruary 2007, the FASB issued SFAS No. 159, *The FairValue Option for Financial Assets and Financial Liabilities – Including anamendment of FASB Statement 115* (SFAS 159).  This statement permits entities to choose tomeasure many financial instruments and certain other items at fair value.  The objective is to improve financial reportingby providing entities with the opportunity to mitigate volatility in reportedearnings caused by measuring related assets and liabilities differently withouthaving to apply complex hedge accounting provisions.  SFAS 159 was effective for us beginning in2008 and was to be applied prospectively. As we did not elect to measure existing assets and liabilities at fairvalue, the adoption of this statement did not have an effect on ourconsolidated financial statements.

 

InDecember 2007, the FASB issued SFAS No. 141 (revised 2007), *Business Combinations* (SFAS 141(R)).  SFAS 141(R) retains the fundamentalrequirements of the original pronouncement requiring that the purchase methodbe used for all business combinations. SFAS 141(R) defines the acquirer as the entity that obtains controlof one or more businesses in the business combination, establishes theacquisition date as the date that the acquirer achieves control and requiresthe acquirer to recognize the assets acquired, liabilities assumed and anynoncontrolling interest at their fair values as of the acquisition date.  SFAS 141(R) also requires thatacquisition-related costs be recognized separately from the acquisition.  SFAS 141(R) becomes effective forbusiness combinations occurring on or after January 1, 2009, and earlyadoption is prohibited.

 

InDecember 2007, the FASB issued SFAS No. 160, *NoncontrollingInterests in Consolidated Financial Statements* (SFAS 160).  SFAS 160 clarifies that a noncontrollinginterest in a subsidiary should be reported as equity in the consolidatedfinancial statements.  Consolidated netincome should include the net income for both the parent and the noncontrollinginterest with disclosure of both amounts on the consolidated statement ofincome.  The calculation of earnings pershare will continue to be based on income amounts attributable to theparent.  SFAS 160 is effective for usbeginning in 2009.  We currently do nothave any subsidiaries in which we hold a noncontrolling interest and,therefore, we believe this pronouncement will have no impact on ourconsolidated financial statements.

 

InMarch 2008, the FASB issued SFAS No. 161, *Disclosuresabout Derivative Instruments and Hedging Activities* (SFAS 161), anamendment of SFAS No. 133.  SFAS 161establishes, among other things, the disclosure requirements for derivativeinstruments and for hedging activities. The intent is to provide users of financial statements with an enhancedunderstanding of a) how and why an entity uses derivative instruments, b) howderivative instruments and related hedged items are accounted for under SFAS133 and its related interpretations, and c) how derivative instruments andrelated hedged items affect an entity’s financial position, financialperformance, and cash flows.  To meetthose objectives, the Statement requires qualitative disclosures aboutobjectives and strategies for using derivatives, quantitative disclosures aboutfair value amounts of and gains and losses on derivative instruments, anddisclosures about credit-risk-related contingent features in derivative agreements.  SFAS 161 is effective for us beginning in2009.  We currently have no derivativeinstruments or hedging activities but will assess the impact of SFAS 161 if andwhen we engage in these types of transactions

 

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***Critical Accounting Policies***

*** ***

Our significant accountingpolicies are described in Note 1 to our consolidated financial statements.  This Management’s Discussion and Analysis ofFinancial Condition and Results of Operations is based upon our consolidatedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States of America.  The preparation of these consolidatedfinancial statements requires management to make estimates and judgments thataffect the reported amount of assets, liabilities, revenues and expenses, andrelated disclosure of contingent assets and liabilities.  The Securities and Exchange Commission hasdefined a company’s most critical accounting policies as those that are mostimportant to the portrayal of its financial condition and results ofoperations, and which require the company to make its most difficult andsubjective judgments, often as a result of the need to make estimates ofmatters that are inherently uncertain. Based on this definition, we have identified the following criticalaccounting policies.  Although we believethat our estimates and assumptions are reasonable, they are based uponinformation available when they are made. Actual results may differ significantly from these estimates underdifferent assumptions or conditions.

 

*Revenuerecognition* – We recognize revenue when it is realized orrealizable and earned.  In accordancewith the Securities and Exchange Commission Staff Accounting Bulletin 104 (SAB104), *Revenue Recognition,*weconsider revenue realized or realizable when persuasive evidence of anarrangement exists, the product has been shipped or the services have beenprovided to the customer, title and risk of loss of products has passed to thecustomer, the sales price is fixed or determinable, and collectibility isreasonably assured.  Our terms are F.O.B.shipping point with no right of return, and customer acceptance of our productsis not required.  The revenue recognitionpolicy does not differ among the various product lines, the marketing venues,or various geographic destinations.  Wedo not have distributors who stock our equipment.  We do not offer rebates, price protection, orother similar incentives, and discounts when offered are recorded as areduction in revenue.

 

Revenue for preventivemaintenance agreements is recognized on a per visit basis and extended warrantieson a straight-line basis over the life of the contracts, in accordance withFASB Technical Bulletin 90-1, *Accounting for SeparatelyPriced Extended Warranty and Product Maintenance Contracts*.

 

Emerging Issues Task Force(EITF) Issue 00-21, *Revenue Arrangements withMultiple Deliverables*, provides revenue recognition guidance forarrangements with multiple deliverables, and the criteria to determine if itemsin a multiple deliverable agreement should be accounted for separately.  If products or services are sold on astandalone basis, revenue is recognized as the products or services aredelivered.  When products or services aresold as part of a multiple element arrangement, we allocate revenue on arelative fair value basis.  In theabsence of fair value for an undelivered element(s), the arrangement isaccounted for as a single unit of accounting, resulting in a deferral ofrevenue recognition for the delivered elements until all undelivered elementshave been fulfilled, at which time previously deferred revenue is recognizedratably over the remaining contract term of the arrangement.

 

*Allowance for doubtful accounts and sales returns* –Our allowance for doubtful accounts and sales returns is for accountsreceivable balances that are estimated to be uncollectible as well asanticipated sales returns.  The reserveis based on a number of factors, including: (1) an analysis of customer accounts and (2) our historicalexperience with accounts receivable write-offs and sales returns.  The analysis includes the age of thereceivable, the financial condition of a customer or industry and generaleconomic conditions.  We believe ourfinancial results could be materially different if historical trends do notreflect actual results or if economic conditions worsened for ourcustomers.  In the event we determinedthat a smaller or larger allowance for doubtful accounts is appropriate, wewould record a credit or charge to selling, general and administrative expensein the period that we made such a determination.  As of June 30, 2008, we had $97,364reserved against our accounts receivable for doubtful accounts and salesreturns.

 

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*Accrualfor excess and obsolete inventories –*We perform ananalysis to identify excess and obsolete inventory.  We record a charge to cost of sales foramounts identified.  Our analysisincludes inventory levels, the nature of the finished product and its inherentrisk of obsolescence and the on-hand quantities relative to the sales historyof that finished product.  We believethat our financial results could be materially different if historical trendsdo not reflect actual results or if demand for our products decreased becauseof economic or competitive conditions or otherwise.  As of June 30, 2008, we had $579,919accrued for excess and obsolete inventories.

 

*Recoverabilityof long-lived assets*–**We assess the recoverability of goodwill and otherlong-lived assets annually or whenever events or changes in circumstancesindicate that expected future undiscounted cash flows might not be sufficientto support the carrying amount of an asset. We deem an asset to be impaired if a forecast of undiscounted futureoperating cash flows is less than an asset’s carrying amount.  If an asset is determined to be impaired, theloss is measured as the amount by which the carrying value of the asset exceedsits fair value.  Changes in our businessstrategies, changes in the economic environment in which we operate,competitive conditions, and other factors could result in future impairmentcharges.

 

*Accruedproduct warranties*–**Our products are generally covered by a warranty, withwarranty periods ranging from ninety days to one year from the date ofsale.  Estimated warranty costs areaccrued in the same period in which the related revenue is recognized, based onanticipated parts and labor costs, utilizing historical experience.  Additional warranty reserves are also accruedfor major rework campaigns.  Weperiodically assess the adequacy of our warranty reserves based on changes inthese factors and record any necessary adjustments if actual claim experienceindicates that adjustments are necessary. Although we believe the likelihood to be relatively low, warranty claimsexperience could be materially different from actual results due tomanufacturing changes that could impact product quality, a change in ourwarranty policy in response to industry trends, as yet unrecognized defects inproducts sold, or other factors.  As of June 30,2008, we had $209,340 accrued for future estimated warranty claims.

 

*Incometaxes*–In the preparation of our consolidated financialstatements, management is required to estimate income taxes in each of thejurisdictions in which we operate.  Thisprocess involves estimating actual current tax exposures together withassessing temporary differences resulting from differing treatment of items fortax and accounting purposes.  Thesedifferences result in deferred tax assets and liabilities, which are includedin our Consolidated Balance Sheets.

 

We have significant amounts of deferred tax assets.  Management reviews the deferred tax assetsfor recoverability on a quarterly basis and assesses the need for valuationallowances.  These deferred tax assetsare evaluated by considering historical levels of income, estimates of futuretaxable income streams and the impact of tax planning strategies.  A valuation allowance is recorded to reducedeferred tax assets when it is determined that it is more likely than not thatwe would not be able to realize all or part of our deferred tax assets.  At June 30, 2008 and December 31,2007, we provided a valuation allowance in the approximate amount of $324,000against our net deferred tax assets.

 

### ***Forward-Looking Statements***

 

This quarterlyreport on Form 10-Q contains or incorporates by reference not onlyhistorical information, but also forward-looking statements within the meaningof Section 27A of the Securities Act of 1933, as amended, and Section 21Eof the Securities Exchange Act of 1934, as amended, and are subject to the safeharbor created by those sections.  Inaddition, we or others on our behalf may make forward-looking statements fromtime to time in oral presentations, including telephone conferences and/or webcasts open to the public, in press releases or reports, on our website or otherwise.  All statements other than statements ofhistorical facts included in this report that address activities, events ordevelopments that we expect, believe or anticipate will or may occur in thefuture are forward-looking statements including, in particular, the statementsabout our plans, objectives, strategies and prospects regarding, 

 

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among otherthings, our financial condition, results of operations and business.  We have identified some of theseforward-looking statements with words like “believe,” “may,” “could,” “might,” “forecast,”“possible,” “potential,” “project,” “will,” “should,” “expect,” “intend,” “plan,”“predict,” “anticipate,” “estimate,” “approximate” or “continue” and otherwords and terms of similar meaning. These forward-looking statements may be contained in the notes to ourconsolidated financial statements and elsewhere in this report, including underthe heading “Management’s Discussion and Analysis of Financial Condition andResults of Operations.”

 

Forward-lookingstatements involve risks and uncertainties. These uncertainties include factors that affect all businesses as wellas matters specific to us.  Some of thefactors known to us that could cause our actual results to differ materiallyfrom what we have anticipated in our forward-looking statements are describedbelow.

 

·                  Increases in prices for rawmaterials;

·                  Risks inherent in operatinginternationally and selling and shipping our products and purchasing ourproducts and components internationally;

·                  Fluctuations in foreigncurrency exchange rates and interest rates;

·                  Failure to develop newproducts and technologies, delays in new product introduction and lack ofmarket acceptance of new products;

·                  Failure to effect strategicacquisitions and integrate effectively newly acquired operations;

·                  Incurrence of additionaldebt, contingent liabilities and expenses in connection with futureacquisitions;

·                  Decreases in capitalspending by our customers;

·                  Exposure to assertions ofintellectual property claims and failure to protect our intellectual property;

·                  Disruption in our ability tomanufacture our products or the ability of our key suppliers to provide usproducts or components or raw materials for products resulting in our inabilityto supply market demand for our products;

·                  Reliance on independentsales distributors and sales associates to market and sell our products;

·                  Highly competitive nature ofthe markets in which we sell our products and the introduction of competingproducts;

·                  Loss of customers;

·                  Failure to retain seniormanagement or replace lost senior management;

·                  Employee slowdowns, strikesor similar actions;

·                  Reliance on our managementinformation systems for inventory management, distribution and other functions;

·                  Effects of any pending orthreatened litigation;

·                  Failure to comply withapplicable laws and regulations and adverse changes in applicable laws orregulations;

·                  Changes in generallyaccepted accounting principles; or

·                  Conditions and changes ingeneral economic and business conditions.

 

For moreinformation regarding these and other uncertainties and factors that couldcause our actual results to differ materially from what we have anticipated inour forward-looking statements or could otherwise materially adversely affectour business, financial condition or operating results, see our annual reporton Form 10-K for the fiscal year ended December 31, 2007 under theheading “Part I– Item 1A.  RiskFactors” on pages 8 through 12 of such report.

 

We wish tocaution readers not to place undue reliance on any forward-looking statementthat speaks only as of the date made and to recognize that forward-lookingstatements are predictions of future 

 

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results, whichmay not occur as anticipated.  Actualresults could differ materially from those anticipated in the forward-lookingstatements and from historical results, due to the risks and uncertaintiesdescribed above, as well as others that we may consider immaterial or do not anticipateat this time. Although we believe that the expectations reflected in ourforward-looking statements are reasonable, we do not know whether ourexpectations will prove correct.  Theexpectations reflected in our forward-looking statements can be affected byinaccurate assumptions we might make or by known or unknown risks anduncertainties, including those described above. The risks and uncertainties described above are not exclusive andfurther information concerning us and our business, including factors thatpotentially could materially affect our financial results or condition, mayemerge from time to time.  We assume noobligation to update forward-looking statements to reflect actual results orchanges in factors or assumptions affecting such forward-lookingstatements.  We advise you, however, toconsult any further disclosures we make on related subjects in our quarterlyreports on Form 10-Q and current reports on Form 8-K we file with orfurnish to the Securities and Exchange Commission.

 

Item 3.  Quantitative andQualitative Disclosures About Market Risk

 

*Equity Price and Interest Rate Risk*

 

Substantiallyall of our marketable securities are at fixed interest rates and all of ourmarketable securities mature within two and one-half years; therefore, webelieve that the market risk arising from the holding of these financialinstruments is minimal.

 

### *Foreign Currency Risk*

 

Historically,approximately 50% of our consolidated sales have been to internationaldestinations.  Since we invoice most ofthese customers in U.S. dollars, we do not have significant exposure to foreigncurrency transaction risk.  We invoice asmall amount to our international customers in their local currency whichexposes us to some transaction gain or loss when converting their payments intoU.S. dollars.  We also pay a small numberof our international suppliers in their local currency which exposes us totransaction gain or loss.  However, thesehave not resulted in material amounts in the past.  Our foreign operations expose us to foreigncurrency exchange risk when the euro and yuan currency results of operationsare translated to U.S. dollars.  While wehistorically have not experienced any material foreign currency translationlosses, we may engage in hedging activity in the future to minimize thisrisk.  Our net investment in foreignsubsidiary translated into U.S. dollars is not hedged.  Any changes in foreign currency exchangerates would be reflected as a foreign currency translation adjustment, acomponent of accumulated other comprehensive income in stockholders’ equity,and would not impact our net income.

 

Item 4T.  Controls andProcedures

 

*Evaluation of Disclosure Controls and Procedures*

 

We maintaindisclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and15d-15(e)) that are designed to ensure that information required to bedisclosed by us in the reports we file or submit under the Securities ExchangeAct of 1934, as amended, is recorded, processed, summarized, and reported,within the time periods specified in the Securities and Exchange Commission’s rules andforms and that such information is accumulated and communicated to ourmanagement, including our principal executive and principal financial officers,or persons performing similar functions, as appropriate to allow timelydecisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, werecognize that any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desiredcontrol objectives, and we necessarily are required to apply our judgment inevaluating the 

 

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cost-benefitrelationship of possible controls and procedures.  Our management evaluated, with theparticipation of our Chief Executive Officer and Chief Financial Officer, theeffectiveness of the design and operation of our disclosure controls andprocedures as of the end of the period covered in this Quarterly Report on Form 10-Q.  Based on that evaluation, our Chief ExecutiveOfficer and Chief Financial Officer concluded that our disclosure controls andprocedures were effective as of the end of such period, to provide reasonableassurance that information required to be disclosed in our Exchange Act reportsis recorded, processed, summarized, and reported within the time periodsspecified in the SEC’s rules and forms, and that material informationrelating to our Company and our consolidated subsidiaries is made known tomanagement, including our Chief Executive Officer, and Chief Financial Officer,particularly during the period when our periodic reports are being prepared.

 

*Changes in Internal Control Over Financial Reporting*

 

There was nochange in our internal control over financial reporting that occurred duringour quarter ended June 30, 2008 that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

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PART II.  OTHER INFORMATION

 

Item 1A.  Risk Factors

 

We are affected by risks specific to us as well asfactors that affect all businesses operating in a global market.  The significant factors known to us thatcould materially adversely affect our business, financial condition oroperating results are described in our annual report on Form 10-K for thefiscal year ended December 31, 2007 under the heading “Part I – Item1A. Risk Factors.”  There has been nomaterial change in those risk factors.

 

Item 2.                         Unregistered Sales of EquitySecurities, Use of Proceeds and Issuer Purchases of Equity Securities

 

*Unregistered Sales of EquitySecurities*

 

We did not sell any equity securities of MOCON, Inc.during the second quarter ended June 30, 2008 that were not registeredunder the Securities Act of 1933.

 

*Issuer Repurchases of EquitySecurities*

 

The following table shows our stock repurchaseactivity during the second quarter ended June 30, 2008:

 
| **Period**                                      | ** ** | **Total Number  of Shares  Purchased** | ** ** | **Average  Price  Paid Per  Share** | ** ** | **Total Number  of Shares  Purchased as  Part of  Publicly  Announced  Plans or  Programs** | ** ** | **Maximum  Amount of  Authorization  Remaining  Under the  Plan** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------------|------------|------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| April 1,  2008 through April 30, 2008 |       | —                                           |       | —                                   |       | —                                                                                                               |       | —                                                                      |       |
| May 1,  2008 through May 31, 2008     |       | 225                                              | (1)        | $                                        | 8.75       |                                                                                                                 | 225        |                                                                        | $          | 1,634,906 |   |
| June 1,  2008 through June 30, 2008   |       | —                                           |       | —                                   |       | —                                                                                                               |       | —                                                                      |       |
|                                                 |            |                                                  |            |                                          |            |                                                                                                                      |            |                                                                             |            |  |  |

 

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(1)            On November 9, 2005, our Board ofDirectors authorized the repurchase of up to a total of $2,000,000 of ourcommon stock.  This program has noexpiration date, but may be suspended or discontinued at any time by our Boardof Directors.  We purchased 225 sharesduring the period indicated above under this program which, when combined withrepurchases made in prior periods, leaves $1,634,906 remaining in thisauthorization as of June 30, 2008.

 

Except as set forth in the table above, we did notpurchase any shares of our common stock or other equity securities registeredpursuant to Section 12 of the Securities Exchange Act of 1934, as amended,during the second quarter ended June 30, 2008.

 

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Item 4.                         Submission of Matters to a Voteof Security Holders

 

(a)   Our Annual Meeting of Shareholders was heldon May 16, 2008.

 

(b)   The results of the shareholder votes were asfollows:

 
| ** **                                                                          | ** ** | **For**   | ** ** | **Against/Withhold** | ** ** | **Abstain** | ** ** | **Broker  Non-Votes** | ** ** |
|-------------------------------------------------------------------------------------|------------|-----------|------------|----------------------|------------|-------------|------------|-----------------------|------------|
| 1.  Election  of Directors                                                |       |      |       |                 |       |        |       |                  |       |
| Robert  L. Demorest                                                                 |       | 4,469,456 |       | 75,267               |       | —      |       | —                |       |
| Dean  B. Chenoweth                                                                  |       | 4,459,211 |       | 85,512               |       | —      |       | —                |       |
| Donald  N. DeMorett                                                                 |       | 4,468,083 |       | 76,640               |       | —      |       | —                |       |
| J.  Leonard Frame                                                                   |       | 4,466,926 |       | 77,797               |       | —      |       | —                |       |
| Robert  F. Gallagher                                                                |       | 4,470,301 |       | 74,422               |       | —      |       | —                |       |
| Daniel  W. Mayer                                                                    |       | 4,474,612 |       | 70,111               |       | —      |       | —                |       |
| Ronald  A. Meyer                                                                    |       | 4,474,612 |       | 70,111               |       | —      |       | —                |       |
| Richard  A. Proulx                                                                  |       | 4,470,373 |       | 74,350               |       | —      |       | —                |       |
| Tom  C. Thomas                                                                      |       | 4,465,616 |       | 79,107               |       | —      |       | —                |       |
|                                                                                |       |      |       |                 |       |        |       |                  |       |
| 2.  Ratification  of Independent Registered Public   Accounting Firm |       | 4,483,020 |       | 22,674               |       | 39,029      |       | —                |       |

 

Item 6.  Exhibits

 

The followingexhibits are being filed or furnished with this quarterly report on Form 10-Q:

 
| **Exhibit   No.** | ** ** | **Description**                                                                                          |
|------------------------|------------|----------------------------------------------------------------------------------------------------------|
| 31.1                   |       | Certification of Chief Executive Officer Pursuant to Section 302  of the Sarbanes-Oxley Act of 2002 |
|                   |       |                                                                                                     |
| 31.2                   |       | Certification of Chief Financial Officer Pursuant to Section 302  of the Sarbanes-Oxley Act of 2002 |
|                   |       |                                                                                                     |
| 32.1                   |       | Certification of Chief Executive Officer Pursuant to Section 906  of the Sarbanes-Oxley Act of 2002 |
|                   |       |                                                                                                     |
| 32.2                   |       | Certification of Chief Financial Officer Pursuant to Section 906  of the Sarbanes-Oxley Act of 2002 |

 

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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 theundersigned hereunto duly authorized.

 

 
|                       | MOCON, INC.                                  |
|----------------------------|----------------------------------------------|
|                       |                                         |
|                       |                                         |
| Date: August 14, 2008 | /s/ Robert L. Demorest                       |
|                       | Robert L. Demorest                           |
|                       | Chairman, President and Chief                |
|                       | Executive Officer                            |
|                       | (Principal Executive Officer)                |
|                       |                                         |
|                       |                                         |
| Date: August 14, 2008 | /s/ Darrell B. Lee                           |
|                       | Darrell B. Lee                               |
|                       | Vice President, Treasurer and Chief          |
|                       | Financial Officer                            |
|                       | (Principal Financial and Accounting Officer) |

 

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MOCON, INC.

QUARTERLY REPORT ON FORM 10-Q

QUARTER ENDED JUNE 30, 2008

 

EXHIBIT INDEX

 
| **Exhibit   No.** | ** ** | **Description**                                                                                          | ** ** | **Method of   Filing** |
|-------------------|------------|----------------------------------------------------------------------------------------------------------|------------|------------------------|
| 31.1              |       | Certification of Chief Executive Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 |       | Filed  herewith        |
|              |       |                                                                                                     |       |                   |
| 31.2              |       | Certification of Chief Financial Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 |       | Filed  herewith        |
|              |       |                                                                                                     |       |                   |
| 32.1              |       | Certification of Chief Executive Officer Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 |       | Furnished  herewith    |
|              |       |                                                                                                     |       |                   |
| 32.2              |       | Certification of Chief Financial Officer Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 |       | Furnished  herewith    |

 

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